The New Math of Housing Inaffordability

The California Asssociation of Realtors ® on Thursday released a new version of its 22-year-old "Housing Affordability Index," which at first glance appears to portray a less dismal outlook for homebuyers than previous index reports.

What's changed? Math and language.

Consider this comparrisson of the annual household incomes necessary to buy a home under the old method results * (in green) and the reconfigured index:

Area or Region

3Q '05 HAI

2Q '06 FTB-HAI

California:

$127,950

$98,720

CA Condos:

$100,310

$75,080

Cen Valley:

$84,630

$62,070

SF Bay Area:

$169,180

$130,890

S California:

$120,570

$96,130

*Old method results are from the 3rd Quarter index for 2005.

Judging by the state average alone it would appear something good has happened since last summer, when $29,230 more annual income was needed to purchase a home than in the second quarter of this year. But how can that be when the median price for a single family home in California rose from $545,910 in 3Q 2005 to $575,800 in June 2006?

Even interest rates are higher today. (6.52 percent on Thursday, according to Freddie Mac).

What gives?

One hint lay in the language of the new index. It's different. "Households" are now "first-time buyer households." And instead of purchasing a home at the "median price," as in previous HAI reports, buyers under the FTB-HAI purchase homes at the "first-time buyer median price."

In LA County those seemingly semantical differences amount to a $90,000 reduction, the difference between the June 2006 "median price" of $580,140, and the $489,860 "first-time buyer median price."

The difference is not semantical.

"First-time buyer median price" is not the same thing as the "median price."

"First-time buyer median price" is 15 percent less than "median price."

CAR explains all this by citing research:

"[...] first-time buyers typically purchase a home equal to 85 percent of the prevailing median price."

That means somewhere in Los Angeles County there are houses for sale at or near $490,000. Find them on Realtor.com.

Another change is in the downpayment calculation.

The old method figured "a 20 percent downpayment," which may be the ideal, but not the norm in this market. And so, the new method assumes "a 10 percent down payment" more in tune with reality.

Times have changed.

People don't finance homes like they did 20 years ago. Most anyone who bought a home back in the 1980s, for example, likely used a 30-year fixed because it was the standard.

But, as home prices stretched beyond the reach of young families in the past few years, the mortgage market responded with products like interest-only mortgages, "balloon payment mortgages" and "negative amortization loans." Joe Homebuyer snapped them up.

Whether any particular loan product is a wise, or unwise, choice is not at issue. This is about what people have been using to acquire homes.

CAR says the new FTB-HAI is intended to reflect all of this:

"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."

CAR has also produced a historical series using the new FTB-HAI, providing quarterly comparisons back to 2003. This helps avoid confusion that might result from comparing the old method results to the new method results.

And therein lies the bad news.

The perspective might have changed, but ugly is ugly all the way around. The market hasn't gotten better for first-time buyers. FTB-HAI comparisons back to 2003 show that affordability in Los Angeles has declined every quarter.

Using the FTB-HAI, 50 percent of first-time buyer households in Los Angeles could afford to purchase a home during the first quarter of 2003.

By the second quarter of 2006 that percentage dropped to 19 percent.

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