Are buyers struggling to afford the market? Let’s talk about that today. I have some brand new visuals to share (Part I) and then let’s unpack a new study that says Sacramento is the least affordable area for new homes (Part II). What are you seeing in your area regarding affordability? I’d love to hear.
UPDATE: News just broke about Zillow exiting the market for good. I’ll talk about that next week on my blog (but now on social channels).
PART ONE: Affordability
1) Duh, affordability is going down: It’s no surprise to see affordability diminished in recent years in the United States, California, and locally. Prices have risen and while mortgage rates have been a game-changer for affording higher prices, affordability is still taking a hit. Here are some visuals I made based on data from the California Association of Realtors (CAR) (here).
2) What was affordability like during the “bubble” days? How many people could afford to buy before the market crashed? According to CAR data in 2006 only about 12% of buyers could afford the median price in California, 10% of buyers in the United States, and 21% of buyers in Sacramento. In contrast, this same index today shows 23% of buyers in California can afford a median-priced home, while it’s 50% of buyers in the United States and 38% of buyers in Sacramento. Keep in mind just because you cannot afford the median price doesn’t mean you cannot afford to buy at a lower price.
California: This visual tells the story that 23% of households in California are able to afford a median-priced home. I suspect many states are more affordable than California, but I’d love to hear any specifics from any onlookers. As CAR points out, affordability was at the peak in 2012. See full report from CAR here. As a side note, there are thirty seven counties in California where fewer buyers can afford the market compared to Sacramento County. But Placer, Yolo, and El Dorado are all less affordable, so when we look at regional data this pushes Sacramento as a whole to be less affordable (though nowhere close to the Bay Area and coast).
PART TWO: Sacramento made the top of the list
A new report says Sacramento is the least affordable area in the country for brand new homes. This report from a company called Knock has gone viral. The Sacramento Bee wrote about it here. I even had an out-of-state family member forward me a national TV show talking about the subject.
A few things:
1) This is only about new homes: Understanding the fine print helps us interpret what is and isn’t being said. For instance, this study from Knock only focuses on brand new construction. In Sacramento 12% of the market is said to be brand new homes, which means this report doesn’t apply to 88% of the market. In other words, when people start saying stuff like, “Bro, Sacramento is the least affordable place in the country,” that’s NOT what this study is saying.
2) Brand new vs used: The median price for a brand new home is said to be $650K compared to $550K for older homes. This highlights the reality of how much more expensive new construction can be at times and also how difficult it is to build affordable housing too (but that’s a different post). Keep in mind some of this price difference could have to do with newer units being larger too. Anyway, it’s not a massive shocker to see fewer buyers able to afford a home priced $100,000 or 18% higher than older units. Check out Knock’s research below. I know, the font is tiny. Click the image for a larger version.
3) Is the resale market 80% unaffordable? This study says 80% of households in Sacramento are not able to afford a brand new home at the median price of $650,000. That’s a sobering stat that most of us wish was different. But does this mean 80% of buyers cannot afford homes that are not brand new (aka “resale” homes)? Nope. According to the California Association of Realtors 38% of households last quarter could afford the median price in Sacramento County and most other local counties range anywhere from 31-35% (see visual). To say this negatively, 62-69% of buyers can’t afford the median price in the Sacramento region (the percentage varies depending on the county). Ultimately it’s clear affordability is better in the resale market, but the stats at 62-69% don’t sound incredibly encouraging either, right?
4) Buyers are engaged: It’s easy to say stuff like, “The market is not affordable”, but does that line up with actual stats? Are buyers pulling the trigger at current prices or are they stepping on the brakes? For now despite affordability declining in recent years, volume has been really steady locally and buyers have had a voracious appetite. So despite weakening affordability buyers have been getting it done. Anyway, stay tuned for fresh stats in coming weeks.
Let me stop before this becomes a dissertation.
Stephen Forrester: I did not know Stephen, but he was an appraiser who tragically passed recently. Here is a GoFundMe to help him out.
Questions: What stands out to you most above? What are you seeing and hearing regarding affordability? What did I miss?
If you liked this post, subscribe by email (or RSS). Thanks for being here.
Some people who currently own a home may be planning to sell their current home to buy something smaller because their children have left the nest or they could be looking to buy a larger home due to a growing family or because an elderly parent is needing to move in with them. In doing so these people may now have large amounts of cash to put down on this next home because of the equity they will be pulling out of the home they are replacing.
Thanks Tamara. True story. Downsizing and upsizing is a real thing. Right now many owners have massive equity to deploy also that can end up working for them. That can be a catalyst for some to get into a different neighborhood and make real estate decisions. I find some buyers are able to afford higher prices by deploying their equity. Equity = power.
Great information as always. I’m impressed with some of the data you’re able to tabulate. Nicely done and vey informative.
Thanks so much Gary. It’s fun to experiment and plot different types of stats. It helps me understand the market too. Hopefully this resonates. I find sometimes more technical stuff doesn’t do as well. I think this is fascinating though.
Maybe what this Knock report also misses is that many buyers in Sacramento & surrounding areas come from the Bay Area, where I’m sure average annual income is much higher. Seems to me that would push affordability much higher.
