THE ASSUMPTIONS AND METHODOLOGY USED TO CALCULATE C.A.R.'S HOUSING AFFORDABILITY INDEX FOR FIRST TIME BUYERS (HAI-FTB)
Step 1. MEDIAN PRICE: C.A.R.'s housing affordability index is based on the median price of existing single-family homes sold from C.A.R.'s monthly existing home sales survey. Starting in 1987, this survey is based on reports of closed escrow sales from 80 Boards or more of REALTORS ® and multiple listing services around the state. Prior to 1987, the survey was based on reports from 45 Boards. A FIRST-TIME BUYER is assumed to purchase a home at a price equal to 85 percent of the prevailing median price for existing homes.
Step 2. DOWNPAYMENT: A FIRST-TIME BUYER is assumed to make a 10 percent downpayment. Therefore, the loan amount needed to purchase a home would be 90 percent of the median home sales price.
Step 3. INTEREST RATE: A FIRST-TIME BUYER is assumed to finance the home purchase with an adjustable rate mortgage (ARM). The effective interest rate series previously used to calculate C.A.R.’s First-Time Buyer Housing Affordability Index (FTB-HAI) was discontinued in 2008. Beginning in the first quarter of 2009, the FTB-HAI incorporates an effective interest rate that is based on the one-year, adjustable-rate mortgage (ARM) from Freddie Mac’s Primary Mortgage Market Survey (PMMS). The effective rate accounts for both the one-year ARM rate and the points/fees as reported by Freddie Mac.
Step 4.The monthly payment for PRINCIPAL, INTEREST, TAXES AND INSURANCE (PITI) is computed as the sum of three parts:
-Monthly mortgage payment, based on the terms of the mortgage in Steps 2 & 3.
-Monthly PROPERTY TAXES are assumed to be 1 percentof the median home sales price divided by 12.
-Monthly INSURANCE PAYMENTS on the house are assumed to be 0.38 percent of the median home sales price divided by 12.
The results of these three calculations are added together to findthe PITI or total monthly payment for a household that buys the median priced home.
Step 5. It is then assumed that the monthly PITI can be no more than 40 percent of a household's income. Thus, the monthly housing payment is divided by .4 to come up with the MINIMUM INCOME NEEDED TO QUALIFY FOR A LOAN on the median-priced home.
Step 6. Starting in 1988, data for the distribution of households by various income ranges was obtained from Claritas. INCOME DISTRIBUTION figures were developed based on the projected percent change in the annual median household income. Prior to 1988, household income utilized in the housing affordability index was based on projections by C.A.R. using the 1980 census data as a base.
Step 7. The minimum income amount calculated in Step 5 is multiplied by 12 to determine the minimum annual income needed to qualify. This amount is compared to the income distribution of households. The percent of the households with incomes greater than or equal to the minimum income becomes the HOUSING AFFORDABILITY INDEX FOR FIRST-TIME BUYERS (HAI-FTB).
NOTE: The quarterly HAI-FTB for a given geographic area in a particular quarter is based upon the quarterly median price for that area as well as the quarterly income distribution for that area.