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California’s Housing Affordability Index - 2004

By Rathin Neogy, MBA
The Sterling Real Estate Company*

The housing affordability index (HAI) indicates the percent of households who can afford to buy a median priced home. Nationwide, the HAI in July 2004 was 53 percent, down slightly from July 2003 when it was 57 percent. By comparison the HAI for California was 18 percent in July 2004, a 9 percent decrease from a year ago, with San Diego the least affordable at 10 percent.

Housing Affordability Index According to the California Association of Realtors (CAR), the minimum household income needed to purchase a median-priced home at $463,540 in California in July was $109,590, based on an average effective mortgage interest rate of 5.93 percent and assuming a 20 percent downpayment. The minimum household income needed to purchase a median-priced home was up from $86,120 in July 2003, when the median price of a home was $381,940 and the prevailing interest rate was 5.39 percent. By comparison, the minimum household income needed to purchase a median-priced home at $191,300 in the U.S. in July 2004 was only $45,230.

By major city in California, the most expensive median priced home in July 2004 was San Francisco at $651,150 followed by Santa Clara (Silicon Valley) at $640,000 then San Diego at $582,490 and Los Angeles at $448,800.

And yet, according to the National Association of Realtors, greater than expected sales of existing homes in the first seven months of the year will help set a record for annual existing-home sales in 2004. Existing-home sales are projected increase about 6.5 percent this year to 6.50 million.*

New-home sales also are expected to rise to a record level this year, to 1.16 million, up 7.1 percent. Housing starts are forecast to increase 4.8 percent to 1.94 million in 2004, the strongest pace since 1978 when baby boomers were entering the market en masse.

David Lereah, NAR's chief economist, said a continued decline in mortgage interest rates is creating favorable market conditions at a time when household formation is rising. Though NAR projects the 30-year fixed-rate mortgage to slowly rise to 6.0 percent in the fourth quarter, the average rate for the entire year should be 5.9 percent, the second-lowest annual average since the mid 1960s. The lowest rate in recent years was 5.8 percent in 2003.

"Price appreciation is projected to be only slightly higher than historic norms next year, as supply levels come closer to market demand. Although we expect the number of home buyers to continue to exceed the number of sellers, the situation should improve in 2005," Lereah said.