Decreasing Affordability

In the recent months home affordability has become a topic of many different real estate seminars that I have attended. Home affordability, or affordability index is a measure whether or not a typical family can qualify for a mortgage loan on a typical home. This has become a popular topic recently due to real estate pricing increases, and current real estate prices across the nation. Home affordability has increased to a point that it is not as feasible for a buyer to purchase a home in the current market; specifically California verses the national index.

Affordability Index

As the definition states above, a typical family is one earning the median family income reported by the U.S. Bureau of the Census (2014 median income in American was $66,632; 2014 median income in California $68,617). The typical home is define as the national median-priced, existing single-family home. (California Assoc. Realtors current median home price in California $483,280, and the national median home price $288,000 per U.S. Bureau of the Census). You can get more information on your specific area on these websites (car.org) (census.gov).

Evaluation

Home affordability is a calculation that factors in the assumption of a down payment that is 20 percent of the total home value, while assuming a qualifying ratio of 25 percent. This means that the monthly principal and interest (P&I) payments cannot exceed 25 percent of the median family income. As families purchase homes across the nation the parameters of 25 percent of their income going to P&I leaves $26.17 left over after the mortgage is paid not including taxes and insurance (calculated from mortgaging $288,000 and subtracting 25 percent of annually household income of $66,632).

In California, these limitations give the homebuyer no ability to purchase a home with the P&I limit at 25 percent of their household income. This gives the homebuyer in California a median household income of $68,617; which is a negative cash flow over $800 a month (calculations from a mortgage $483,280 and subtracting 25 percent of annually household income of $68,617).

Showing

As the information shows above, the affordability within California verses the national median has a large gap. It shows that homebuyers have a tough home affordability index in any area of the nation, which is very tight and in many cases nonexistent in California. In this situation homebuyers need a household that is duel income if not already, a raise, or the family members obtain a second job to afford a home within these ranges.

The California median is a drastic difference from the national median, which gives context to the affordability index within the United States verse more define regions. California’s affordability has a larger gap between household income and home prices; however, the affordability across the nation is still quite large.