More NONSENSE from the CAR (Ca. Assoc Realtors)
Look at this latest report from the California Association of Realtors (CAR): 3Q 2006 First-time Buyer Housing Affordability Index (HAI).
This is the part I find interesting…and for several reasons to be discussed below:
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The minimum household income first-time buyers needed to purchase a home at $478,710 in California in the third quarter of 2006 was $98,890, based on an adjustable interest rate of 6.58 percent and assuming a 10 percent down payment. First-time buyers typically purchase a home equal to 85 percent of the prevailing median price. The monthly payment including taxes and insurance was $3,300 for the third quarter of 2006.
—————-
First off, the OLD standard used to be 20% down and a FIXED rate loan. Now, they are using 10% down and an ADJUSTABLE rate loan. Looks like the ole “when things aren’t looking as good as we think they should, we will just change the standard”. It has been used successfully with SAT scores, so why not housing stats? After all, if we just change the ’standard’ every so often, we can show progress with each new ’standard’. Don’t believe me…here is the link to a report from December 2005 that uses the ‘old’ 20% down standard: The ‘OLD’ affordability index from 2005. Here is the excerpt:
—————-
LOS ANGELES (Dec. 8 ) – The percentage of households in California able to afford a median-priced home stood at 15 percent in October, a 4 percentage-point decrease compared with the same period a year ago when the Index was at 19 percent, according to a report released today by the California Association of REALTORS® (C.A.R.). The October Housing Affordability Index (HAI) was unchanged from September, when it stood at 15 percent.
The minimum household income needed to purchase a median-priced home at $538,770 in California in October was $128,480, based on an average effective mortgage interest rate of 6.03 percent and assuming a 20 percent downpayment. The minimum household income needed to purchase a median-priced home was up from $106,490 in October 2004, when the median price of a home was $459,530 and the prevailing interest rate was 5.70 percent.
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There you have it…complete with links to actual pages on the CAR site. I wonder why it is so hard for the OC Register, LA Times, San Diego Union Tribune, and others to do such ‘investigative journalism’? “Bueller……Bueller…….” Did somebody say advertising?
Not only did they change the standard, but they used an interest rate that I don’t think is attainable by very many people. I looked at the California rate sheet of a major nationwide lender, and I think it would be rather difficult for most people to get a 90% LTV loan at 6.58%! For the people that could get it, they would need to show full documentation, and that rate would only be ‘fixed’ for TWO years!! Sorry, no 90% stated loans at that rate! Getting that rate would ‘assume’ that the broker wasn’t charging any points, and bare-bones fees…and we know how much brokers like to work for ‘no fee’ loans! But lets not forget that unless you were using a ‘non-conforming’ loan, you would be paying PMI (mortgage insurance) until you had 20% equity in your property…so that would add a few hundred a month to the bill as well…and make that rate even less applicable to this situation. Most people would have to get an 80/10 loan to get to 90%…and the 10% would be in the 8-12% range depending on all of the underwriting factors, but they would avoid paying the PMI by using the ‘combo’ loan.
From the thousands of credit reports and files that I looked at, very few people had $47,000 to $50,000 sitting in their savings accounts for the 10% down payment…which doesn’t include those pesky things called closing costs. I know that most sellers are dying for a chance to pay them for you now, but we can’t assume that those will automatically be paid for. So, might as well have another 5-12k set aside for those. But let’s do this the bare-bones CAR way…after all, why should they care if you have any money left in your savings account for reserves, emergencies, etc? You ‘own’ a house now…right?!?!?
So, using their numbers, I crunched the loan of $430,839.00 at 6.58% to have a principal/interest mortgage payment of $2745.90 per month. That doesn’t include insurance, which on a $480k piece of property will be about $100 a month. Don’t forget property taxes which will run about $450-500 per month (most lenders underwrite CA state property tax at 1.25% of the purchase price…but it can be a bit lower, or much higher depending on things like Mello Roos and other local assessments). Lets just round the property taxes to $444.10 and that makes our total monthly expenditure for this house the $3300 like the CAR says was the average in Q3 2006. At least the CAR can crunch the numbers right! The problem is that their numbers are not completely realistic in my opinion. This situation would put the person at a 40% debt ratio assuming they had NO other debt…no student loans, no car payments, no credit cards bills…nothing. If that was the case, this person would be OK spending 40% of their income on housing with no other debt.
