Volume 30, Number 2 February 2009
Affordability Highest Since Start of Decade
By Sara Sutachan, Senior Research Analyst & Robert Kleinhenz, Ph.D. Deputy Chief Economist
Home prices in California have declined markedly since peaking in mid-2007. The fourth quarter of 2008 was no exception as the median price of an existing detached single-family home fell 41 percent from the same time a year earlier. The median price in the fourth quarter of 2008 was $291,800 compared to $492,490 for the fourth quarter of 2007.
The unprecedented price declines have dramatically improved affordability in the state. C.A.R.'s Housing Affordability Index for First- Time Buyers, which measures the share of all households that can afford the entry-level home, rose to 59 percent in the fourth quarter of 2008, meaning that nearly six in 10 households in California could afford the entry-level home (defined as 85 percent of the median home price) in the fourth quarter. Affordability has nearly doubled from a year earlier when the affordability index was at 33 percent and now stands at its highest level since the start of the decade. The index is based on an entry-level home price, a 10 percent down payment, an ARM effective composite rate, and a 40 percent debt-qualifying ratio.
While the statewide picture shows promise for first-time buyers, would-be buyers can get a more accurate picture by looking at affordability in their own part of the state. Affordability has improved the most in the parts of the state with relatively high concentrations of distressed sales. For example, affordability in the Inland Empire climbed 25 points from 45 percent to 70 percent in the fourth quarter of last year. Similarly, the Central Valley markets in Sacramento, Fresno, Merced Counties all experienced affordability increases of more 20 than percentage points. In each of these markets, at least 70 percent of households can afford the entry-level home.
By contrast, distressed sales were less prevalent in the San Francisco Bay area over the past years. Although Bay Area counties have experienced price declines, the rates of decrease were generally smaller than in the Central Valley and Southern California. As a result, affordability in the Bay Area improved but remained considerably below the overall statewide figure. For example, in San Francisco County, driven in part by a 20 percent year-to-year price decline, affordability rose from 20 percent a year ago to 30 percent in the fourth quarter of 2008. Similarly, Contra Costa affordability improved from 22 to 35 over the past year. Even in Santa Clara County, where affordability more than doubled from 24 to 49, year-end affordability remained below 50 percent.
With lower prices and relatively low mortgage rates, affordability has improved dramatically in recent months, creating great opportunities for well-qualified buyers with a steady job and stable income situation. First-time buyers are in a somewhat better situation than current homeowners, who may have the contingency of selling their current home in order to buy another home. In addition, the Homebuyer Tax Credit (H.R. 1) just signed into law will also make buying a home more affordable to first-time buyers in 2009 than in previous years.
Note: The HAI-FTB does not account for changes in underwriting standards or the global financial freeze in the marketplace, both of which have muted effective increases in affordability resulting from price declines. Mortgage money is available from Fannie Mae and Freddie Mac, as well as the Federal Housing Administration, provided loan amounts fall within the current limits. Jumbo lending continues to be severely constrained. In the absence of a secondary market for non-GSE mortgage back securities, it is limited to portfolio lending among lenders who have been especially reluctant to lend.
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