New lows in California housing affordability set off recession alarms for SLO County experts

As the statewide and San Luis Obispo County housing markets went through another month of stagnant prices and underperforming sales, affordability sunk to new lows in the Golden State last month — raising concerns of a recession.

According to the California Association of Realtors’ quarterly housing affordability report, just 15% of California households could afford to purchase a $843,600 median-priced home in the third quarter of 2023.

To afford a median-priced home, a household would need to make a minimum of $221,200 a year to make monthly payments of $5,530 at a 7.14% interest rate, CAR’s analysis found.

This most recent nadir in affordability — the lowest since the third quarter of 2007, during which only 11% of California households could afford a home — is the result of months of sustained sky-high interest rates and limited inventory, San Luis Obispo County Realtor Lindsey Harn said.

Harn said with consumer spending lagging in the holiday season, a recession may be brewing next year.

However, while a recession would likely lower interest rates, a post-crash housing market would also reward the buyers with the most money on hand: investors and buyers looking for second homes.

“There’s a big disconnect on what people earn here and the cost of housing,” Harn said. “That entices a lot of investors, a lot of people buying second homes, but for the people living here, rolling up their sleeves every day, it’s really difficult.”

Low housing inventory, high interest crush local affordability

Samuel Cotton, a senior loan officer with home lending firm The Mortgage House, said the current state of the housing market has experts searching for answers when trying to predict how mortgage rates could trend in the near future.

Uncertainty over how the Federal Reserve will handle interest rates, heightened international conflict in Israel and Ukraine and a coming election all could influence rates in the coming months; the only question is how, Cotton said.

“If you talk to certain economists, it’s their opinion we’re already in a mild recession,” Cotton said. “Whether we’re in a recession or we’re not, nobody can even agree on that.”

In October, mortgage rates hit a 20-year peak, hitting 7.79% on Oct. 26, but have since softened to 7.44% as of Nov. 16, according to mortgage loan corporation Freddie Mac.

While interest rates reached new peaks, San Luis Obispo County’s housing market reached new lows in affordability, bottoming out at 10% in the third quarter of 2023, according to CAR’s analysis.

Cotton said Freddie Mac is often around two weeks behind on reporting interest data. As recently as Nov. 17, he’s quoted 30-year fixed-rate Federal Housing Administration loans for buyers as low as 6.99%, he said.

Statewide, local prices hold steady as sales show little growth

Though affordability slipped statewide, prices largely held steady — a phenomenon Cotton attributed to the impact of high interest rates.

Last month in California, median prices reached $840,360 — 0.4% lower than the previous month, but 5.3% higher than October 2022’s median price.

Sales in California were similarly muted, rising just 0.3% from September and falling 11.9% from October 2022 for a total of 241,770 last month.

Year-to-date, statewide home sales were also down 27.2% in October compared to this time last year.

The Central Coast region, which CAR identifies as San Luis Obispo, Monterey, Santa Barbara and Santa Cruz counties, was the only region in the state to post a sales increase compared to last October, CAR’s report found.

The Central Coast also led all regions with the highest year-over-year increase in median price, with a 12% regional increase in price buoyed by strong performances from Monterey and Santa Barbara counties.

Though prices in San Luis Obispo County rose 8.9% year-over-year to $888,000 in October, they were unchanged from the previous month.

San Luis Obispo County also saw limited growth in sales, with 170 sales last month — 0.6% more than October 2022.

Neighboring Santa Barbara and Monterey counties saw similarly muted sales performances, though both saw prices climb far more year-over-year than San Luis Obispo County.

Santa Barbara County posted a median price of $1.37 million last month, growing 22.9% year-over-year, while Monterey County’s median price grew 29.8% to $1.12 million.

Sales in Santa Barbara County grew by 4.5% year-over-year with 161 in October, while Monterey County sales trended in the opposite direction, falling 4.6% year-over-year to 144.

SLO County prices rise, sales fall in small communities

Year-over-year, median prices rose in all but three San Luis Obispo cities in October: Los Osos, Morro Bay and Pismo Beach.

San Luis Obispo’s median price reached $1.19 million in October, growing by 23.3% year-over-year and 10.2% compared with the September.