Let me just throw this question out there for many of you…what do you think the ‘typical’ 480k house in California rents for per month??? Do you think the rent is more or less than $3300 a month? Enquiring minds want to know…
The scary thing is what happens in 2, 3, or 5 years when that wonderful ARM adjusts! What does the payment jump to then? What is the underlying index the CAR suggests to use for the ARM? Where will that index be in a few years? What will happen if ‘heaven forbid’ property values decrease a bit before I need to refinance, and I can’t get out of my ARM? Even if they decrease just a little bit, that 10% equity cushion can evaporate pretty quick. Even if the borrower isn’t upside down, it will still be hard to get a good rate on a high LTV loan (loan to value). I think you get the point…
Oh well…anything to make the market look better for a little while longer. You know what though…just like a kid wading too far into the deep-end…even the biggest moron knows when he is underwater and drowning…and there is nothing the CAR will be able to say or do to make these people feel any better about their situations when that time comes.
Stay tuned…
SoCalMtgGuy
November 28th, 2006 02:04
SoCal,
A realtor just emailed me a ‘Real Estate Outlook for 2006/2007 presented by Gary Watts’. It is in PDF and I would like to post it, but don’t know how to link this local document. Can I email this to you, or what should I do?
Thank you,
VirtualChris-OC
November 28th, 2006 02:07
Just saw your email up top… INCOMING!!!
-VC
November 28th, 2006 06:31
How much is rent? Well, a $600k place in Napa seems to rent for anywhere from $1500-2000/month.
November 28th, 2006 06:56
and even with this kind of statisticvoodoo they can´t push the rate to really high levels.
that tells you something…….
November 28th, 2006 07:02
Expose the Real estate propaganda machine again!
You should send this post to all media outlets.
Email this to all friends and potential buyers that could be suckered into believing this gibberish shilling.
November 28th, 2006 09:14
Even without the wanna-be slumlords & arbitrageurs like Casey Serin running around juicing the market, the central dynamic of the housing market is for buyers (ie us) to bid prices up to unaffordability.
In the 1960s and 1970s we discovered that if both spouses worked we could ‘afford’ a nicer home. The 80s saw the rise of the ‘balloon payment’.
Now we have (or had…) negative am stated-income products. This is not going to end well, not at all.
But, I do believe you need to factor in the mortgage interest deduction . . . a $3300 PITI is really only $2050 with this adjustment, which in fact is not that far off from the rent on a $500k property (within spitting distance of the premium I would pay not to live in a ‘tenement’).
November 28th, 2006 09:52
Another great post. Their numbers are bogus in my eyes as you clearly explain.First of all, there really are very few people with any money in savings. Most people who do have savings got in from equity from selling a house. Most people are living paycheck to paycheck. People with no money are going to buy with zero down and finance it all.Any blip in their employment = foreclosure quick. I think they need to calculate affordablity at zero down for first time buyers.I think there are a lot of households out there bringing in 40-50k per year so the 100k needed to afford median house is ridiculous. What we really have here is the rich and the poor class. People who benefited from the housing boom have a very pronounced advantage of the working joe who has to work and save money for his wealth.
November 28th, 2006 10:02
I think buy lowering the measure of down payment is a good thing. It will make the afordability index go down because the loan amount goes up. They should calculate the affordability index at 0-5% down payment to be more accurate.
November 28th, 2006 10:34
I currently am renting a house which the owners have had on the market for 2 months with only 4 people have come to look at. Its in Simi Valley CA so good area, was priced at $590K to start now down to $555K our rent was $2150 until Nov. When the owners begged us to stay till it sells and lowered our rent $200. Even without the lowered rent way cheaper to rent then buy the place, plus living there i know alot wrong with the place that a buyer wont. We are looking to move just to get out before it sells and be forced to move, but in this slow market we have time to find another nice place.
November 28th, 2006 11:39
I explained the EXACT same changes that CAR has made to the affordability index to my sister over the weekend. Even though she has friends in the RE and mortgage industry this was the first she heard of the fudgeing of the numbers. She wants to put her house on the market next summer also. I told her she will likely have a lot of competition at that time. Thanks for continueing to expose the truth in RE.
November 28th, 2006 11:57
I agree with problems concerning the new and old standard (especially without mentioning it) But would it not cost more per month now with having a larger loan (10% down instead of 20%). So did the CAR just make the statistics harder on themselves? They made the the monthly payments higher, and what someone could afford lower. Does not sound like normal talking points that the CAR would want.
Looks bad though when they change loans from the 30 year standard to a 5 year fix. I guess next year it will be a neg am loan with a start rate of 1%
November 28th, 2006 12:24
“But, I do believe you need to factor in the mortgage interest deduction . . . a $3300 PITI is really only $2050 with this adjustment, which in fact is not that far off from the rent on a $500k property (within spitting distance of the premium I would pay not to live in a ‘tenement’).”
