The California Home Buying Debate: Southern California Home Sales Broken out in Price Tier Ranges. The Amount of California Home you can Afford is Probably Less Than you Expect.

For many prudent prospective home buyers, many who have saved diligently for years, many are licking their chops to purchase a home in California.  But let us be honest, most are looking to purchase in selective markets like Marin County or parts of the Westside here in Southern California.  They hear about the 50 percent median price drops and overlay this statewide data to niche markets.  Yet most of the sales are occurring at the lower end.  This is a given.  But how does this look if we really break the data down?  I pulled the recent DataQuick data for August of 2009 for Southern California and broke out the price segments:

Now I think this data is extremely important in helping to dissect the current home selling trends in Southern California and for the most part, other areas of the state.  The lower end of the market, homes priced under $300,000 seem to be moving at a brisk pace.  Yet once you move over that point, things change.  In fact, 53 percent of all homes sale occurred under the $300,000 point mark.  Out of 4,168 single family homes sold, over 2,000 came from the lower priced region.

There seems to be a bit of frustration by people who have sizable down payments and look at regions that have resistant price drops.  It isn’t so much that prices are resistant, it’s just that there is a number of buyers who are capitulating at a time when California will see a second leg hit in 2010.  Interestingly enough more of the problems are going to occur on the over $300,000 market.  But let us look at some affordability calculators here.  Since the government is backing most mortgages and subsidizing purchases with tax credits, let us see what a family can afford according to Ginnie Mae.  I’ll run the numbers for a family making $150,000 a year, with $200 of credit card payments per month, and a $300 auto loan:

Here is the problem.  With a $150,000 income a family can afford a home within a $350,000 to $360,000 range.  This is assuming they use a FHA backed loan which for Southern California, made up 37 percent of all loans for last month.  But notice the conventional side of the equation?  If they have a down payment of $85,000 they can buy a home up to $569,000.  But look at the total housing cost.  For this borrower they will be spending $5,300 a month on their overall home payments which include principal, interest, taxes, and insurance.  This is assuming only $500 in other expenses and the family having over $100,000 to close on the deal.  And you wonder why the higher end of the market is stagnant.

So how were buyers able to buy expensive homes in the past?  Usher in the era of the interest only, option ARMs, and other mortgage products that artificially gave the buyer massive leverage that is now putting many in trouble.  Just run a scenario.  A couple that pulls in $150,000 now loses a job in California.  Not unlikely with 12.2 percent unemployment.  They were already squeaking by if they have a $600,000 mortgage so the income might fall by half.  But the payment is actually going to go up either with a reset or more likely, a recast in more expensive areas.

But go back to the scenario above.  All someone would need to buy a $365,000 home with a FHA backed loan is about $14,000.  That is a large amount of leverage still.  You would hope that banks are at least adhering to strict underwriting guidelines required by FHA and their front end and back end ratios (31 to 38 percent).

The above also explains the stagnant mid to upper tier market.  People can still buy as long as they have the adequate income to back it up.  But don’t expect a flurry of people to jump on all these homes and certainly don’t expect prices to zoom back up.  The economy in the state is already putting a cap on that.  The amount of leverage is simply no longer in place.  We are really heading back to a more traditional market but we have years of pending foreclosures that will work their way through the system so our market won’t be “normal” probably for another 5 years or so.

So how much home can you afford?  As a rough rule about 3 times your gross annual income for a mortgage.  So someone making $100,000 can buy a $300,000 home and still have safe wiggle room.  But many of these people when I speak with them have their eyes set on $600,000 homes.  This is the same logic that went with the housing bubble.  They cannot afford these homes.  And given the troubled loans in the mid to upper tier, I won’t be surprised to see a 10 to 15 percent drop in the next few years which in many cases will wipe out 2 or 3 years of you saving up for a down payment.

You also want to assess how secure your position is.  Are you seeing hours cut?  Will you downsize from two incomes to one if you plan on having a family?  Sometimes people ignore these important questions.  So right now California is still seeing pockets of the bubble but homes that are priced right are moving.  Yet many people have beer budgets and champagne taste.

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