Housing more affordable? Sure, compared with the bubble years

The percentage of California households that can afford to buy an entry-level home has more than doubled in the last year because of plummeting home values.

That’s according to the California Association of Realtors, which released third-quarter results for its First Time Buyer Housing Affordability Index. Assuming an adjustable interest rate of 5.91% and a 10% down payment, the association calculated it would require a household income of $56,100 to buy an entry-level home. What’s an entry-level home? The association says a typical first-time buyer purchases a home equal to 85% of the state’s median home value. In today’s case, that's $287,760 — which wouldn't have gotten you a fixer-upper under the freeway not long ago. Using this formula, 53% of California households can afford an entry-level house today, up from 24% a year ago.

The gains were slightly more modest in Los Angeles County, where the index jumped from 20% last year to 42% today. In Orange County, it went from 23% to 43%, and in Santa Barbara County, a startling 11% to 45%.

"From a homeowner’s point of view, you look at the price decline and wince," said Robert Kleinhenz, deputy chief economist for the association. "But for first-time home buyers, this is the first time in a decade they’ll have such an opportunity to buy a home. We haven’t seen this kind of affordability since the mid-1990s."

-- David Pierson

Comments

[RichW]

"Assuming an adjustable interest rate of 5.91% and a 10% down payment...."

As usual, another idiotic statement from the NAR. An ARM simply means that one day the payment will increase beyond the borrowers ability to pay, and the low down payment means they will have so little skin in the game that they will probably walk away and let it get foreclosed. Sounds familiar eh ?

How about the NAR re-quote these numbers based on a 30-year fixed with 20% down ? Thats probably a lot more realistic considering the current lending environment.

[sunsetbeachguy]

All you noob journalists forget to mention that CAR/NAR gamed the model at the height of the bubble.

85% of the median home
ARM - mortgage (how are those working out)
38% front-end DTI ratio

All the sorts of things that got us into this burst bubble mess.

It won't be affordable until it is affordable by the NAHB/Wells Fargo index.

[MyLessThanPrimeBeef]

Unfortunately, the percentage of Californians who can afford their vehicle or federal income tax will be drastically reduced in the coming years.

The Tax Affordablity Index, TAI, that's the next bubble.

And for all you environmentalists out there, please say a prayer tonight for the nearly-extinct animal known to most people as the American Taxpayer.

[Nick]

How about the LA Times blog monitors get the actual numbers, and do the re-calculation with a fixed rate mortgage and 20% down, to get a more realistic number for affordability. It goes without saying that lower prices make housing more affordable, and non-idiotic politicians should be making housing more affordable (despite doing the exact opposite through stupidity and corruption), but obviously NAR's unedited analysis is very misleading.

For bonus points, you could also run the numbers for some of the sample zip codes you're tracking, since you have median home prices for those areas. That would be much more informative than the entire metro area, which includes very remote locations.

NAR marketing BS is fine, as long as it stays in the realm of obvious marketing BS. When they start spewing nonsense about affordability percentages based on their propaganda "models", it's up to responsible journalists (that's you guys) to point out for your readers (that's us) that what the NAR is spewing is pure marketing BS garbage with as much credibility as a used-car salesman selling you a mattress based on a "scientific comfort index" unique to that store or street corner: ie less than none.

[jbunniii]

So the upper 50% or so can afford the lower 50% of California houses. The problem is that the upper 50% of would-be buyers live in the coastal cities, but the lower 50% of houses are in the central valley.

If we consider what proportion can afford the median house WHERE THEY ACTUALLY LIVE, it's probably more like 10-20%.

[jbunniii]

P.S. I wonder how many Californians who have 10% or more to afford a downpayment don't already own houses.

One way to further improve affordability is to assume a 100% downpayment - then everyone can afford to buy!

[LA-renter]

Here, here, Nick. You tell 'em.

David, can I give you advice? Stop being a journalist and start being a man... a man with a mind and you-know-what.

The guy everyone so dearly misses... you-know-who... Peter. He made it real.

David and Lauren, we want to know what you're really thinking.

Lauren, does David run to your cubicle when the PR fax arrives from NAR? "This NAR analysis is mind blowing, Lauren!" I suspect not.

[Hangemhigh]

Thanks, Nick, well said. What is missing from this blog is the opinion cutting through the nonsense. Guess I'll have to rely on the comments section......

