Out at the peak

Thursday, August 17, 2006

California Association of Realtors change the rules of affordability

Actual housing affordability in some parts of California are in the single digit percentage range (such as about 7% of house holds in Sonoma County can afford a median priced house).

These numbers were not acceptable to California Association of Realtors (C.A.R.), so they redefined the Housing Affordability Index. Instead of taking the median price of a California house, they decide to take only 85% of that price because clearly, more people can afford that. And they believe first time home buyers will buy a house worth less than median.

They also use to assume people had 20% down payment to buy with a house. They are realistically throwing aside that possibility because the money that should be enough for 20% is now only 10% of today's purchase price.

They no longer use a fixed rate mortgage in their assumptions. Everybody loves adjustables!

Here is the kicker: They do not mention that they changed how much they assume a household will spend towards mortgage, property tax, and insurance. They have a spreadsheet with raw numbers, but if you do the math, you will see that they allow the household to spend 40% of their gross earnings (53.3% after taxes -- given a 25% tax bracket)! The old methodology only allowed 30% of gross earnings to go toward the housing expense. (1320 x 12 / 39600 = 40%)

This is their reasoning:
"The range of mortgage products available to buyers as well as underwriting criteria has changed. 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."

Maybe we will have hit bottom when C.A.R. goes back to their original HAI.


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