May 2008

Affordability Surges in First Quarter
By Robert A. Kleinhenz, Ph.D. Deputy Chief Economist

First-time home buyer affordability jumped in the first quarter of 2008 as mortgage rates remained low and home prices continued to decrease. The median price of a home in California fell by a record 14.3 percent quarterly margin from $488,950 in the fourth quarter of 2007 to $419,240 in the first quarter of this year. The median price also declined by more than $140,000 compared to a year ago when the median was $562,970. This was also a record decrease of 25.5 percent year-to-year. The median price for California now stands at roughly the same level as in early 2004. Over the same period, mortgage rates registered slight declines from rates that were already quite low by historic norms.

The combination of lower prices and low mortgage rates yielded a vast improvement in affordability for California home buyers. C.A.R.'s Housing Affordability Index for First-Time Buyers (HAI-FTB), which measures the share of all households that can afford the entry-level home, rose to 44 percent in the first quarter of 2008, driven mainly by a succession of large and rapid price decreases over the past several months. The HAI-FTB rose by 18 points from 26 a year earlier, and increased 11 points compared to the fourth quarter 2007 figure of 33 percent. Affordability last stood at 44 percent in the third quarter of 2003.

At 85 percent of the overall median, the price of an entry-level home in the first quarter was $356,350, well below a year earlier when the entry-level home was $478,520. With a 10 percent down payment and a 1-year adjustable rate mortgage of 5.65 percent, the monthly payment (including taxes and insurance) was $2,260. Assuming a 40 percent qualifying ratio, the minimum income required for such a home was $67,830, much closer to the prevailing statewide median household income of $50,700, and considerably lower than the levels of recent years when the minimum income approached $100,000.

Affordability was also aided by decreases in mortgage rates. The one-year effective adjustable rate was 5.65 percent in the first quarter, down just over a half percent from 6.21 percent a quarter earlier and 0.65 percent below the 6.30 percent rate of a year earlier. In general, a half percentage point decline in the mortgage rate raises the HAI-FTB for the state by two percent.

With a national entry-level price of $168,860, the HAI-FTB nationally was 69 percent, meaning that over two-thirds of households nationally could afford the entry-level home. Only the High Desert and Sacramento County both had affordability readings over 60, with each at 64. The Monterey Region was the least affordable at 29 percent, although San Mateo was the individual county with the lowest affordability at 22 percent.

The index does not account for changes in underwriting standards or the current liquidity crunch, both of which have muted effective increases in affordability resulting from price declines. On the other hand, higher loan limits for Fannie Mae and Freddie Mac should be a positive influence on the market in the months to come.

To learn more about our Trends Newsletter, please contact the Research & Economics Department at  research@car.org or (213) 739-8352.