Foreclosure and Real Estate Blogs

Everyone’s aware of the issues with California’s housing markets, today’s question is whether current prices make sense given a more realistic loan underwriting requirement. Conventional loan underwriting requires a home loan payment, including property tax and hazard insurance, to be less than 33% of a borrower’s pre-tax income. That’s not cast in stone, but it’s a good number for determining housing affordability.

Let’s take a house listed for sale at $600,000. Yes, some areas will be lower priced, some will be higher priced, adjust the numbers to reflect your local area.
$600,000 Purchase Price
-$60,000 Down Payment (10% down based on the $600,000 purchase price)
$540,000 Loan Amount

What will the payments look like?
$3,413 Principal and Interest ($540,000 loan @ 6.5% for 30 years)
$ 625 Property Tax ( 1.25% of $600,000/12 ) - might be significantly higher
$ 250 Hazard Insurance - Probably a bit on the high side, this will vary
Total Monthly Payment - $4,288 - Does not include the possibility/probability of PMI or Association dues

What income is required to purchase this home affordably?
$12,994 a month, or $155,928 a year.

2006 California median income for a 4 person family was $74,801. Half of the families were making more than that number, half were making less. Census Median Income
Now, we can use the argument that some California counties are affluent, and some California counties are more rural and less affluent. That’s reasonable. Orange County had a 2004 median household income of $58,605. Marin County had a 2004 median household income of $67,731.  Maybe there are more affluent counties?

There’s also the argument that only people earning significantly more than the median average were buying homes over the past few years.  It sounds reasonable, but if the qualifying threshold is roughly three times the median income, the buyer pool becomes really, really small.  The most likely answer to why prices reached levels unaffordable for many lies with the Option Arm loans with qualifying based on teaser rates or stated income.

It allowed many people to purchase homes, but will it allow them to keep those homes?

This entry was posted on Monday, October 8th, 2007 at 1:41 pm and is filed under Loan Qualification, Residential Lending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.