California housing: still unaffordable

From Inman News:  "A new report released by an industry trade group found that only 24% of California households could afford to buy an entry-level home during the second quarter."

More on the affordability report from the California Assn. of Realtors: "The minimum household income needed to purchase an entry-level home at $504,080 in California in the second quarter of 2007 was $101,550, based on an adjustable interest rate of 6.29% and assuming a 10% down payment."

More numbers: The price of an entry-level home in Los Angeles is estimated at -- oddly -- the exact same amount as the statewide number, $504,080, requring the same income, $101,550.

Our take: First-time buyers put down a lot less than 10%, on average. In 2006, 41% of first-time buyers put nothing down, according to CAR.

Thoughts? Comments? Insights?

Comments

[longdriver]

And how many people making 100K a year are going to want to live in a 500K house in LA. That gets you a tiny condo or a 80 year old shack in south central. Anything decent in a decent area is north of $700k. 500K gets you a nice home in Temecula, Riverside or Palmdale. The problem is those homes should be $200k and might very well be in a couple of years. Well it is nice to see an article about the affordability problem finally. Lets face it, a family making 100K a year should be able to afford a nice home in a nice area.

[Jeffrey Allen Miller]

Would like to know where people found the money (in the first place) to feed the housing boom that is now past. I'm sure you Peter can attest these buyers were not living on journalists' slave wages.

Even with a slight decline in home prices, my question still stands: Where does the money come from and what professions afford entry homeowners to buy a rinky-dink starter home for $500k in LA? (Or $1M for a studio here in Manhattan.) I would smile at a market crash that resulted in an average entry level price falling back into the $90s, or only twice the median household income.

[AnnS]

Sort of related trivia. I came across an article detailing who is defaulting - owner occupied or non-resident owner.

"Mortgages for investment properties constitute a major chunk of defaults in four states with the fastest-rising rates of seriously delinquent loans, according to data released Thursday by the Mortgage Bankers Association."

(And one of those with the high rate of defaultng investors is CA)

http://www.marketwatch.com/news/story/story.aspx?guid=%7BA7BAF583%2DA2CD%2D46A9%2DA1D3%2D75CA367D7487%7D&siteid=rss

[Xtine]

Why is this news now? Hasn't this been a fact of life for 5 years already?

[Richard]

The problem here....is greed pure and simple. People are hanging by their teeth because they were sold a con that prices will continue to go up. Until they face reality and lower their asking price about 20% it will remain a Mexican standoff!

[Cal]

I posted this as an OT post in another thread:
"They CAR used to have more conventional assumptions for their index but it showed "affordability" going into the single digits, instead of admitting that California is unaffordable, they did what any blue blooded economist would do, they changed the parameters of affordability.

Current "affordable" parameters are 40% of income for PITI (that is the front end ratio), First time homebuyer will only buy a home that is 85% of median price for the area, and will have a 10% down payment. They also assume ARM interest rate because the interest rate is lower.

So even with all of these impossible assumptions only 20% of LA County residents can afford a home with a minimum income required of $101,550.

http://www.car.org/index.php?id=Mzc2NjY= "

The difference between the new definition of affordability and the old definition of affordability are so far off from what FTHB were really using to get into homes it makes you wonder if the CAR is completely out of touch with reality or if they know what the real deal is (IO loans, stated incomed, payment option arms, etc) and know that talking about that in an open setting will be like pointing out that the emperor has no clothes. Either way it doesnt inspire confidence in the CAR or their "economists".

[investorguy]

AnnS... Interesting stat. There's probably a psychology to that -- investor properties are easier to walk away from for most people because it's not their personal residence. I'm willing to bet that the majority of those are first-time investors who hadn't a clue. And they make the rest of us look bad. As you know, a smart professional investor can make money in any market -- as it climbs or sinks. Amateurs get crushed.

I look at the numbers, not the property, and walk away if they don't work. As one of my colleagues says: "The deal of the century comes along every three or four days, so don't fall in love. Work the numbers. If they don't make sense, wait for the next one."

[hehe]

I am also one person so glad that it is coming to make people to talk about simple math. You can use certain portion of income for mortgage and rest for usual stuff including saving for retirement. Now some funky ideas and there goes the stuff out of window. I am surprised that some heads roll in the context of lending practice by the some unscrupulous equivalent of loan sharking or ponzy scheme. i got rich of you,you next in line until and unless last person lose . This is what lead to high price fuel to housing,please wake up. Please help those who didn't read fine print

[shockg]

Why does the Blogger have to be so anti-real estate. Did something bad happen to you? got priced out of the market? Try reporting the facts and leave the negative anti-real estate opinion at home.

[AnnS]

"I look at the numbers, not the property, and walk away if they don't work. .... Work the numbers. If they don't make sense, wait for the next one." Posted by: investorguy |

I've been doing some business counseling on real estate investments. One person has been looking to buy single family, duplexs or 4 flats as an investment-income properties. Uh huh..... Sellers are still in la-land believing in the 'appreciation' tooth fairy.

