(Contributed)
Last year was a perfect storm for the housing market: interest rates and homeowner’s insurance premiums skyrocketed, wages were stagnant, and fewer houses were on the market. So, it’s no wonder that last year was the least affordable year on record for single-family homes.
“Affordable” indicates that people with the median income for an area can afford to purchase the home by spending no more than a third of their income on the mortgage payment. Between 2013 and 2019, about 40 percent of homes up for sale nationwide were considered affordable. After the pandemic, things changed dramatically. In 2022, only 21 percent of homes for sale were affordable, and last year, the number dropped to 16%.
In 2023, people’s purchasing power in the housing market tumbled. If you bought a $500,000 home with a 20 percent down payment, your loan would be $400,000. In early 2023, you could have secured an interest rate of 2.5 percent. And let’s say this is before homeowners insurance companies began dropping Californians from their rolls, forcing many to choose the expensive California Fair Plan. So, we’ll say the monthly homeowner’s insurance premium was only $100/month. In this scenario, with a 30-year, fixed-rate mortgage, your monthly payment would have been $1,480.
If you bought that same house when rates were at 8% last year and after your insurance renewal tripled your premium, your monthly payment would have been $3,235. That’s an increase of 115% from earlier in the year. Even without an increased insurance premium (just the interest rate hike), the monthly mortgage payments alone would have gone up 85%. Yikes!
Given this, it is no surprise that the number of people able to afford median-priced homes declined, especially in California.
The good news is that housing affordability is expected to improve this year. Wages started inching upward late last year and home prices began softening a little. Plus, interest rates have dropped from their peak. These three things together mean that locally, the affordability index is improving. If we’re really lucky, the State of California will address some of the current insurance problems, which would make insurance more available and, hopefully, a little cheaper.
I also believe more people will be willing to put their homes on the market this year. When interest rates skyrocketed last year, some homeowners felt trapped. They didn’t want to give up the low interest rate on their current mortgage, even if their home no longer met their needs. Now that rates have started to drop and people are getting used to the idea that these rates probably aren’t going to return to pre-pandemic lows, they are more willing to consider selling their house and buying one that works better for them.
Housing availability is a big deal. According to Redfin, in 2023 there were only 350,000 affordable single-family homes for sale nationwide. The year before, there had been closer to 600,000, and in years prior, there were consistently more than a million homes in the “affordable” category. For example, in 2019 there were 1.3 million affordable homes for sale across the country.
When there are more homes for sale, prices drop. It’s that old supply-and-demand relationship. This explains why prices stayed so high last year, even as interest rates went up. Usually, when rates go up, prices go down, but if there’s hardly anything for sale, people are willing to pay a premium.
Polishing my crystal ball as I look into the future, I believe interest rates will continue to decline for a while longer and that more houses will hit the market. These two factors may invite more buyers to enter the housing market. Whether the increase in qualified buyers offsets the decrease in prices caused by higher supply remains to be seen.
Given how many buyers were willing to pay the high prices in 2023, we may see a boom in real estate in 2024. Imagine what will happen if rates come down and wages go up.
In January, California’s minimum wage went up for everyone, and it went up more for fast food and hospital workers. While I do not anticipate that many people earning minimum wage plan to buy a home, I do know that increases to the minimum wage will put upward pressure on other wages.
Many of the factors that made 2023 the least affordable housing market are already changing. This could be a good year for those who want to buy or sell a home.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.