Affordability Index Slips from Peak

This year--despite high home prices--housing affordability in California reached the highest point in this decade. But affordability has been dropping rapidly since March, when 30-year, fixed-rate mortgages were at 9%.

By next year, only about one in four Californians will be able to afford the median priced single-family home, according to Joel Singer, chief economist of the California Assn. of Realtors.

“The affordability rate (percentage of Californians who can afford the median-priced home with an 80% loan-to-value mortgage) stood at 37% earlier this year, with the lower interest rates and home prices. But affordability already has dropped to 31%, and we’re expecting it to drop to 28% within 60 days,” Singer said.

“By the end of next year, we’ll be seeing about one out of four Californians being able to afford the median-priced home,” Singer said.

Singer said he expects most home buyers (60%) to turn to the adjustable-rate mortgage. “The adjustable-rate loan will be the mortgage of choice as interest rates on 30-year loans hit 11%,” he said. Only 30% of California’s mortgagors chose the adjustables less than seven months ago.

Mortgage interest rates should stay in the 11% range for the rest of this year and move higher in the first quarter of next year before moving slightly lower the second and third quarters of 1988, Singer predicted. Initial rates on adjustables will be in the 9.5% to 9.75% range, he added.

More buyers will turn to condominiums next year to resolve their affordability problem, Singer also predicted. “Condos will make up 20% to 25% of total home sales in urban areas (of California) next year,” he said. Condo sales this year were 17%-18% of the market.

The strong trade-up market may slow because of higher interest rates, he added. But 40% of 1988 home buyers will be moving into their own homes for the first time. First-time buyers comprised 35% of the resale market in 1987. “Facing rent increases, the first-time buyer will still have the incentive of tax benefits,” he said.

Singer told the realtors, “We expect a 10% drop in sales next year. California home sales should be in the 435,000-440,000 range in 1988.”

That contrasts with 1987 expected sales of 485,000, he said. The median California resale price went from $131,000 last year to $141,000 in 1987. Singer forecasts a 6.5% increase in the median price next year.