In a tourist economy area where the median income $47,000 to $38,000 (largest neighboring community), the income can not support much more than $600 - 800 for apartments (and landlord pays heat, water, & sewer) or $700-1000 for a 3 bedroom house.

Sellers have this idea that their 4 unit building that rents for $650 (including heat,water, sewer) and has a 25% vacancy rate is worth $300,000 and up...... Add on a property tax rate of $40 -55 per $1000 of actual value and the numbers do not work.

There is a lovely small inn for sale in my town. Problem is that it is a seasonal business that managed to gross $92,500 and the best projected income numbers (if changes were made in operation) would be about $135,000. Sounds good until you run the costs. Currently they have retired family living there and acting as managers for nothing more than the apartment. Costs are currently $41,000 but add the real costs of wages and it hits around $80,000 in operating expenses. They have the delusion that it is close to a $600,000 property........... Now why has that been on the market for going on 2 years, eh??? (Oh and they flat refuse to have a commercial appraisal done and the realtor humors themhoping for an idiot buyer)

The numbers in that link pretty much show how much speculation was going by people who got the idea from reading a book or watching TV. They bought into the delusion that prices would go up forever and thought themselves very clever.

We have 2 here who decided to go into building properties on spec. Of course they waited until late 2005 to jump in. Of course, they can't sell a thing and are sitting there eating the interest payments to their rather annoyed lenders.

Never play a game where you are gusessing at the rules or you think you learned all you need to know from a self-help book.

_____

On affordability, the numbers from CAR are completely out of whack with the income of or the area. In 2005,the medin family income for the state was $61,476.

There are roughly 12 million households in the state - and they are trying to sell the 'entry level' homes to 2.7 million households (those with incomes over $100,000)

[Sam]

How about this brilliant solution to addordability in SoCal which has not changed in the last 50 years and will never change>MOVE

[XPDX]

When the numbers say only 20% of LA County households can afford a home, I am guessing they mean only 20% of LA County households have an income of $100,000. Any guesses on what percentage of that 20% already own homes? It would be interesting to know what percentage of LA households that can afford homes at the current prices would be potential buyers. Even an existing homeowner looking to upgrade or downsize would be likely to sell their current house so that wouldn't change the inventory of unsold homes. Seems to me that the number of LA County households that qualify to buy a $500K house, not already owning a home, could go as low as 10%.

[jemarqu]

shockg wrote: "Why does the Blogger have to be so anti-real estate. Did something bad happen to you? got priced out of the market? Try reporting the facts and leave the negative anti-real estate opinion at home."

I think Peter does do a good job at reporting the facts. I think his assessment of the LA market is very fair. If the market wasn't so horrible, I'm sure he would have something positive to blog on.

[jemarqu]

Sam wrote: "How about this brilliant solution to addordability in SoCal which has not changed in the last 50 years and will never change>MOVE"

No thanks! There aren't many states in the union that I haven't been to and I have yet to find a state with a climate that I would enjoy living in. I would rather live in my 900 sq ft apartment then 10 acres in a state with bad weather.

[jemarqu]

I think that the 5 phases of grief are applicable to the current RE mess.

Denial: If you watch the news at all you are probably past this phase.

Anger: I think most Americans are here right now. Everyone is pointing fingers. The lenders are mad at the Feds and the Feds are mad at the lenders. Home owners are mad at their agents, loan officer and the Feds. Everyone is mad at Countrywide.

Bargaining: This phase will accompany a price drop.

Depression: During this phase unemployment will go up and people will look back at all the money they lost .

Acceptance: This is when we all look back and say "this boom never made sense". This will be similar to how we look back at the great depression.

I think we can add a 6th phase...

Forget: This happens just before the next CA real estate boom.

[MyLessThanPrimeBeef]

Shockg, yes, I did get priced out of the market - I am mad because I can't even afford to buy from myself the house I own right now.

That's what I am mad at.

[MyLessThanPrimeBeef]

Jemarque, it was D.T. Suzuki who said, 'You do not understand until you have forgotten,' or something like that.

[investorguy]

AnnS wrote: I've been doing some business counseling on real estate investments. One person has been looking to buy single family, duplexs or 4 flats as an investment-income properties. Uh huh..... Sellers are still in la-land believing in the 'appreciation' tooth fairy.

I don't invest in LA because the numbers don't work here. Investment property doesn't cash flow in LA, and hasn;t for sevreal years. The last deal I did here (this week, actually) was in investor to investor flip that made a nice profit, but I've been putting my rental property purchasing money into other markets where the numbers actually work. Detroit, Toledo and, Mississippi and Northern Florida, for example.

[MyLessThanPrimeBeef]

Cal, a smarter economist will tell you, not only should you use ARM interest rate, instead of one for 30 year fixed, but also you should use the average projected annual income, for the expected loan duration, of the mortgage applicant when assessing his or her ability to service said mortgage, because, I mean, after all, he or she is not going to make the same amount forever.

