The Impact of Low Home Affordability on a Market

Carrie Rossenfeld Residential & Mixed Use

U.S. home prices in the first quarter of the year were at their least-affordable level since Q3 2008, according to a recent report from Irvine, California–based ATTOM Data Solutions. The report also showed that home prices are rising faster than wages in 64 percent of U.S. local markets, including San Diego, Orange, and Los Angeles counties.

Moreover, the report stated that median home prices are not affordable for average wage earners in 75 percent of U.S. local markets, including San Diego, Orange, and Los Angeles counties. The report was based on a 3 percent down payment and a maximum front-end debt-to-income ratio of 28 percent.

“Slowing home price appreciation in the second quarter was not enough to counteract an 11 percent increase in mortgage rates compared to a year ago, resulting in the worst home affordability we’ve seen in nearly 10 years,” says Daren Blomquist, SVP at ATTOM Data Solutions, about the report. “Meanwhile home price appreciation continued to outpace wage growth, speeding up the affordability treadmill for prospective homebuyers even without the rise in mortgage rates.”

SoCal Real Estate spoke with Blomquist about how low home affordability impacts the economy and the multifamily sector in those markets, as well as where he sees the trend heading, what is being done to increase affordability in those markets, and whether those actions are working.

Daren Blomquist | Courtesy ATTOM Data Solutions

SoCal Real Estate: Home affordability continues to drop in many desirable markets. How does this impact the economy of those markets?
Home affordability challenges are a sign of a booming economy, attracting jobs and people to come live in that market and pushing up prices. Affordability challenges are a good problem to have in some ways, but there is a certain tipping point where affordability will basically cause a backlash in the local economy. At that point, you will start to see businesses potentially start moving out because it’s too expensive for their employees to live there, and employees will follow the jobs. Employees will decide they can get a job in another market that’s doing well and will move. One of the reason we attached census migration numbers to our affordability spreadsheet is because there’s a connection there — you will see migration in some high-cost markets.

Also, homelessness becomes a problem in high-priced coastal markets, especially when that is an issue with which these cities are already grappling.

Do you see this trend continuing in those markets?
It’s tough to see this turning around. There is one small glimmer of hope: there are some signs that wage growth is maybe starting to kick in, and we did see it tick up a little bit higher. The most recent wage numbers were around 3 percent growth, which is a little bit of an improvement, but in the majority of markets — 65 percent — we are seeing home prices continue to outpace wage growth.

On the other hand, there are some markets where we see home prices starting to cool off, which could be a good thing for those markets. Granted, those markets are few and far between: for example, Orange County was down to a 4 percent year-over-year increase in home prices, which is somewhat in line with the cost of living. But for the most part, the inertia of this market is heading toward less affordability, particularly with mortgage rates going up and projected to continue to go up.

What about the effect on the multifamily sectors of those markets with low affordability?
It means that a lot of people can’t afford to buy homes, so they will continue to be renters in a lot of these markets. That should continue to create strong demand for multifamily in a lot of these markets. We have seen a pretty robust amount of new multifamily homes being built, so supply is more in line with demand there. We do expect to continue to see demand continue to strong for multifamily because of the affordability crunch on the home-buying side.

What is being done to increase affordability in these markets, and is it working?
One push we see is densification: more housing being built or, in cases where there are a lot of houses but not a lot of land, densification of housing. In California, there have been legislative efforts to streamline the development of land, particularly properties that are close to transportation. I think that we haven’t seen a huge impact from that yet — it’s going to take some time — but I think it’s probably a good way to encourage the market to respond by reducing some of the red tape for developers to redevelop land.