So in a sense the market (when it comes to buyers) is a combined Bay Area/Sacramento metro market. Does that sound plausible?
Hi Dave. Thanks so much. This is definitely something to consider. I just wish we had more robust data to help see exactly where buyers are coming from. Granted, in a few weeks we might have more data out and I’ll do another post on migration like I did last year (cannot wait). But otherwise I’m not aware of any one data source that is completely unpacking the trend as to explain just how many Bay Area buyers are present. I do recall a study from CBRE earlier in the year that showed extra migration to Sacramento, though it doesn’t look like the migration is really swaying the market either because these buyers are not the total dominant force. Overall my sense is Bay Area buyers are a definitive factor, but I’m not sure they are the real driver of the market. Case-in-point. The market in Sacramento has felt incredibly lopsided and we’ve seen a major emphasis at higher prices too. This seems like it can easily be explained by Bay Area buyers, which is certainly part of the issue. Yet this same exact dynamic has been happening nationally where luxury real estate has increased during the pandemic. There has been SO much movement at higher prices for many reasons. Thus what we are experiencing here isn’t foreign to the rest of the country, so I think we need to be cautious about pinning the trend on the Bay Area exclusively. All that said, I’m not dismissing the Bay Area dynamic at all. I’m just saying I think at times it maybe gets emphasized a bit too much (not saying you are doing that).
I’m open ears for any data if you or others have a solid source. This is one thing that needs further investigation and it’s absolutely a layer that needs consideration in this conversation.
Thanks Ryan. I came across information some time ago which had data on wealth migration, from state to state and even county to county. I’m sure all these people aren’t real estate buyers but I would think a significant percentage are. Anyway, interesting site. Click on California, zoom in and click on counties. For example, in my El Dorado County, 4 of the top 5 counties we gained wealth from were Bay Area counties. Every top 5 county we lost to was in Nevada.
See:
https://www.howmoneywalks.com/irs-tax-migration/
Thanks Dave. This is a cool link. I’ve seen it before, but I totally forgot about it. I’m really looking forward to updated data as it looks like the stats go through 2019. Now my turn to return the favor. Here is a link called the Census Flows Mapper. It’s a way to see where people are moving and where they are coming from. The problem is data only goes through 2019. Hopefully in the next month or so we will get more 2020 data. Fingers crossed. https://flowsmapper.geo.census.gov/
But back to your source. It shows the top group to El Dorado (and Placer) is really Sacramento County. My observation through the Census Flows Mapper has shown the same thing. I know we talk quite a bit about the Bay Area, but we have huge movement from Sac to Placer and El Dorado. I think at times that gets lost in translation as maybe the narrative isn’t as sexy.
Please keep me posted if you see any interesting migration stats. I’m always open ears. Thank you again.
Do these statistics include the bidding war prices we have seen in the last year or so? Resale houses are going for lot more than asking price. Is that included in this assessments? Thanks! And Yes 62-69% is a very sobering #
That’s a great question Shikha. I’m not on their end, so I don’t really know what they included, but there are two reasons why their stats should consider the bidding wars: 1) They are presumably looking at closed sales and any closed sales should have the bidding war dynamic already baked into the data; and 2) Their quote of the median price at $550,000 is spot on for the region. That’s basically the median price for October for the entire region (Sacramento County is about 10% lower than the region though).
I live in Florida. The guy that painted my house last year, is married with 3 small kids under 10. One child is special needs. He is now homeless and living in a tent. I just dont know what to say.
That is just horrible. It makes me so sad to hear.
Great stats Ryan. Affordability isn’t just about the home purchase price, but also property taxes, income taxes and sales tax. My numerous sellers moving to Texas for example, are buying larger, higher end homes to accommodate aging parents, yet the even with higher property taxes and a sales tax in range with ours, no income tax levels the playing field, ultimately making it cheaper to live there than CA.
Thank you Karen. You are so right. What is the monthly payment when considering all the factors? That’s the real question. I have heard about Texas taxes.
Ryan, thanks for sharing your thoughts. Sacramento has always been unique in terms of Bay Area migration. I’d be interested in hearing about Bay Area stats because when that market starts cooling off there, Sacramento will hit the breaks shortly after. Affordabilty seems to be the main indicator and we appear to be nowhere close to a level of concern especially if you were to toss in Bay Area salaries that are moving up here which might not be reflected in the figures.
Thanks Paul. We certainly aren’t back to the previous bubble levels of concern. We aren’t heading in the right direction though either. California as a whole is becoming less affordable though and it’s a concern. Having only 23% of buyers being able to afford the median price isn’t high enough. Point taken on the Bay Area. I think we need to see some more robust migration data soon to understand just how much Bay Area influence there is right now. I heard someone say the other day that 70% of escrows are Bay Area buyers, but when asked to substantiate that there was radio silence. Hopefully in the next couple of months we will have more data. I wish there was one end-all source, but I’ve yet to find anything that was really descriptive. I will say most of the time when stats come out they end up being more subdued than the narrative.
Thank Ryan for the great information as always! i love to read the comments and your responds. very informative. Thank you All.
Thank you so much Arax. I appreciate it. I’m all about the comments too. That’s typically what I do on social platforms also. I like to see the tweet, but I love to see the conversation more. 🙂