Homes are still the least affordable in California. Together with the huge surplus of homes for sale, a sustained pickup in housing market will come much later than in the rest of the country. The recent stabilization of home sales in California was due to bargain hunters investing in foreclosed or about to be foreclosed homes and will disappear when bargains are no longer available.

Calculations from NAHB (National Association of Homebuilders) affordability data show that home are much less affordable in California than elsewhere in the southwest, in Florida or in other cities where housing prices soared a few years ago. The ratio of median income to median home price is still double the US average in both Los Angeles and San Francisco. New York City is the only other major housing market at the same level of affordability.

Note that the data is nearly two quarters old. It is nearly certain that plunging home prices have brought affordability in the formerly boom markets closer to the US average during the winter and spring. But it is equally certain that prices have to decline significantly more for the high priced markets to begin to recover. Modest income households still have an incentive to leave for cities with lower housing costs.

The table also shows representative cities with stable housing markets. These cities will be among the first to recover. How quickly depends on the current degree of surplus in homes for sale.

Some representative declining markets are also in the table. Affordability has not been a restraint on home sales in these cities. The restraint is surplus inventory of homes for sale created by people who leave to find a job elsewhere. Most of these cities will experience further decline in home sales over the next year.

The affordability situation in California is unique. The poor affordability took nearly a decade to develop and will take a long time to correct. Steep home prices increases began along the coast in the mid-1990s due to both real increases in home demand in the strong local economy and restrictions on supply, often in the form of high impact fees and permitting delays. Households moved inland for less expensive housing, raising inland home price. Then households moved far inland into the desert and eventually into the central valley, creating soaring home prices (now crashing quickly) in poor farming cities. In 2005, the flight from the high prices on the coast pushed people into Arizona, Nevada and Oregon, creating soaring home prices in these states.

It appears that a balanced market requires a 30% or more drop in home prices in Los Angeles and San Francisco, perhaps 25% elsewhere in the state and as much as 20% further inland in Arizona and Nevada. Income gains will contribute 4-6% over the next year. The balance has to come from further price cuts.

The Florida data needs to be interpreted carefully. The affordability problem appears to be much less severe than in California. But this is the average of depressed markets along the south coasts and nearly stable markets inland and in northern Florida. Coastal housing development recovery may be as delayed as in California but recovery will be many months sooner in the rest of the state where affordability is better and the inventory surplus is smaller.

Ratio of Median Income to Median Home Price

Source: Calculated from National Association of Homebuilders data

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