Isn't it a shame that because all economists fail to be smart and take future earnings into account that we are not permitted twice what we qualify for today?

[MyLessThanPrimeBeef]

Investorguy, I have a question.

Isn't real estate investing all about knowing your markets and buy in places you know well and can actually watch over them?

Maybe real estate day-trading is different? I don't know.

[TrojanDLA]

Where does the NAR get these silly numbers? An entry level home at $500,000 even with a 10% downpayment of $50,000 means you are borrowing $450,000 which is a JUMBO loan - uh oh, suddenly the interest on a Jumbo loan is actually 8.0% if not higher for a 10/30 fixed with interest only the first 10 years.

Oh gee, I guess the buyer has to make $150,000 to buy that $500,000 fixer upper in Gardena. Affordability is a joke right now, most families have been priced out of the market, period. Sure, people making $250,000 can do a little shopping and negotiate, but the saps making $150,000 are out of luck unless they want to move into some sketchy parts of town with a questionable public school system.

[tarbubble]

oh yes, Sam. let's have everybody who can't afford to buy a house in CA move out of state. that way you can live here all by yourself! nobody working at the stores, nobody working at the restaurants, nobody unloading at the ports, nobody bringing in your drinking water, nobody fixing the streets... oh wait, can YOU afford to buy a house? i can, or at least i can still get approved for a loan. i just refuse to pay overinflated prices and have been patiently waiting for the crash to come. rent is cheap in comparison.

[LC]

100% loans are NOT the reason people are going into foreclosure...they are going into foreclosure because of the AMOUNT of the loan they took out and they can't afford the payments. If I can afford the payments of a 300K mortgage, then I either only get a house worth 400k or a house worth 500k with me bringing 100k to the table. But I definitely should not finance more than 300k, regardless of wether I get a 100% loan or an 80% loan.

What happen with the ARMs they gave buyers more money to get a house worth more, like getting the 500k house without bringing the extra 100k to the table and have a mortgage payment equivalent or at times less than it would have been with a 400k mortgage. So knowing fully well that rates would reset, they approved them for the loan based on the lower payment instead of the highest rate. That's where the loans went wrong. Those buyers should've never been approved based on the lower payment of teaser rates. Had the lenders only approved them based on the highest rate, then many of these homeowners wouldn't have had the buying power to inflate the prices and outbid people that could afford them.

So, it's not the 100% loans that caused the trouble. Is the AMOUNT of the loan that they were approved for. 100% loans are great product to help first time buyers get into knew homes but they have to use wisely, they have to be used for the correct approved amount that you really can afford to pay back. If it's not enough to buy the home that you want then you can't afford it and either you look for one that falls in your price range or you SAVE to make up the difference.

[Bubblewatcher]

'How about this brilliant solution to addordability in SoCal which has not changed in the last 50 years and will never change>MOVE'

How do you figure it hasn't changed in the last 50 years? In 2000, the median price of a home in SoCal was $211,000 -- or about 4 times the median income at the time. Now it's at $500,000 -- 8 to 9 times median income. Until this bubble deflates completely, affordability will remain terrible. I, for one, can't wait for prices to finally come back down to fair value again.

And the CAR must be on a different planet from us. They're still pushing adjustable rate mortgages and low down payments in a lending environment where these options are less available and causing all sorts of havoc in the credit markets. Do they honestly think ANYONE making that kind of money would be stupid enough to get an ARM and buy some overpriced, deflating property in this market?

Doh.

[LC]

Oops I meant ...400k not 300k...sorry, I corrected it...

100% loans are NOT the reason people are going into foreclosure...they are going into foreclosure because of the AMOUNT of the loan they took out and they can't afford the payments. If I can afford the payments of a 400K mortgage, then I either only get a house worth 400k or a house worth 500k with me bringing 100k to the table. But I definitely should not finance more than 400k, regardless of wether I get a 100% loan or an 80% loan.

What happen with the ARMs they gave buyers more money to get a house worth more, like getting the 500k house without bringing the extra 100k to the table and have a mortgage payment equivalent or at times less than it would have been with a 400k mortgage. So knowing fully well that rates would reset, they approved them for the loan based on the lower payment instead of the highest rate. That's where the loans went wrong. Those buyers should've never been approved based on the lower payment of teaser rates. Had the lenders only approved them based on the highest rate, then many of these homeowners wouldn't have had the buying power to inflate the prices and outbid people that could afford them.

So, it's not the 100% loans that caused the trouble. Is the AMOUNT of the loan that they were approved for. 100% loans are great product to help first time buyers get into knew homes but they have to use wisely, they have to be used for the correct approved amount that you really can afford to pay back. If it's not enough to buy the home that you want then you can't afford it and either you look for one that falls in your price range or you SAVE to make up the difference.

Posted by: LC | August 31, 2007 at 10:50 AM