Housing Affordability Remains a Tough Issue

Problem could persist in the second half of 2023, according to new report
Published on Aug 16, 2023

Despite a strong job market, and the slow easing of inflation, housing affordability remained an issue in the second quarter, and according to a recent report from the California Association of Realtors (CAR), the problem will persist in the second half of the year, as interest rates continue to stay high. 

While inflation dropped to nearly 3% over June and July, food and energy prices are expected to increase in the coming months, said CAR. 

According to the report, inflation is not likely to come down meaningfully in August and September. Thus there is yet another chance that the Fed could raise its policy rate again before the end of the year. 

In that case, mortgage rates could remain elevated for a longer period than what the market previously anticipated.

In its second quarter Housing Affordability Index, CAR reported that the share of households in California that can afford to buy a typical single-family home dropped to 16%, the lowest since the third quarter of 2007. 

The report found that only 25% of Californians could afford a condominium or townhome in the second quarter of 2023, requiring an annual income of more than $160,000 with monthly payments of approximately $4,000 on a median-priced unit.

Higher mortgage rates continued to push the cost of borrowing to an all-time high, said the report, resulting in an increase of 8.1% in mortgage payment from Q123 and a 5.3% jump from Q222. 

In addition, a minimum qualifying income of $208,000 was required to make the monthly payment of $5,200 for a median-priced home, at the prevailing 30-year fixed-rate mortgage of 6.61% in the state. 

The record high minimum income required in the second quarter of 2023 was the second time in the last three quarters that it exceeded $200,000, said the report. With interest rates near the highest level in the past 17 years and expected to remain high for the remainder of the year, the housing affordability picture will be a challenge for many homebuyers in the coming year.

Although headline inflation rose from 3% in June to 3.2% in July, the monthly increase of 0.2% last month continued to moderate from the 0.5% average gain in 2022. 

At the same time, core inflation gradually declined on a year-over-year basis from 4.8% in June to 4.7% in July, and the 3-month annualized average of 3.1% was the slowest pace since September 2021, said the CAR report. 

Prices of housing actually cooled from early 2023, however, while used cars/trucks softened further in July and airline fares dropped sharply on a year-over-year basis, the report added. 

Gasoline, however,  began to head up in price again while producer prices for food also climbed in July. According to CAR, “geopolitical tension and weather-related factors could continue to put upward pressure on food and energy and may also disrupt the declining path in inflation in the next few months.”

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