How do you arrive at 2050/mo? I think that number is *way* optimistic. It all depends on your tax bracket, issues like AMT, the fact that “P” is not a deduction, loss of the standard deduction, state income taxes, carry-overs from previous years, child credits, etc., but numbers in the 2500-3000/mo are more realistic. What’s more, may God save you if you are laid off for a while, since the deductions are now no more.
November 28th, 2006 12:41
I’m not a CPA…but spending $1.00 to save about 30 cents in taxes is NOT the best plan. Yes, the deduction is nice, and it does save money…but it should not be a ‘reason’ to go ahead and over-pay for real estate.
It would be nice if is a CPA would be able to chime in on this. I remember reading somewhere that the average deduction falls somewhere between 19-31 cents per dollar spent on interest payments.
SoCalMtgGuy
November 28th, 2006 13:46
80% of people who earn between $100K and $200K a year are subject to AMT, and something like 90% of people who earn between $200K and $500K are affected. And about half of people who earn between $75K and $100K are affected.
In short, if you’re “upper middle class” (I guess that means a six figure income), you are likely to get zero benefit from the mortgage interest deduction.
I remember when my wife was squawkin about selling our house (to make a $500K profit) and renting for a few years, she called our tax accountant to ask how the home mortgage deduction would affect our taxes. Our accountant laughed and said, “You guys haven’t gotten a mortgage deduction in 3 years. Haven’t you noticed?”
Oh yeah, we rent now, and my wife is thrilled with it. (We have 2 kids under 5 - they can either trash a house that we’ve invested everything in and that costs us 40% gross income and that we have to pay maintenance on, OR they can trash a rental house and we lose a $2500 security deposit someday. Hmmm … easy decision.)
November 28th, 2006 15:04
A Post from A HP Reader SOCALMORTGUY;
Bake McBride said…
Has anyone seen anything like this offer…The builder is offering something called a “Guaranteed Appreciation Mortgage”
Here is the site:
http://www.160first.com/hl/hl.nsf
I’ve heard of Shared Appreciation Mortgage (SAM), but this is a first…Is it just marketing spin or a new product.
Anyone out there have any knowledge on how this works? Co-Worker is about to “invest” in a 3bdr 2bath for 860K in this place with one of these mortgages.
Yes, there are still people out there that have no clue about the bubble
November 28th, 2006 15:05
Sorry, forgot the Link for above question.
http://tinyurl.com/yfma2m
November 28th, 2006 16:17
Something hit me midway through the above that I’m surprised you all missed…
THEY ALSO CONVENIENTLY LOWERED THE PRICE OF THE HOME BY A SUBSTANTIAL AMOUNT IN THE CALCULATIONS!!
‘The minimum household income first-time buyers needed to purchase a home at $478,710 in California in the third quarter of 2006
The minimum household income needed to purchase a median-priced home at $538,770 in California in October
There are only 2 options - 1) prices dropped an average of $60,000 YOY or over 10% (can you imagine them admitting that?) or 2) they changed either/both the metrics from a) what a ‘first time buyer home’ value is from ‘all home’ prices to lower the target price and thus the affordability and/or b) changed from median #’s to a more convenient (and not stated - is it average, median, number out of hat?) metric.
So EVERY PIECE of the new calculation is b$%&it - not ‘just’ the down payment and loan type assumptions picked up already.
Amazing. Truly f’ing amazing…
November 28th, 2006 16:22
Whoops - actually re-read it to see that they state 85% of median is a 1st time buyer median metric. My Bad. So they didn’t pull that out of thin air (although I wouldn’t put any $ on that either).
However - it still doesn’t change that they put in a new, conveniently lower, total cost metric to help drive the result they want. It’s artibrarily changing the metric when it works in your favor…total crap.
Still unbelievable and completely misleading to keep this game going…
November 28th, 2006 16:37
Tom K,
You are correct. Capitalizing your $2,150 rent at 6.5% for 30 years equates to a $349,000 mortgage. That’s 63% of what they are asking. In other words, you are able to rent way above what that payment could buy. Plus, repairs, taxes, depreciation etc. are all on the owner’s plate. Sure, I know thatt he IRS allows a lessor to “depreciate” the property, which they only “get” every April 15th.
Also, the IRS keeps score, and at the end, you have to give that back in reacpture (one way or another). It either gets paid back at the sale, or it reduces your basis going into the next deal.
So, clearly in your case, you are better off renting until you think the market has reached bottom so that you don’t ride away your equity.
November 28th, 2006 16:39
FYI, I did a rent vs buy tax analysis here.
