Breaking News: 80% of LA Families "Can't Afford" To Buy A House

The California Association of Realtors reports that you need an income of $101,000 to buy an entry level home in Los Angeles, which means 80% of local families can't afford to buy a home. Now, we understand the real estate market doesn't work this way, but the Realtors try to measure "affordability," and it is worth taking a quick look at their findings.

The CAR reports that "affordability" for entry-level buyers across California is 25%, but is just 20% in Los Angeles. down from 21% in LA a year ago. The national "affordability" index is 64, up from 63 a year ago.

Here are the assumptions behind the 20% number: The Realtors calculate that the median-priced entry level home costs $501,000 in LA; the Realtors assume a buyer puts 10% down (Realistic? Probaly not), and can spend only 40% of his or her income on monthly housing expenses, which include mortgage, taxes and insurance. They assume an ARM at 6.3%, and crunch those numbers and come up with a minimum annual income of $101,000, which means only 20% of the population qualifies.

Why this exercise is somewhat irrelevant in the real world: LA homeowners borrow much more aggressively than this model allows.

Thoughts? Comments? Email story tips to lalandblog@yahoo.com.

Comments

[rufusxaviersasparilla]

Amazing.

As long as this keeps up, people will keep jumping through their asses
to get a piece of the American dream to the detriment of their pockets.

Were's the tipping point?

[Ran]

What happens when all the young familys leave California? Many of my friends have relocated, and I believe we will too. There must be some effect.

[brettdl]

The same thing is happening in Chicago -- I recently left SoCal for the Windy City -- but on a smaller scale where fewer old neighborhoods have been resucitated. What I see is this: While a lot of newcomers are bailing out of wealthier neighborhoods, new money keeps coming in.

Here's what I suspect: The upper-middle class hasn't been hit yet by what's going on because the housing woes haven't trickled UP through the economy. And because it hasn't caught up with them yet, they haven't yet adjusted their behaviors.

But I think it will. I envision a three-part housing crash: subprime, Alt-A and finally the prime. The Alt-A is just getting underway.

[Patrick]

The reality is even worse. The US average for personal savings is negative so there are no down payments. Certainly not 10% for the median sales price! And then the CAR adds insult to injury by using an ARM suicide loan rather than the traditional 30 year fixed. I'd be shocked if even 5% of Los Angeles can buy the median home without severe threat of foreclosure two to three years down the road. The city and state are going to reap what they sow - negative population growth and an evaporated middle class.

[IDrinkAlone]

I love how they assume that you will just take out an ARM to "buy" the house.

Only idiots get adjustable rate mortgages.

I would say that the true rate of affordability is less than 10%. I know that if I had to buy my house at it's current price (based on comps) that I couldn't afford it, and almost everybody I know is in the same boat.

With credit tightening up, I'd say that house prices are going to crash and crash hard. It's already happening all over California, and won't stop until they're about 50% of peak levels.

[Craig]

I just looked at the Wells Fargo Opportunity index which evaluates how affordable homes are...Los Angeles is one of the worst areas and is basically at RECORD lows as the median price is over $500K and median salary in the mid $50K range. The index value was down from levels of 50 and higher to current levels of 2...thats right, just 2. When taking neg-am and interest only loans with 0 down becomes NECESSARY to get into a home, then you know things are looking bad. We are at all time highs here and the deflation of the market seems to be happening faster and faster as all the loan resets and defaults begin to occur. This could take 5 years or longer to get back to normal here. Renting is almost always half as expensive as owning (even after taking into consideration the tax break), so for now it seems to be a good time to rent something cheap, hoard cash and polish up your credit profile. I wouldn't want to even think about buying anything for at least 2-3 years...this is going to take time, don't be a knife catcher.

[rickdanger]

In response to I Drink Alone. There is nothing wrong with adjustable rate mortgages, I have one on my home. On an adjustable your payment is caluculated off your remaining balance, therefore by prepaying my loan, my next months payment is calculated off a slightly lower loan amount. If you get a stable cost driven index (cosi) and go directly to a bank instead of paying the broker mark up you can get a loan in the 6% range.

The adjustable is a little more sophisticated than the follow the heard "fixed" rate crowd, it's not the rate that you borrower but the rate you paid that counts and I would bet $1.00 that I Drink Alone still lives with his mother.

If anyone would like more info, I'd be glad to help.

[Cal]

With the CAR formula they find a convenient way of reducing the median price down to 76.5%, a financially suicide level of household debt (40% of income), Insurance (.0038 of purchase price divided by 12) and Taxes (.01 of purchase price) are both light.

The question then becomes how are people actually affording homes, looking at what people are doing to get into homes (ARMs with teaser rates, Interest only and negative amortization payments, 100% financing (no down needed), very high debt to income ratios as high as 60%). If you look at the amazing concentration of these loans in Southern California you can see how prices got to the level they are at. Then throwing into the mix the number of cash-out refinances from fixed interest rate into the toxic loans you can see that we are going into uncharted territory.

This market cannot stand even a little credit contraction, that is why the government is trying to let FHA + Fannie Mae + Freddie Mac underwrite these toxic loans. They want to prop up the market as best as possible. The issue becomes that it is in a fundamentally unhealthy state, people aren't paying down principal, ARMs are adjusting upwards taking even mroe money away from the homeowners, no savings for emergencies/retirement/healthcare/college, loss of appreciation which was the safety valve of the market to allow homeowners to refi, and the inability of new people to enter the market in a stable fashion. We actually have a net outflow of people (more people moving out than moving in, only population growth comes from births) because of this situation. So the government propping up the market at this price level is creating a huge class of debt ridden people with no savings and no equity in their homes. It will burden the state and the nation for a very long time.

The fed is playing a high risk game of devaluing the dollar "just enough" to reduce the burden and hoping that other countries dont stop supporting it. We will see how it all plays out, but a prudent course of action (in case the plan doesnt work) would be to pay down debt, save/invest (index funds, bonds, international index funds) as much as possible, and dont leverage yourself (mortgage or borrowing on margin) in any way.

[Diana Moon Glampers]

The solution is mass lottery winnings.

[T]

I feel like I'm on the outside looking in on some strange phenomenon. I'm 39 years old, share a 1-bedroom apartment with my partner in West Hollywood (where there's rent control), drive a 12 year old car that's paid for, have no credit card debt, and earn $120k a year--and I can't fathom buying a home in today's market. My obvious problem is that I invest 25% of my income in a combination of 401(k) retirement and general investments through a managed brokerage plan instead of just buying a home in the hills and living on credit cards. Am I missing something?