The Stars Are Aligned
We're currently in a perfect storm and the stars are aligned. Housing prices have fallen an average of 2% since last year, wages have improved an average of 2.9%, and mortgage rates are down across the board.
Theoretically, the housing market should be better for buyers! The title insurance company, First American Financial Corp, says San Jose is the best place in the US where housing affordability has improved over the last year, compared to the other 44 major markets that it tracks.
The study says that all of the factors increased the home-buying power of a buyer by 6.9% over the last 12 months.
It Isn't Helping That Many People
However, the amount of new people that are now able to purchase a home is still very small. Only 6%-7% of current renters can buy in San Jose, so not a lot has changed.
The median renter can afford a $474,000 home, which is great in most places, but the average home price in San Jose is $1,028,000. The median renter can only afford 5% of the homes in the local market. The renter in the 90th percentile of incomes can afford a $1.4 million home, which is about 71% of the homes on the market.
How Long Will It Last?
This perfect storm that has increased affordability is temporary. Demand for real estate is still high and the increased affordability is now making new home buyers eager to purchase their own property. As demand increases, the nominal house price appreciation will erode the affordability boosting benefits of the lower mortgage rates and rising income.
More house-buying power means more buyers. More buyers means more appreciation. It's an intricate dance that determines the direction and pace of affordability trends.
To be honest, the slowdown of the market still perplexes me. I saw the signs of a growing stock market, increased wage growth, and a steady unemployment rate. But prices in the Bay Area softened significantly (peak to trough drop) in 2018. What caused the housing market to soften in the first place? Some say it was a combination of buyer's fatigue and rising mortgage rates.
Let's hope this window of opportunity lasts for those who want to purchase a house in the near future!
Link to the original Business Journal article: https://www.bizjournals.com/sanjose/news/2019/06/25/housing-affordability-much-improved-in-san-jose.html