[esp4p3]

Wow that last statement is so bogus! "We haven’t seen this kind of affordability since the mid-1990s." Are you freaking kidding me? Just because prices have gone down 30% in LA does not mean that it's affordable. How about coming down another 40% or more? Then we may see levels comparable to 1995.

I talked to a coworker who bought a house in Chino Hills in 98 for 315k. During the peak this house would have gone for 800k. Now it's going for 600k. Even though it went down considerably, its still inflated.

[Laker]

Flaws in the NAR propaganda:

1) How many households in LA that are NOT home owners, have 10% cash down payment? Let alone 20% that is really needed to qualify.

2) ARMS are stupid to take, they are double stupid to take today where 30 year fixed rate is at all time low and maybe 0.5% more than the ARM...The ARM has only one way to go from here.....UP UP UP

3) Show me where can i find a house for $287,760? Please don't send me to Lancaster, palmdale, Watts.

4) Quote: "But for first-time home buyers, this is the first time in a decade they’ll have such an opportunity to buy a home. We haven’t seen this kind of affordability since the mid-1990s." ahahahahahahah
Let's see, median household income in mid 90's in LA was about $41,000. Median house price in mid 90's was in LA was $120,000. Price to income ratio = 3
Today(10/2008) price to income ratio is = 5.2 (way optimistic since they assume 85% of median)

Bottom line, according to the NAR, 3 > 5.2 (three greater than five point two)
Send the clowns to math class pleasssssssssssse.

[dwr]

It was bad enough that the CAR completely changed the formula when, under the old formula, affordability was going toward 5% in California, but to then compare the bogus numbers derived from the new formula with the numbers from the old formula is almost criminal. But hey, the federal government (and the mainstream media) does it with unemployment numbers, so I guess it's ok.

I agree with the other posters, the people running this blog need to do some analysis or you're quickly going to lose whatever credibility you may currently have.

[Will]

i'm surprised it doesn't say something to the effect of "People better hurry up and buy or be priced out of the market FOREVER!!" considering they can't use the "Real Estate only goes UP in value" one anymore. Although I think I saw a variation of it a couple of days ago on here when they advised to hurry and buy because these foreclosure deals won't be around for long...what a crock!

[mid-wilshire]

Please, gimme a break. There's nothing 'affordable' about home prices in the Los Angeles neighborhoods. They're still totally, utterly ridiculous, just a little lower that the complete insanity of a year or two ago. That state of our economy is both dreadful and frightening. And yet people still have the nerve to list their crappy 2 bedroom stucco home for 1.3 million when it sold for 300-400k ten years ago. I'll move out of state before I give some greedy homeowner who hasn't emerged out of thier imaginary 'bubble' the satisfaction of buying their home at what they THINK it's worth.

[Nick]

Along the lines of the blog posters doing the actual analysis...

I have to disagree with the ARM rates having nowhere to go but up. An affordability analysis should use a fixed rate mortgage because it's predictable and doesn't require subjective speculation about future events, not because it's necessarily the best option in the current climate.

However, on the topic of subjective speculation, I think ARM rates will be low for quite some time. The government is literally giving away [your] money to banks and insiders to "recapitalize" (read: give free money to) them. Unless/until we have a currency crisis from our obscene out-of-control deficit spending (at which point the country has bigger problems), I expect we'll continue to print money and throw it at everyone remotely connected to our corrupt leaders and/or any business who can credibly claim to help propagate our deficit consumer economy (eg: banks). This will cause "cost of borrowing" indexes to remain low for quite some time, and most (if not all) or ARM's are tied to such indexes. Basically, ARM rates only go up when the government stops handing out money they don't have like free hits to crack addicts, which is not going to happen any time soon.

That's my analysis, anyway.

[Nick]

To Will:

As an aside, ironically they are probably somewhat correct: foreclosure deals won't be around forever. I predict there will be a substantial decline in new foreclosures next year, as the next administration rewrites the laws to let people stay in the houses they can't afford, and force the banks to eat the losses. There will have to be some compensation to the banks in exchange, but with the government writing trillion dollar checks to the banking industry as a great big "thank you" for the economic disaster they helped create, that shouldn't be an issue.

[Tim K.]

