By Sara Sutachan, Senior Research Analyst & Robert Kleinhenz, Ph.D. Deputy Chief Economist

Record decreases in the California median home price led to a record-high affordability reading statewide in the third quarter. The median price of a home in California fell by an 11.9 percent quarterly margin from $384,060 in the second quarter of 2008 to $338,540 in the third quarter of this year. The median price also declined by a record 41 percent from a year ago when the median was $574,080. The year-to-year declines in the median price surpassed the record annual decreases set in the first and second quarters of this year. The median price for California now stands at roughly the same level as in early 2003. 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 53 percent in the third quarter of 2008, driven mainly by the large price decreases over the past year as a result of a large proportion of distressed sales in the state. The HAI-FTB rose by more than half as affordability stood at 24 a year earlier, and increased 5 points compared to the second quarter 2008 figure of 48 percent. Affordability surpassed the previous record high of 49 set in the first quarter of 2003, when this series began.

At 85 percent of the overall median, the price of an entry-level home in the first quarter was $287,760, $200,000 below a year earlier when the entry-level home was $478,970. With a 10 percent down payment and a 1-year adjustable rate mortgage of 5.91 percent, the monthly payment (including taxes and insurance) was $1,870. Assuming a 40 percent qualifying ratio, the minimum income required for such a home was $56,100, lower than the prevailing statewide median household income of $59,160 and considerably lower than the levels of recent years when the minimum income exceeded $100,000.

Affordability was also aided by decreases in mortgage rates. The one-year effective adjustable rate was 5.91 percent in the third quarter, slightly higher than 5.69 percent in the second quarter but down 65 basis points from 6.56 percent rate of a year earlier. In general, a half point decline in the mortgage rate raises the HAI-FTB for the state by two percent.

Ten C.A.R. defined regions in the state including the High Desert, the Monterey region, the Inland Empire, and Sacramento County set or tied record high affordability readings in the third quarter as median prices in these regions also declined by large margins. The San Francisco Bay Area was the least affordable at 35 percent, with Marin County, San Francisco County, and San Mateo Counties all registering affordability under 30 at the individual county level.

The index 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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