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

[Grey]

LA's housing is expensive because DEMAND exceeds the AVAILABLE SUPPLY. Since demand (people moving to Calfiornia) hasn't stopped, and SUPPLY (new housing construction, new condos, etc) hasn't kept up with the population growth) people CANNOT AFFORD the resulting rise in prices. If mega-condominium construction projects were undertaken, and mega-apartment construction projects were undertaken, and the number of new units exceeded the population growth, you would see prices at a reasonable level. Why doesn't it happen?
1) Because property owners have it good and it's in their best interest to fight new development
2) Because development and developers are dirty words to progressives and liberal minded people, but the fact that they are seen that way has actually HURT the little guy's chances of owning property and taking part in the american dream... Because housing developers are STOPPED again and again throughout the state. And the projects that do make it through aren't enough to catch up to the rate of population increase.
3) Because renters and potential owners don't organize and speak up IN FAVOR of development

At some point liberals and progressives have to understand that development helps moderate and low income people and they need to support it so that these people can have a piece of the american dream too. Instead the current political structure is too busy demonizing, finding scandal, and looking for enemies and people to villify... rather than making the hard choices that are required in order to get enough housing units built in the state.

[Marty Zollner]

Whatever you do, do not move to Washington. It rains here on a continual basis. If you are natural light lovers, and hate moss, this is not the place for you.

[srla]

Sam - Anyone who actually believes that the recent (3 year and 10 year) price run-ups in L.A. bare any relationship to the average housing appreciation in the region over the past 50 years is either entirely ignorant of the facts or incapable of understanding basic arithmetic.

In fact, until around 1980, L.A. was CHEAPER than many other parts of the country, and until around 2003, the median house price in L.A. was less than 1/3 of the current median. This means that, in UNDER three years, prices have TRIPLED.

So just because after 1980, L.A. was maybe 25% higher than the national average (an estimate - the actual percentage fluctuated from 1980 to 2003), we are supposed to accept the recent tripling of prices (actually quadrupling or more in some neighborhoods) as logical and sustainable?

And by the way, L.A. pricing HAS changed quite a bit in those 50 years, both up and down. In fact, it dropped over 20% in 1991-95. And that was after a run up only about 15% as dramatic as the current price escalation.

Before you are going to be brash and tell people to move, at least attempt some semblance of a cogent argument. Yeesh.

Grey - the price escalation I just mentioned bares NO relationship to supply. Demand has been driven by mass psychology and ease of access to money.

Massive condo and apartment projects HAVE BEEN and ARE underway. Have you driven down the Miracle Mile lately? Rents have gone up, but only moderately after an initial bump in 1997, due to the state mandated termination of rent control policies in West Hollywood and Santa Monica.

In fact, renting is currently around 3 times cheaper than buying in most of L.A., whereas usually the two are relatively comparable in price. And the number of available housing units per capita has gone UP in both L.A. and the Bay area over the past 5 years, NOT down. The same holds true nationwide.

So, sure, maybe in some areas (like Seattle) environmental restrictions have led to housing price increases, but in L.A., supply has not been and is not the problem.

So if supply is up, people are no longer in the bubble mindset, and lenders are far tighter with the purse strings, what do you think will happen to housing prices in L.A.?

shockg - what are you SMOKIN?

[investorguy]

PrimeBeef: Excellent question!

The answer is: not if you have an excellent property manager and a team in place there. You don't have to be in the same city if you hold rentals. In fact, the less day-to-day contact you have with your properties, the more investing you can do. I have top-notch managers, a couple of regular rehab crews, an inspector I trust implicitly, and one or two Realtors in each of my markets. I've met them all and spent time on the job with each. Works like a charm, and I was only burned once by a contractor. I get a monthly financial statement via email, the rents go directly into my accounts, and I write one check for management. When my Realtors call or email with a new deal, I send my property manager, inspector and a contractor out. If the numbers work, I pull the trigger. If they don't, I move onto the next deal. I have specific criteria and they know exactly what I want.

For rehabs, especially if I'm doing seller financing, that's better done in a market you know. And we're considering making a move for just that reason. Check out Frank McKinney's new book and a book by a brilliant guy named William G. Barnett in Fort Worth.

LC: You're right on the money (pun intended). 100 percent financing is great in lower priced markets, in the midwest for instance, where you can own a $50k or $75K house for $600 a month. The problem is in high-priced markets like LA.

