Intersections: A Monthly Go-To for Reliable Facts and Analysis About California's Debt, Investments and Economy
 

Vol. 1, No. 6, Published October 1, 2015

Guest Column

Persistently Low Inventory Reflects Affordability Constraints for Current Homeowners

By Leslie Appleton-Young

stock market bull and bear

Last month we talked about the looming crisis in housing affordability and its impact on the state�s overall economy and future growth prospects. Despite the availability of low-rate mortgages and a slight easing in underwriting standards, first-time buyers are still finding it difficult to break into the world of homeownership. According to the California Association of Realtors (CAR) 2015 Housing Market Survey, the share of first-time buyers is 29.5 percent and has been in the 28-30 percent range for the last three years. Compared with the long-term average of 38 percent, the plight of renters trying to buy their first home is clear. But what about current homeowners? Could they also be stuck because of affordability concerns?

Consider the fact that the California housing market has been experiencing what appears to be a chronic lack of listings since 2010. (See Figure 18.) The long-term average for inventory is six to seven months, and the market remains well below that with a 3.6-month supply of homes for sale in August 2015. And in the Bay Area, where strong job and income growth have been rushing headlong into limited housing supplies, inventory is at historic lows. (See Figure 19.)

What�s going on?

With housing prices up significantly since the bottom, shouldn�t more existing homeowners be interested in taking advantage of current market conditions? Earlier this year, CAR surveyed current homeowners and asked them if they had considered moving and if not, why not? Their answers were illuminating, and raised an interesting issue. While we typically focus on the housing affordability challenges faced by first-time buyers, is it also possible that cost issues are also holding back current homeowners?

CAR�s inaugural Survey of California Homeowners found that more than half (59 percent) of homeowners have not seriously considered selling their home in the past year, with more than half (60 percent) saying their current home will be their retirement residence, and 44 percent indicating they are concerned their taxes would be too high on another home. For those who have been in their home 15 years or more, 70 percent indicated they have not considered selling because their current residence will be their retirement home. So, it would appear that many boomers are retiring in place.

Of the more than one-third (35 percent) of homeowners who have considered selling their home in the past year, about two-thirds (64 percent) are reluctant to sell because they can�t afford to go through the home-buying process again. In first quarter 2012, when housing affordability in California was at its most affordable, a median income of $56,324 was needed to purchase a median-priced home. In second quarter 2015, that figure jumped to $96,160, with 99 percent of that required income increase attributable to home price increases.

The obstacles faced by current homeowners go even deeper. Many have low rate mortgages they are not sure they want to give up and more than a few would not be able to qualify for a mortgage given today�s underwriting environment, especially homeowners who are �outside the box,� such as independent contractors. Then there is the issue of property taxes and the possibility of exchanging an attractive tax burden for one that is much less so. And, why sell and put yourself in the position of competing with other would-be buyers in a market where there are few listings? In terms of new supply, foreclosures have all but disappeared in the communities with the strongest job growth. New construction in these same communities is limited to infill and some higher-density development � but the process is long and arduous and demand far outpaces supply.

Unfortunately, it�s difficult to imagine these conditions changing quickly and affordability will continue to be a constraint on the state�s first-time and repeat buyers for the foreseeable future.

Figure 18: Unsold Inventory Index of Existing Single-Family Homes, January 2005 to August 2015

Aug 2014: 4.0 Aug 2015: 3.6 (Months of Supply)

Note: Unsold Inventory Index represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were active, pending, and contingent (when available). We then divide the sum by the number of sold properties for the month in question.

Source: California Association of Realtors

Figure 19: Inventory of Single-Family Homes Dropped Significantly in the Bay Area Since 2009

Note: Unsold Inventory Index represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were active, pending, and contingent (when available). We then divide the sum by the number of sold properties for the month in question.

Source: California Association of Realtors

Additional findings from CAR�s 2015 Survey of California Homeowners:

  • Forty-five percent of homeowners have considered moving out of state, with Texas (15 percent), Oregon (11 percent), New York (9 percent), and Arizona and Nevada tied (8 percent) as the top five states where homeowners have considered moving.
  • Sixty percent of homeowners bought their home within the past 15 years.
  • The median purchase price for all homeowners was $265,000, with the purchase price being more than twice as high for those who bought less than 15 years ago ($350,000) compared to those who purchased their home 15 or more years ago ($162,000).
  • All homeowners have a median home equity amount of $200,000, and those who have owned their home more than 15 years have 60 percent more equity ($300,000) compared to those who bought within the past 15 years ($179,000).
  • Twenty-four percent of homeowners don’t have a mortgage, and those who bought their home 15 or more years ago were more than twice as likely not to have a mortgage compared to those who bought within the past 15 years. The majority of homeowners with a mortgage (77 percent) have an interest rate below 5 percent.
  • Twenty-seven percent of homeowners have tapped into their equity. Those who bought 15 or more years ago or were more likely to have tapped into their equity (32 percent) compared to those who bought within the past 15 years (24 percent), indicating a healthy market where homeowners are not overleveraged on their home.
  • Nearly one-third of homeowners (32 percent) indicated a Craftsman-styled bungalow is their dream home, beating those preferring mansions by more than double (14 percent) and Neo-Colonial (19 percent). California is considered the center of the architectural arts and crafts movement and is home to the majority of Craftsman-styled housing.
  • Nearly half of homeowners (45 percent) have children residing with them, with 83 percent of children being minors.

Leslie Appleton-Young, a member of Treasurer John Chiang's Council of Economic Advisors, is vice president and chief economist for the California Association of Realtors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.