The California Association of Realtors just released its Housing Affordability Index (HAI) for the 2nd quarter of 2015. All Bay Area counties saw declines in their affordability index reading – which measures the percentage of households that can afford to buy the median priced single family dwelling (house) – and San Francisco is now only 2 percentage points above its all-time low of 8%, last reached in Q3 2007.
In this analysis, affordability is affected by 3 major factors: median house price, mortgage interest rates and household income. (Housing Affordability Index Methodology).
Affordability Percentage by Bay Area County, Q2 2015
Minimum Qualifying Income to Buy Median Priced House
Assumes 20% downpayment and including principal, interest, property tax and insurance costs.
Bay Area Median House Prices, Q2 2015
Affordability Trends: San Francisco, San Mateo & Marin
These 3 counties illustrate the general ups and down in Bay Area housing affordability since 1991.
San Francisco County: Median Price vs. Affordability
Illustrating the surge in SF home prices and decline in affordability since the current market recovery began in 2012.
- By definition, half the homes sold in any given county were at prices below the median sales price, i.e. there were numerous homes that were more affordable than the median price, with lower associated housing costs and income requirements.
- The CAR Housing Affordability Index uses median house prices for its calculations. In all Bay Area counties, median condoprices run below and often far below median house prices, which also adds to overall affordability. In San Francisco itself, more than half of all home sales are condos, stock co-op apartments and Tenancy-in-Common units (TICs), and if units of less than 2-bedrooms are included, they are significantly less expensive than houses. (SF condos of 2-bedrooms or more actually come within 4% to 5% of overall median house prices.)
- Besides increases in employment and population, much of the demand for Bay Area housing is being driven by increases in household wealth, which is different from household income. Wealth includes gains from a surging stock market and such things as stock options and IPO proceeds at high-tech companies, which have generated huge amounts of new wealth over the past 3 years.
- Pertaining to San Francisco: Most of its households are made up of renters, most of whom are under rent control. Furthermore, a very large percentage – 39% – of SF households is made up of single persons. Both these issues skew the household income equation: According to census figures, SF has a lower median household income than Santa Clara, Marin, San Mateo and Contra Costa (but higher home prices).
Monthly Housing Costs: Purchase vs. Rental
Two issues to keep in mind when comparing monthly ownership costs with monthly rental costs, both of which are very high in the Bay Area: Firstly, the average house is much larger than the average apartment, so this is not an apples to apples comparison. Secondly, the housing costs for ownership should ideally be adjusted for loan principal repayment, which builds equity, as well as for the tax deductibility of mortgage interest and property tax payments (depending on one’s specific financial circumstances). Those are two reasons why buying often makes financial sense when compared to renting. Long-term home-price appreciation may be another.
San Francisco: Trends in Prices and Rents
The same economic and demographic forces have been putting pressure on both home prices and apartment rents.
SF Median Home Prices since 2012, by Quarter
SF Average Asking Rents since 1994, by Year
Mortgage Interest Rates since 1981
Interest rates play an enormous role in affordability, and it is certainly reasonable to be concerned that affordability percentages are now hitting such depths while interest rates are also close to historic lows. For example, in 2007, when affordability percentages hit previous low points, prevailing mortgage interest rates were approximately 50% higher than today’s. When interest rates start to rise – when and how much being the real questions – there will be potentially dramatic effects on affordability, which could presumably affect demand and prices.
Monthly Housing Cost Adjusted for Inflation and Interest Rates
This chart illustrates a very approximate calculation of monthly housing cost (principal, interest, property tax and insurance)adjusted for inflation – i.e. in constant 1993 dollars – over the past 22 years, using annual median house sales prices, average annual 30-year interest rates, and assuming a 20% downpayment. The compounding CPI-Urban inflation rate fluctuated over the period, but averaged about 2.4% annually. Average annual 30-year mortgage rates fluctuated from 8.4% to 3.7%, hitting a historic short-term low of 3.4% in 2013; it is currently running around 4%.
Adjusting for inflation and interest rate changes means that though the median sales price is now far above that of 2007, the monthly housing cost is still a little bit below then – which generally correlates with the HAI percentages. This isn’t a perfect apples-to-apples comparison because it doesn’t take into account that the amount of the 20% downpayment increased significantly over the time period.
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