California Housing Affordability Continues to Decrease, CBIA Announces

California still home to half of the top 20 least affordable markets

SACRAMENTO, CA – November 24, 2009 – (RealEstateRama) — Housing affordability continued to creep downward throughout the state during the third quarter of 2009 as a result of incremental price increases due to increased demand for homes, the California Building Industry Association said today.

The quarterly National Association of Home Builders/Wells Fargo Housing Opportunity Index found that homes were less affordable in 23 of the state’s 28 metro areas included in the report.

On a statewide basis, the HOI found that a family earning the median-income could have afforded 59.1 percent of the new and existing homes that were sold during the third quarter, down from 62.7 percent in the second quarter.

Liz Snow, CBIA’s President and CEO, encouraged buyers to take advantage of the high affordability rates as the continued decrease in affordability could signal an increase in demand for homes as more buyers return to the market amid shrinking inventories.

“As existing home inventories drop and builders sell more homes, we’re seeing increased competition among buyers which has led to incremental price increases in most areas around the state,” said Snow. “While we’re not out of the woods yet, this could signal that the bottom of the market is here, and as the market improves, we could be facing an imbalance in supply and demand. I would encourage buyers to take advantage of these affordability levels as they may not last long.”

Snow cautioned that housing production hasn’t kept up with population growth and that two years of record-low production could accentuate the supply/demand imbalance.

“According to the California Department of Housing and Community Development, California needs to be building around 230,000 units per year to keep up with population growth,” said Snow. “Production in 2008 was just 65,000 units and this year will be below 40,000 units, so we could see a big swing in affordability levels as prices increase due to increased competition among buyers.”

Snow added that state and local lawmakers should ease regulations and make building more feasible in order to keep up with population growth and meet the demand to help sustain higher affordability levels in the future.

“Easing regulations on homebuilding and lowering development impact fees would go a long way towards avoiding a housing shortage as the market corrects itself,” said Snow. “Helping projects get off the ground more quickly would also help in putting more people back to work and reinvigorating our overall economy.”

San Francisco, San Mateo and Marin counties once again earned the distinction of California’s least-affordable metro area, and second in the nation, with just 23.6 percent of the homes sold affordable to a median income family, down from 26.9 percent in the second quarter. San Luis Obispo County came in third (29.2 percent), followed by Honolulu, Hawaii (32.7 percent) and Ocean City, N.J. (35.7 percent). The New York City metro area continued to hold the title of the nation’s least affordable market for the sixth quarter in a row (19.2 percent).

Stanislaus County has once again become California’s most affordable market with 84.5 percent affordability, up from 83.6 in the second quarter. Merced County and Madera County were the second and third most-affordable metro areas in California with 84.2 percent and 83.2 percent affordability, respectively.

Nationwide, 70.1 percent of new and existing homes sold in the third quarter were affordable to families earning the national median income, down slightly from 72.3 percent in the second quarter. Kokomo, Ind., retained the title as the nation’s most-affordable housing market with an affordability ranking of 96.7 percent, followed by Springfield, Ohio, with a ranking of 96.1 percent.

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How the HOI is calculated

For income, NAHB uses the annual median family income estimates for metropolitan areas published by the Department of Housing and Urban Development. NAHB assumes that a family can afford to spend 28 percent of its gross income on housing; this is a conventional assumption in the lending industry. That share of median income is then divided by twelve to arrive at a monthly figure.

On the cost side, NAHB receives every month a CD of sales transaction records from First American Real Estate Solutions (formerly, TRW). The data include information on state, county, date of sale, and sales price of homes sold. The monthly principal and interest that an owner would pay is based on the assumption of a 30-year fixed-rate mortgage, with a loan for 90 percent of the sales price (i.e., 10 percent down-payment). The interest rate is a weighted average of fixed and adjustable rates during that quarter, as reported by the Federal Housing Finance Board. In addition to principal and interest, cost also includes estimated property taxes and property insurance for that home. This is based on metropolitan estimates of tax and insurance rates from the 2000 Decennial Census, as estimated by NAHB from the Census Bureau’s Public Use Microdata Sample (PUMS). Mortgage insurance is not currently a component of the HOI.

More information about the HOI, including historical tables for communities nationwide, can be obtained at http://www.nahb.org/page.aspx/category/sectionID=135. Questions about the methodology should be directed to Gopal Ahluwalia (202-266-8480) or Rose Quint (202-266-8527) in NAHB’s Research Department.

The California Building Industry Association is a statewide trade association representing thousands of homebuilders, remodelers, subcontractors, architects, engineers, designers, and other industry professionals. More information is available on the Association’s Web site, www.cbia.org.

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