Affordability Low Despite Market Slowdown

- Robert Kleinhenz, Ph.D., Deputy Chief Economist, C.A.R.
California home sales continued to slow during the first quarter of the year, even as the statewide median price showed a slight gain. Seasonally adjusted annualized sales of existing detached homes fell to 443,080 units in the first quarter of 2007, down 1.3 percent from the fourth quarter of 2006 and down 14.4 percent compared to the first quarter a year ago. Larger year-to-year declines in sales were expected for the first half of this year, with smaller changes anticipated for the second half.

At $565,490, the statewide median price remained in the $560,000 range for the fourth quarter in a row, rising just 0.7 percent quarter-to-quarter and 3.0 percent year-to-year. However, the statewide median masks a very mixed picture at the county and regional level, where 10 of 16 regions registered year-to-year declines, nearly all measuring less than five percent. In general, the greatest downward pressure on existing home prices has appeared in areas of the state that are either second-home locations or areas that have sizable new home inventories in direct competition with the existing home market.

Despite the slowdown in activity and price appreciation across the state, housing affordability has shown little improvement. The C.A.R. Housing Affordability Index for First-Time Buyers (HAI-FTB), which measures the share of all households that can afford the entry-level home, held steady at 25 percent in the first quarter of this year. This was unchanged from the fourth quarter of 2006, and down 1 point from a year ago. At 85 percent of the overall median, the price of an entry-level home in the first quarter was $480,670. With the entry-level price increasing slightly faster than income gains in California and with mortgage rates not moving much over the past year, it is no surprise that the HAI-FTB has shown little variation.

The monthly payment (including taxes and insurance) in the first quarter was $3,230, assuming a 10 percent down payment, a 1-year adjustable rate mortgage, and a 40 percent qualifying ratio. The minimum qualifying income for that home loan was $96,910 annually. By comparison, the median income for all California households is about $57,000 per year.

The entry-level price in California was more than twice the national entry-level price of $180,460. The HAI-FTB for the nation was 64, meaning that 64 percent of households nationally could afford the entry-level home. No region of the state came close to the national affordability reading. The High Desert was the most affordable part of the state with an HAI-FTB of 44 percent, up from 41 percent a year earlier. The Santa Barbara area was the least affordable at 12 percent, down from 13 percent a year ago.

If price changes (positive and negative) throughout the state remain in the small, single-digit percent range over the next few months as expected, there may be slight improvements in affordability. However, marked improvements in affordability seem less likely, as they would require much larger declines in home prices.