August 17, 2006
Affordability Is Up! (But Not Really)
Earlier this morning, we referenced the Housing Affordability Index (HAI) which is published by the California Association of Realtors (C.A.R.). According to the last published index (February), the percentage of households that could afford to purchase a median-priced home in the Bay Area was 12% (and only 9% in San Francisco).
Almost right on cue, C.A.R. released a new First-time Buyer Housing Affordability Index (FTB-HAI) this afternoon:
C.A.R. began producing its Housing Affordability Index (HAI) in 1984. At that time, fixed-rate mortgages were the prevailing form of financing a home purchase, while the calculations used to produce the HAI reflected a 20 percent down payment. The methodology also assumed a monthly payment for principal, interest, taxes and insurance that was no more than 30 percent of a household’s income.
In the more than two decades since the CALIFORNIA ASSOCIATION OF REALTORS® first conceived the HAI, the mortgage finance landscape has changed dramatically. The range of mortgage products available to buyers as well as underwriting criteria has changed.
C.A.R. developed the new index measuring affordability for first-time home buyers to better reflect the realities of today’s real estate market.
According to the new model, the percentage of first-time buyers able to afford a median-priced home in the Bay Area stands at 24% (16% in San Francisco). And while that’s more palatable than 12% and 9% respectively, keep in mind that based on this new model (which takes into account relaxed lending standards and the shift away from long-term, fixed-rate mortgages), affordability in San Francisco is down about 18% from a year ago, down 28% from two years ago, and down 35% from the second quarter of 2003. That's the market reality.
First Published: August 17, 2006 2:02 PM
Comments from "Plugged In" Readers
How are they measuring the income level of first time buyers? Almost certainly this will differ (i.e. be lower...) than the population in general. Without knowing their methodology, for some strange reason I'm not willing to trust CAR's numbers...
Posted by: Amen Corner at August 17, 2006 3:09 PM
Sure, you can afford to buy a home with these insane mortgage products. BYT how many first time buyers can afford to take a 5% reduction in home value AND afford the 8% transaction cost to sell their house(6% real estate fee, transfer tax + staging/marketing) after the average 4-5 year ownership period. That's an 88k cash hit on a 700k home, and 190k on a $1.5M home.
Posted by: Andy at August 17, 2006 7:36 PM
Is this a stealth housing bubble blog site? Most of my colleagues in their mid-20's can afford to buy after 4-6 years of work. Sure, they may just be buying a 600-800K 1 or 2 bedroom condo, but they got to start somewhere right?
It's call hard work, saving, and investing. There's not question that tons of people are able to buy in their late 20's and 30's. The question is whether they want to buy at these levels or not. My point is that there's much more money out there than all you think.
Posted by: stealth at August 17, 2006 7:49 PM
"just be buying a 600-800K 1 or 2 bedroom condo"
"just"! ... "just"!!
600k mortage needs 150k+ income for a 30 year fixed ... while I know that income level isn't that uncommon in the bay area it is still about twice the avg income in the bay area which is around 80k I believe which only gets you a 300k or so 30 year fixed
Posted by: badlydrawnbear at August 18, 2006 8:55 AM
Good point badlydrawnbear. Plus, that 600k condo is a "starter condo" and is essentially a bottom wrung property. So you need twice the median income to afford a starter property in this town?
Posted by: SaveYourMoney at August 18, 2006 10:33 AM
apparently, pointing out facts about the market now makes you a bubble blogger. who knew?
i would say that an organization that changes statistics to make it look like the market is healthier than it is deserves a little more ire than someone who points out that they changed the stats, which were at/near all-time lows before their recalibration.
the stats actually show there is much LESS money than stealth thinks. i have lots of friends that can afford to buy at that age too. that doesn't mean my circle of friends is typical or that it's a good idea to buy now.
Posted by: paa at August 18, 2006 11:22 AM
the 'fact' is that even the median income in the Bay area is not nearly enough to afford a starter home without some kind of risky mortage.
In fact the median is considered low income by the state of California when attempting to buy a house
2006 HOMEOWNERSHIP PROGRAM INCOME LIMITS
EXISTING RESALE NEW CONSTRUCTION
COUNTY NAME 1 or 2 Persons 1 or 2 Persons
Moderate Income $135,720 $135,720
Low Income $ 81,432 $ 93,647
CAR is playing a game and encouraging people to use 'creative' financing and take a substantial financial risk that could be disasterous with a rise in interest rates, job loss, medical emergency, divorce, or other life changing event.
Posted by: badlydrawnbear at August 18, 2006 12:54 PM
Of course there's tons of money among young professionals with financial district. Four to six years of work at Bigger, Stronger, and Richer LLP puts you and your colleagues on partner track, which is great for you guys. Four to six years of a couple making $80,000 a year still doesn't make the nut on a $500,000 loan, even if mom and dad sell their house in Jersey to help cover your down payment.
Posted by: GoodToBeTheKing at August 18, 2006 8:20 PM
I'm glad some people came into this thread behind stealth. My original point is that buying ahouse in this market as a first time buyer is nearly impossible; and at best incredibly risky if you believe the market is going to run flat or decrease slightly.
Posted by: Andy at August 19, 2006 3:23 PM