Housing Affordability Improves as Prices and Rates Decline

California homes reach greatest affordability in three years...

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From C.A.R.
Written by Robert A. Kleinhenz, Ph.D. Deputy Chief Economist

Decreases in the median price and declining mortgage rates during the fourth quarter of 2007 dramatically improved affordability in California for the first time in two years. At $483,730, the statewide median price fell by a record margin of 14.9 percent or $84,400 compared to the third quarter median of $568,130. The median price was nearly $80,000 lower than the median of $561,430 from the fourth quarter of 2006, corresponding to a record-setting 13.8 percent year-to-year decrease. Nearly all areas of the state experienced large price declines, as tighter underwriting standards and the liquidity crunch dramatically reduced the pool of qualified buyers who could obtain a loan.

Dramatically lower prices have contributed to large improvements in affordability in recent months. The C.A.R. Housing Affordability Index for First-Time Buyers (HAI-FTB) measures the share of all households that can afford the entry-level home. At 85 percent of the overall median, the price of an entry-level home in the fourth quarter was $411,170. Assuming a 10 percent down payment and a 1-year adjustable rate mortgage of 6.21 percent, the monthly payment (including taxes and insurance) was $2,740. With a 40 percent qualifying ratio the minimum income required for such a home was $82,200, considerably below the levels of recent quarters when the minimum income approached $100,000.