Is the “California Dream” Still Alive? By Lloyd Segal

Though the Golden State has a reputation for being one of the least affordable states in the nation, there are apparently still pockets in our state where a person can own a home without spending a king’s ransom on housing. However, such places are vanishing rapidly. In 2021, a WalletHub study ranked California as the most expensive state in the country!  Another study ranked the top 11 cities where residents spend the most on housing, and more than half of those cities are in California. Still, SmartAsset managed somehow to find ten smaller cities where the California Dream meets affordability. These are places where homeownership costs were lowest relative to the median income in each city. Not surprisingly, none of them are where you live (or want to live). In fact, the further you get from the Bay Area and Los Angeles, the more affordable housing becomes. SmartAsset’s list of affordable cities are largely in Southern California and the San Joaquin Valley. What are the ten most affordable cities in California? I thought you’d never ask. You’ll have to read further into this week’s Economic Update for the answer. How’s that for a tease…

Existing-Home Sales Decline Amid Listings Shortage 

Existing-home sales decreased 4.6% between November and December, hitting a seasonally-adjusted, annual rate of 6.18 million, the National Association of Realtors said last Thursday. Compared to a year ago, sales were down more than 7%. Overall, in 2021, existing-home sales reached the highest level since 2006, a sign of the strong demand among buyers nationwide in light of the short supply of properties on the market. With respect to inventory, the number of homes for sale fell to the lowest level on record! The total inventory of homes for sale dropped 18% between November and December. Expressed in terms of the months-supply, there was only a 1.8-month supply of homes for sale in December. (A 6-month supply of homes is generally viewed as indicative of a balanced market.) Further, the median price for an existing home was $358,000, up 15.8% from December 2020. Homes remained on the market for only 19 days on average, and 79% of the homes sold in December had been on the market for less than a month. But the recent surge in mortgage rates threatens to knock some of the wind out of the housing market’s sails. With a backdrop of still-rising home prices, some buyers will face greater affordability challenges in the high-rate environment. Still, the other factors that have fueled the rise in home sales over the past two years remain, including the shift to remote work and the resounding emergence of millennial buyers. In the near term, the prospect of rising interest rates could cause some buyers to rush to lock in deals.

U.S. home builders started construction on homes at a seasonally-adjusted annual rate of roughly 1.7 million in December, representing a 1% increase from the previous month, the U.S. Census Bureau reported last Wednesday. Compared with December 2020, housing starts are up 2.5%. Meanwhile, permits for new homes occurred at a seasonally-adjusted annual rate of 1.87 million, up 6.5% from a year ago. Most of the boost in permitting activity stemmed from a swathe of authorizations for multi-family buildings and projects with between two and four housing units. Before seasonal adjustments, the number of multi-family permits issued in December was the highest for any month since 1985. Single-family permits only increased 2% between November and December. Similarly, the number of single-family homes that builders started construction on actually dropped by roughly 2% on a monthly basis. So where were the increases? The increase in starts was driven by a nearly 14% gain in construction of multi-family projects. For the full year, though, builders maintained a steady pace of construction on single-family properties. Before seasonal adjustments, the number of single-family homes completed in 2021 was the highest since 2007. At the current level, the number of single-family homes under construction remains at a level last seen in 1973. For each single-family unit completed in December there were 9.5 single-family units under construction, the highest ratio in the life of the data. Meanwhile, multi-family building, which lagged notably in the early stages of the pandemic, is now the dominant driver. This is undoubtedly a response to surging rents and ultra-low rental vacancy rates.

Growing inflation concerns and ongoing supply chain disruptions snapped a four-month rise in builder sentiment (even as consumer demand remains robust). Builder confidence in the market for newly built single-family homes moved one point lower to 83 in January, according to the National Association of Home Builders (“NAHB”)/Wells Fargo “Housing Market Index” (“Index”). The Index has hovered at the 83 or 84 level, the same rate as the spring of 2021, for the past three months. Higher material costs and lack of availability are adding weeks to typical single-family construction times. NAHB analysis indicates the aggregate cost of residential construction materials has increased almost 19% since December 2020. The most pressing issue for the housing sector remains a lack of inventory. Building has increased but the industry faces constraints, namely cost/availability of materials, labor and lots. And while 2021 single-family starts are expected to end the year about 25% higher than the pre-Covid 2019 level, higher interest rates in 2022 will put a damper on housing affordability. Derived from a monthly survey that NAHB has been conducting for 35 years, the NAHB/Wells Fargo Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. As a result, the Index gauging current sales conditions held steady at 90, the gauge measuring sales expectations in the next six months fell two points to 83, and the component charting traffic of prospective buyers also posted a two-point decline to 69.

Holy moly! Mortgage rates rose to levels last seen in March 2020 as markets continue to price in expectations of an upcoming interest-rate increase from the Federal Reserve. The 30-year fixed-rate mortgage averaged 3.56% for the week ending Jan. 20, up 11 basis points from the previous week, Freddie Mac reported last Thursday. (A year ago this time, the 30-year loan was averaging 2.77%.) The 15-year fixed-rate mortgage, meanwhile, rose 17 basis points to an average of 2.79%. The 5-year Treasury-indexed adjustable-rate mortgage averaged 2.6%, up three basis points from the previous week. To put these numbers in perspective, the last time the rate on the benchmark 30-year loan was this high there were only 15,200 total COVID-19 cases in the U.S. (according to data from the U.S. Centers for Disease Control and Prevention).

Today, the total number of cases in the country has reached nearly 68.6 million, according to the New York Times. Keep in mind, the Fed doesn’t control mortgage rates. Mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury, which rose over the past week as data underscored the likelihood that the Federal Reserve will roll back its stimulus activities to curb high inflation. This data supports market expectations that the Federal Reserve will begin to move early in 2022 to address inflation, and potentially accelerate asset purchase tapering and balance sheet runoff. For investors, this means that the monthly mortgage bill will be significantly higher than it was a year ago. According to an analysis from Realtor.com, at today’s rates you can expect to pay $238 more per month on your mortgage than you would have if you had bought property at this time in 2021. That adds up to nearly $3,000 more per year, on account of the higher interest rate.