[Sam]

Sria-I lived in LA in the 60s and you are wrong, prices where I was in the South Bay were much higher then the national average. People had the same bitch back then that RE was not affordable when you could be a house for by the beach for $60K. Get real CA will never be affordable and it is worse now. You chumps waiting for the deal of the century in 2 years are wasting your time, the deals are out there now and you should be making low offers. Renting is a crock, the high mortgage you would pay now in LA will be the same as rent in 10 years and you end up nothing. Where I live now a house is 60% less then the hell hole and salaries are only 10% less. If you can't afford to buy in SoCal then move, there are so many better places to live. I cannot believe the number of people who stay, the job and weather are a joke.

[JerryLndrs]

Grey - you say that LA housing is expensive because demand exceeds supply. If your argument is true then LA's record high prices should correspond to a record low inventory.

But it doesn't. Sorry. Inventory is far from being at a record low. In fact, the exact opposite is the case. See for yourself.

http://tinyurl.com/2hjgh7

Inventory is higher than it's been in a very, very long time and it's likely to only grow.

So much for your argument.

Why are prices so high then? Well, if you'd been paying attention over the past 6 or 7 years you would have noticed that prices first shot up as interest rates were lowered to next to nothing. You would have also noticed that prices continued to rise as all sorts of free and easy lending practices allowed people to get into homes they wouldn't have traditionally been able to afford. Add in an unhealthy dose of speculative mania, and that explains most of why prices are where they're at today. Demand exceeding supply doesn't have much to do with it.

Simply put, you're wrong. Very wrong!

You say that "development and developers are dirty words to progressives and liberal minded" people. I'm sure that sort of tired, old school rhetoric plays well to the geriatric set that listens to talk radio but it doesn't bear much resemblance to the reality of how modern mega-cities like New York and L.A. are run by liberal municipal governemts. There's plenty of development going on in L.A. Tons. Take a drive through mid-city and then check back in with me.

My advice to you is that you stop seeing the world through your ideological prism and join the rest of us adults in the real world where evidence and rational thinking are more important than identifying with any one political "side" or another.

[John T Watts]

Investorguy. You are so right. Cap rates actually mean something in other parts of the country. Check out Blossom Texas and Paris Texas.

[seattlesnoop]

To Marty Zollner:

Natural light in Seattle? Not this summer. The rest of the time maybe it's July through September. But if you enjoy grey skys and dampness, come on over.
I have lived here for ten years and am soooo ready to head back to sunny California. Glad I held on to property there. And I think I'll do the same when I leave here, there's been nice appreciation over the last ten years, but my guess is I won't be back here on a permanent basis.

[mr mcmansion]

If people need the answers, just read the link here. Real Estate professionals know whats going on. People need to buy now or you will be priced out forever:

http://activerain.com/blogsview/190992/Southern-California-Home-Prices

[investorguy]

John T: Amen. I got into an argument with an LA broker who refused to believe that I would consider buying rental units in Toledo -- and their cap rates of 14 to 20 percent -- over 5 and 6 percent in LA. Especially when I can buy 10-15 of those for the price of a triplex here.

McMansion: Good article -- thanks for pointing us to it. So many people who post angrily here, hoping everyone else's property values plummet, refuse to believe that the LA market doesn't operate and react like ANY other market.

[Christopher Walker]

Affordability in California, I hope, will remain low. With the 5th largest economy in the WORLD, California is, and will remain, unaffordable until the point that our state falls into the ocean or, if you listen some environmentalist extremists, our coastline reaches the mountains.

The truth is that Los Angeles, San Francisco and other metro areas will always be out of reach to the "average" person. California's suburbs are still very affordable to just about anyone. Look at Japan, where Multi-generational mortgages are the only means to "affordability" in major metro markets like Tokyo. You can still find "affordable" housing in outlying areas but, the major difference is that they have spent their time, energy and resources on developing an excellent transportation system. If we used our resources to improve and develop more reliable public transportation, affordability would become less of an issue...IMHO.

We need more efficient and reliable public transportation systems to continue our growth, decrease our dependency on foreign oil and better the lives of all Californians. Environmentalists and our beurocracy need to work together for the better good of our people.

Plans that stall because of environmental studies and lawsuits that take years and millions of our dollars to mitigate need to be pressed forward. The damage to our landscape from 20 more years of increasing vehicle use will be far worse than the damage caused to a kangaroo rat population. They may be misplaced by a rail system but will die from emissions in the meantime.

California is expensive. We have some of the most expensive real estate in the country. Our focus should be on getting our residents from the truly affordable suburbs to city centers efficiently .....before it is too late.