In October, 24 homes were sold in San Luis Obispo based on 35 listings — a 20% increase in sales and 16.7% decline in sales compared to the same month in 2022.

North of San Luis Obispo, Templeton led all San Luis Obispo County markets with a median price of $1.45 million in October, though that was based on just four sales and 16 homes listed on the market.

Because of the low sales, the 61% growth in price compared to last October in Templeton is more likely due to outliers than a solid indication of growth, as the median price there in September was $900,000.

Atascadero meanwhile posted a median price of $818,000, with prices up 19.3% year-over-year and down 16.3% from the previous month.

No other San Luis Obispo County city saw more improvement in sales than Atascadero, with a 130.8% year-over-year spike in sales based on 30 transactions and 50 listings — which was also up 8.7% year-over-year.

Paso Robles continued to enjoy the lowest prices of any city in the county, with the median price rising 9.2% year-over-year and falling 4.4% from September to reach $721,000 in October.

In October, Paso Robles also accounted for the most home sales in the county with a total of 39 — 7.1% lower than in the same month last year — and had the most listings with 79, a 6.8% year-over-year increase.

Along the North Coast, Cambria posted a median price of $1.05 million, rising by 17.7% year-over-year and 14.6% compared to September, while sales declined 14.3% to six in October.

Last month saw 27 homes listed on Cambria’s market, a 22.7% increase from that time last year.

Morro Bay’s median price fell 17% from last October and 14% from September’s price to $920,000 last month, based on just three home sales and 13 listings — a year-over-year decline of 57.1% and 23.5%, respectively.

Los Osos mirrored its northern neighbor closely, with a median price of $913,000 in October that was 8.8% lower than last October and 12.7% higher than September’s price.

Similar to Morro Bay, that was based on just three sales — 57.1% lower than October 2022 — and seven listings, which declined 63.2% over that time.

In South County, Arroyo Grande saw the most year-over-year growth in price of any city in the county, rising 32.2% year-over-year and 16% from September to reach $1.23 million in October.

The city also saw a 43.8% year-over-year drop in sales to just nine units sold in October, based on 25 listings. Those were down 19.4% over that time.

Median Grover Beach home prices grew 31.6% year-over-year and 12.9% from September to reach $869,000 in October.

Sales in Grover Beach declined by 45.5% year-over-year, accounting for just five in October, while listings rose 16.7% over that time to 14.

Median home price fell 17.7% from October 2022 in Pismo Beach, but rose 22.4% from September, reaching $1.1 million last month.

Sales experienced a 71.5% spike to 12 in September, while listings also grew 46.7% year-over-year to 22 in October.

Nipomo’s median price grew 11% from last year and 32.1% from the previous month, reaching $1.09 million in October.

That month, 16 homes were sold in Nipomo — 20% fewer than in October 2022 — based on 31 listings, which were down 3.1% over that time.

Where could interest rates go from here?

Harn and Cotton offered differing views on the future of interest rates.

Both Harn and Cotton said current interest rates are giving existing home owners no reason to enter the market, while keeping prospective buyers boxed out with high monthly payments.

Even with rates declining closer to 7% in recent weeks, they are still high enough to exclude many potential buyers from the market, Cotton said.

“If you have a $900,000 purchase, and the guy puts 20% down at 3%, the payment is $3,035,” Cotton said. “At 7%, it’s $4,790, just for the mortgage.”

Cotton said he was unsure of where rates could land, but advised buyers to buy as soon as interest rates reach their budget range, with the expectation of refinancing later.

“The most important thing is to get ready to jump when you find a house that you like,” Cotton said. “It may not be your dream home, it may be a starter home, but it’s a home.”

Harn said she was “hopeful” interest rates will slowly improve over the next three financial quarters, but said rates will likely need to come down to 5% to work for most home buyers, which could take months — or a recession.

“The (Federal Reserve) has been very unpredictable, but I think they would be making a huge mistake to tamper with interest rates any further,” Harn told The Tribune. “Some people are predicting a recession as early as Q2 of next year, and I think now that inflation is under control, they’ve absolutely got to lower rates and make ownership a little more affordable again.”