More NONSENSE from the CAR (Ca. Assoc Realtors)

Look at this latest report from the California Association of Realtors (CAR): 3Q 2006 First-time Buyer Housing Affordability Index (HAI).

This is the part I find interesting...and for several reasons to be discussed below:

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The minimum household income first-time buyers needed to purchase a home at $478,710 in California in the third quarter of 2006 was $98,890, based on an adjustable interest rate of 6.58 percent and assuming a 10 percent down payment. First-time buyers typically purchase a home equal to 85 percent of the prevailing median price. The monthly payment including taxes and insurance was $3,300 for the third quarter of 2006.
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First off, the OLD standard used to be 20% down and a FIXED rate loan. Now, they are using 10% down and an ADJUSTABLE rate loan. Looks like the ole "when things aren't looking as good as we think they should, we will just change the standard". It has been used successfully with SAT scores, so why not housing stats? After all, if we just change the 'standard' every so often, we can show progress with each new 'standard'. Don't believe me...here is the link to a report from December 2005 that uses the 'old' 20% down standard: The 'OLD' affordability index from 2005. Here is the excerpt:

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LOS ANGELES (Dec. 8 ) – The percentage of households in California able to afford a median-priced home stood at 15 percent in October, a 4 percentage-point decrease compared with the same period a year ago when the Index was at 19 percent, according to a report released today by the California Association of REALTORS® (C.A.R.). The October Housing Affordability Index (HAI) was unchanged from September, when it stood at 15 percent.

The minimum household income needed to purchase a median-priced home at $538,770 in California in October was $128,480, based on an average effective mortgage interest rate of 6.03 percent and assuming a 20 percent downpayment. The minimum household income needed to purchase a median-priced home was up from $106,490 in October 2004, when the median price of a home was $459,530 and the prevailing interest rate was 5.70 percent.
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There you have it...complete with links to actual pages on the CAR site. I wonder why it is so hard for the OC Register, LA Times, San Diego Union Tribune, and others to do such 'investigative journalism'? "Bueller......Bueller......." Did somebody say advertising?

Not only did they change the standard, but they used an interest rate that I don't think is attainable by very many people. I looked at the California rate sheet of a major nationwide lender, and I think it would be rather difficult for most people to get a 90% LTV loan at 6.58%! For the people that could get it, they would need to show full documentation, and that rate would only be 'fixed' for TWO years!! Sorry, no 90% stated loans at that rate! Getting that rate would 'assume' that the broker wasn't charging any points, and bare-bones fees...and we know how much brokers like to work for 'no fee' loans! But lets not forget that unless you were using a 'non-conforming' loan, you would be paying PMI (mortgage insurance) until you had 20% equity in your property...so that would add a few hundred a month to the bill as well...and make that rate even less applicable to this situation. Most people would have to get an 80/10 loan to get to 90%...and the 10% would be in the 8-12% range depending on all of the underwriting factors, but they would avoid paying the PMI by using the 'combo' loan.

From the thousands of credit reports and files that I looked at, very few people had $47,000 to $50,000 sitting in their savings accounts for the 10% down payment...which doesn't include those pesky things called closing costs. I know that most sellers are dying for a chance to pay them for you now, but we can't assume that those will automatically be paid for. So, might as well have another 5-12k set aside for those. But let's do this the bare-bones CAR way...after all, why should they care if you have any money left in your savings account for reserves, emergencies, etc? You 'own' a house now...right?!?!?

So, using their numbers, I crunched the loan of $430,839.00 at 6.58% to have a principal/interest mortgage payment of $2745.90 per month. That doesn't include insurance, which on a $480k piece of property will be about $100 a month. Don't forget property taxes which will run about $450-500 per month (most lenders underwrite CA state property tax at 1.25% of the purchase price...but it can be a bit lower, or much higher depending on things like Mello Roos and other local assessments). Lets just round the property taxes to $444.10 and that makes our total monthly expenditure for this house the $3300 like the CAR says was the average in Q3 2006. At least the CAR can crunch the numbers right! The problem is that their numbers are not completely realistic in my opinion. This situation would put the person at a 40% debt ratio assuming they had NO other debt...no student loans, no car payments, no credit cards bills...nothing. If that was the case, this person would be OK spending 40% of their income on housing with no other debt.

Let me just throw this question out there for many of you...what do you think the 'typical' 480k house in California rents for per month??? Do you think the rent is more or less than $3300 a month? Enquiring minds want to know...

The scary thing is what happens in 2, 3, or 5 years when that wonderful ARM adjusts! What does the payment jump to then? What is the underlying index the CAR suggests to use for the ARM? Where will that index be in a few years? What will happen if 'heaven forbid' property values decrease a bit before I need to refinance, and I can't get out of my ARM? Even if they decrease just a little bit, that 10% equity cushion can evaporate pretty quick. Even if the borrower isn't upside down, it will still be hard to get a good rate on a high LTV loan (loan to value). I think you get the point...

Oh well...anything to make the market look better for a little while longer. You know what though...just like a kid wading too far into the deep-end...even the biggest moron knows when he is underwater and drowning...and there is nothing the CAR will be able to say or do to make these people feel any better about their situations when that time comes.

Stay tuned...

SoCalMtgGuy