Things have changed since the California Association of Realtors (C.A.R.) first started producing their annual Housing Affordability Index in 1984. At that time, the index used was very different. Fixed-rate mortgages were the norm, along with 20 percent down payments, and it was assumed that the monthly payments for principal, interest, taxes and insurance would be no more than 30 percent of a household's income. Since then, mortgage products have expanded and underwriting criteria has relaxed, but affordability hasn't increased accordingly.
In fact, it's gone down.
The percentage of first-time buyers in California able to afford a median-priced home stood at 23 percent in the second quarter of 2006, compared with 30 percent for the same period a year ago, according to a newly developed index, just released by C.A.R.
About 30 percent of first-time homebuyers could afford a home in California back in 1984, but considering the guidelines for the Housing Affordability Index have changed, affordability is a lot less than it was then.
Explains Robert Kleinhenz, deputy chief economist for C.A.R., the index criteria has changed according to what's more normal today. First-time homebuyers no longer put 20 percent down on houses they can afford on 30 percent of their income. They no longer overwhelmingly choose fixed-rate mortgages.
Today, first-time homebuyers, as reflected by the Housing Affordability Index, buy 85 percent of the median price in the area. They put 10 percent down, the qualifying ratio is 40 percent, and they get adjustable-rate mortgages.
Even with those head starts, less than one out of four first-time homebuyers can afford to buy a home in California.
The minimum household income first-time buyers needed to purchase a home at $482,000 in California in the second quarter of 2006 was $98,720, based on an adjustable interest rate of 6.48 percent and assuming a 10 percent down payment. The monthly payment including taxes and insurance was $3,290 for the second quarter of 2006.
"Bear in mind that the median price of a home in California is about two and a half times the national median," explains Kleinhenz.
What's troubling is the size of the numbers -- $482,000 sounds high, but that wasn't even the median price of a California home. The median price of a home then was $567,000; for first-time homebuyers, it was $482,000.
Meanwhile, the rest of the nation had it a lot easier. Nationally, the median price of a home in the second quarter for first-time homebuyers was $193,380.
Says Kleinhenz, "There's a big reason why affordability is so low in California -- homes are substantially higher than the nation as a whole."
However, that's not the whole story. Most of the decrease in affordability has been in interest rates rather than home prices this year. "We have seen impressive double digit increases (16 percent in 2005, and higher in prior years) in home prices, but we are looking at 6 to 8 percent increases for this year which will adversely affect affordability. Adjustable rates are impacting affordability."
This is not a new situation, as only 3 out of 10 homebuyers are first-time homebuyers, but one out of four being able to buy 85 percent of the median home in California is an all-time low as a percentage.
So what's the outlook? "The long-term effects have been evident for 20 years," says Kleinhenz. "With the traditional index, affordability was a problem because California has always been more expensive than the rest of the nation, and it will continue to be, so we find that first-time homebuyers have to look carefully at their options, such as buy condos over detached homes, and they will tend to be older because they have to amass a certain amount of savings, so I don't expect the situation to change for first-time homebuyers."
