To my surprise, the median price for a single-family home reached an all-time high in the last few months of over $600,000 in California. I believed with lending being so restrictive, California would have a hard time passing its former high in median price. That conclusion was wrong.

Along with the over $600,000 median price tag, affordability declined to 26%. California’s affordability levels have long been referred to as a “crisis.” Affordability was referred to as being at crisis levels in 1997, when affordability moved from 40% to 36%. The following eight to nine years prices tripled to nearly $600,000. At the end of that price boom, affordability lows were approximately 12%.

In the other two boom cycles, affordability reached a low of 17% in 1980 and again in 1989. Up until 17%, California home owners actually enjoy declining affordability because it is usually accompanied by rising home prices. If you are a home owner during a cycle of declining affordability, you usually have a smile on your face.

The crisis part of the equation comes when you consider the unintended consequences of not being able to afford a home. As both rents and prices have accelerated, many families have just been priced out of the market. Many people are choosing to exit the state and head for areas where homes are more affordable.

The same is true for seniors. I just lost a long-time hair stylist to the state of Arizona. Her move was prompted by being able to sell her California home (with a mortgage) and buy an Arizona home free and clear. So, declining affordability is a profitable event for the owners of property and a crisis for people who don’t own.

However, there comes a point were affordability reaches such a low point that a series of bad things occur. Historically, that low point in affordability is 17% for the state. Once you hit 17% affordability, a series of charts turn negative and create a very detrimental domino effect.

For whatever reason, 17% affordability seems to be the point where sales stall. Usually, at 17% affordability, you have a real estate market that has rewarded ownership and created quite a desire to own a property. In a legitimate lending market, there is a point where a willing buyer is not capable of getting a “Yes” answer from a lender. It seems historically that point is at 17% affordability.

Once you hit 17% affordability, sales stall. 

Once sales stall, inventory sharply increases. 

 

Once inventory increases, prices stall or go down. 

When prices stall or go down, foreclosures explode.

When new construction stops, unemployment increases. 

 

 

 

When unemployment increases, we generally lose migration out of the state. 

 

At 26%, affordability is a long way from 17%. However, you have twin engines driving affordability lower. If interest rates and prices continue to rise,California could be in for a harder landing than I had anticipated.

I had thought restrictive lending would stop prices from pushing affordability to 17%. That seems not to be true. I also thought we would have a recession by 2019 and that would put pressure on interest rates to decline. I now don’t see a recession in 2019, so I’d have to say the odds of California being spared hitting 17% affordability have diminished.

I still think we’ll have a recession and when we do, I think interest rates could push mortgage rates below 3%. However, that seems to be farther away than I first thought.

My bigger concern now is are we going to repeat the past, hit 17% affordability, and suffer through several years of negative charts.

Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com.