Housing industry braces for possible recession

Nothing significant changed regarding the cost of buying a home in California between 2023 and 2024, unless you consider a one percent change in the number of people who can afford a home signifiant.

For a little than more than four-fifths of the state’s population, buying a home remains an elusive dream, something they can aspire to but may never achieve, a recent study has found.

Only 18 percent of Californians last year could afford the $865,440 statewide median price of a detached single-family home, down from 19 percent in 2024, according to the California Association of Realtors’ 2024 Housing Affordability By Ethnicity study.

Released last month, the report is a detailed analysis of housing affordability in California. Its affordability numbers are based on a 20 percent downpayment on a median-priced home, and an annual income of at least $221,200,

That would be enough to make monthly payments of $5,530, including principal, interest and taxes on a 30-year fixed-rate mortgage with an 6.8 percent interest rate.

The Inland Empire’s affordability index fared slightly better than the state’s last year.

In Riverside County, 25 percent of the population could afford a median-priced home – $628,470 – assuming monthly payments of $4,010. In San Bernardino County those numbers were stronger: 35 percent of the population could afford the $485,000 median price, assuming monthly mortgage payments of $3,100.

“Houses in the Inland Empire don’t cost as much, and there are usually a few more on the market, so it’s not surprising that it has a slightly better affordability index than the state as a whole,” said Manfred Keil, associate professor of economics at Claremont McKenna College.

Broken down by ethnic groups, the affordability numbers are even less encouraging.

Twenty one percent of white households in California could afford a median-priced home last year, while only 10 percent of African-American households and nine percent of Hispanic-Latino households were able to do so.

Those ethnic-group numbers were essentially unchanged between 2023 and 2024, the Los Angeles-based association reported.

“The significant difference in housing affordability for (African-American) and Hispanic-Latino households illustrates the homeownership gap and wealth disparity for communities of color, which could worsen as the economy slows and rates remain elevated in 2025,” the report states.

Housing affordability was better for Asians, but it also declined from the prior year, with the index registering 27 percent who could afford a median-priced home in 2024, down from 29 percent in 2023, according to the association’s Housing Affordability Index.

“While interest rates are projected to dip slightly in 2025, the gap in housing affordability among ethnic groups will likely remain wide this year as home prices are expected to grow moderately in the next 12 months,” the report states.

That single-family homes in California are priced off the market for most families is not new. That’s been the case for at least 10 years, and the reason isn’t because not enough people want to buy a house in California, it’s because not enough houses are being built in California.

There are many possible explanations for that: zoning laws that put strict limits on the number of houses that can be built, community opposition to residential development, high construction costs, and environmental laws that are too restrictive, among other potential culprits.

Whatever the reason, everyone seems to agree that high demand and not enough supply has driven the price of housing in California to astronomical heights. Now, with a possible recession on the horizon, the state’s housing affordability problem could get worse.

“Actually, it could get a lot worse, because the cost of materials that you need to build a house could get more expensive” said Jordan Levine, senior vice president and chief economist with the realtors association. “We are in a tariff dispute with Mexico, which is where gypsum and dry wall comes from, and we have the same situation with Canada, where we get a lot of the lumber to build houses. A recession would impact the housing market, because it would add to those costs.”

Consumer confidence falls whenever the economy slows, and at some point people stop spending money on major items, like a house or an automobile. With a possible recession looming sellers may drop their prices, but how the housing market will react to a recession is difficult to predict.

The 2020 recession didn’t last long, and home prices bounced back quickly, but the recession of 2007-2009 caused a significant drop in prices and took much longer to recover. Either way, an economic slowdown in 2025 seems likely, according to Keil.

“Based on all of the numbers we’re seeing, we’re probably going to have a recession sometime this year,” Keil said. “Inflation is going to stay up, which means the Federal Reserve won’t be able to reduce interest rates, and that won’t be good for the housing market.”

But talk of a recession this year is exaggerated, another local economist believes.

“I will be stunned if we have even a small recession this year,” said Jay Prag, professor of economics at the Drucker School of Management at Claremont Graduate School of Management a Claremont Graduate University. “I think the people who are talking about a recession are reacting to headlines that say one thing one day and then change completely the next day.”