Clearly, this is a desperation move on the part of the Realtors(tm).

If housing was so "affordable", they wouldn't need to shout from the rooftops to everyone - people would be bidding up houses and prices would be going up again!

On a related note, it is wonderful to see housing prices come back down relative to their recent highs. They are nowhere near as cheap as they need to be, so while I am excited about the discounts so far, they are still not deep enough for me to consider buying yet. If this rate keeps up, I think in 2 years things will be priced about right.

[Los Feliz]

Houses are coming down, but even IF everything they say is true, people are losing jobs left and right. Job security is floundering. California is in one of it's biggest messes ever. Taxes will have to be raised and things will have to be cut.

As impatient as I am (wanting to buy a house) housing is going down and will continue until we either: 1. Get our own "bailout" or 2. (most likely) wait until our economy gets better.

I say we won't be at bottom for at least 2-5 years, maybe even longer.

However, those few who are responsible AND lucky during this time period WILL be able to afford a house in the coming months. But I think those people are in the VAST minority.

In a way (especially as a first time buyer) I'm very happy that things are "correcting," however I'm very upset that it has to be placed on some innocent people's shoulders.

[srla]

The downside is that this is precisely the sort of journalism - naive repackaging of interest group spin as news - that allowed the housing bubble to inflate to such an insane degree in the first place.

The good news (if you can call it that) is that NAR schmucks will be losing their shirts for years to come as housing prices continue to plummet.

Clearly newspapers have learned nothing from their role as cheerleaders for the bubble, and we'll lose little from their impending demise in terms of quality reporting that we didn't already lose a decade ago.

[Pat]

Banks are requiring a minimum of 20% down. But, they are also requiring that you have enough cash after closing to cover anywhere from a few months of payments to 1 year of payments (plus property taxes). This effectively requires buyers to have 25% to 30% down. However, the 5 year ARM is realistic since quite a few people sell within that time period. Thanks to the neighborhood comparator at Redfin, you can go neighborhood by neighborhood and calculate the affordability based upon the median price in that neighborhood with the income distribution in that neighborhood. Based upon this, it would appear that affordability in 90266 is around 20%.

[Raymondr]

I am really surprised. I would expect the NAR would want prices to fall. They should champion it. It would generate more sales and prices would eventually start going up. But at current prices, there will be very little sale except foreclosures. Doesn't that tell them something? If a home is priced right, it will sell. Not these inflated prices. And that is speaking from a homeowner free and clear of his mortgage. But I cannot afford these prices and I need a bigger house for my family. So I'll live in my little two bedroom, one bath house until prices come down to earth where average Americans can afford to buy a house without being an mortgage slave.

[njcnyc]

There is a troubling disconnect between all these general reports of prices plummeting in the "LA area" and the persistent reality of obscenely expensive houses everywhere from Los Feliz to the beach. The notion that a run-of-the-mill 2bed/1bath house in the flats of West Hollywood still ought to fetch upwards of $700k strikes me as insane. Who could possibly be paying these prices?

[Dubby]

In 2006 Yale's Dr. Robert Schiller published a graph that talked me out of buying a house. It was published in the New York Times: http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html

Friends were telling me, "You have to get into the market sometime!", Real estate agents (aka "used home salesmen"), "What are you waiting for, home values never depreciate". I almost believed them but then I saw an animation of the above graph: http://www.youtube.com/watch?v=kUldGc06S3U

I quickly changed my mind.

http://www.nytimes.com/2005/08/21/business/yourmoney/21real.html
Wait what? Greenspan didn't see it coming but Schiller did and as far back as 2005 and he was writing of it in the NY Times?

Anyway, Obama's chances of fixing the economy might be linked to whether or not he's talking to the few economists astute enough to foresee the problem in the first place. With his appointments today, so far.. not so good.

Don't get me wrong, we still have Hope!

[monkeyboy]

I'm a card carrying NAR-hater, but I think it's getting close to the time to buy. I'm not talking about the westside or coastal areas, those prices are not for middle income earners. Inland areas like the valleys and Burbank Glendale are coming close to the historical ratios between price and income. Consider this. I bought a house back in 94 for 350k, if it appreciated at just 7% per year (it would double every 10 years) it would be worth about 1 mil. Guess what - that's what prices are going for now in my neighborhood.