November 28th, 2006 18:09
As always, a great post. Roughly speaking, Cali by itself is what, the fifth or sixth largest economy, and a quarter of Cali’s economy is housing-based, and this dishonest spin is what the “official” Realtors Association puts out for the public? With such a massive impact on the state’s economy, it’s astounding that there is no fiduciary responsibility required of CAR…or other realtors or realtor associations. With truly huge amounts of money invested in MBS, domestically and internationally, there is so much financial risk at stake, and you have these greasy, unethical hustlers at the helm.
November 28th, 2006 20:27
Today’s report on Sacramento has been released!
Daily Home Price Analysis
November 28th, 2006 20:43
Capitalizing your $2,150 rent at 6.5% for 30 years equates to a $349,000 mortgage. That’s 63% of what they are asking
Let’s say the place sells for $535K.
80% @ 6.5% & 20% @ 8.5% is $3100/mo in interest.
Add 1.1% prop tax for another $500/mo deduction.
That’s $3600/mo in deductions. The standard deduction of married-filing-joint is $10,700 or $900/mo, so the difference is $2700/mo.
Assuming we’re in the middle 34% (25% + 9.3%) bracket, that’s ~$1800/mo in tax savings.
AFAIK, mortgage interest IS ALLOWED on the AMT calculation.
So, what makes more sense, renting at $2150 or buying at $1800 ($3600 in payments less $1800 in tax savings) + maintenance?
Granted, you can walk away from a lease much easier than a mortgage, and I for one aren’t going to enter this market until we see what happens to all the neg-am & heloc’d idiots in 2007-2008.
November 28th, 2006 22:11
Let’s play find the math error!
$2700/mo x 34% is . . . $900/mo, not $1800/mo.
That puts the cost of ownership at $2700/mo + maintenance & insurance vs. $2150/mo for renting. . .
November 28th, 2006 22:27
“That puts the cost of ownership at $2700/mo + maintenance & insurance vs. $2150/mo for renting. . .”
Hmmm, yeah, right around the middle of the more appropriate range I gave.
FWIW I’m renting for 1700/mo a house which is supposedly worth ~625k. Two houses down an identical unit sold for 624k in June. (Not near shopping, but very near beach and huge parks.) So, I suspect if you look around you will find situations where the math is even more skewed toward renting.
Having said that, can someone explain to me why mortgage interest should be deductible? I’ve never understood that. If you are trying to give hard-working schmoes a break, why not make rent deductible, too? If you don’t, isn’t that effectively a regressive tax?
Don’t answer - I already know. It is a regressive tax, and it is unfair. The right and wrong about it is solved for most Americans by whether or not they gain $$$ from it, so pretty much it’s defined as “good” by most of the American public. $$$ pretty much defines what is good and nothing else. If Americans were making money off their adventures in Iraq, then they’d be hailing Bush as a hero right now, not complaining about an ongoing quagmire.
November 28th, 2006 22:32
Troy,
Great calculations, but aren’t you forgetting that if you buy now, your $535k asset may be worth $335k in a couple of years. That’s an extra $8k/month. I think I’ll stay with the rent option.
November 29th, 2006 09:44
Troy,
Your rent vs buy is off because rents are significantly lower. I’ve looked at a lot of rentals in the SFBA, and a $535K house will rent for significantly less than $2100 - more like $1600/month. At $2100/month, the equivalent price is more like $700K.
November 29th, 2006 11:47
SoCalRugger,
Don’t be amazed. The things some of us in the REIC get to see and hear every day is amazing, especially so over the last 5 year run up. The cracks are now apparent and the 07/08 flood of foreclosure / price reduction will make Katrina look like puddle. What club do you support your local hooker at?
November 29th, 2006 13:05
480K for a home in California?.
I’ll take 2 please. You can tell I’m from the bay area.
If you haven’t found this blog yet check it out.
http://www.burbed.com/
These figures from CAR are laughable.
Thanks for the breakdown based on the CAR numbers btw.
/et
November 29th, 2006 15:21
SOCALAPPRAISER - have been a big proponent of the disconnect for a while, and a housing bear for quite some time - so I’m not shocked by anything we’re seeing in the marketplace - just the level of BS these guys will throw out to manipulate data and protect their BMW’s and bling. Criminal if you ask me.
I support nothing more than a nice pint of lager at the pub afterwards nowadays, but used to lock with a college back east and a stint with LARC a while back. Actually I likely pulled a muscle just hoisting a larger beer the other day so I’m far removed from the pitch it would seem.
December 3rd, 2006 19:28
SoCalGuy,
I just came off the golf course with a friend of many years. His sister and husband live in the greater Sacramento area. My friend told me a friend of his sister and husband bought a home for 700K a few years ago and spent 150K fixing up the backyard with pools and waterfalls etc. Their intention was to flip a high end place for a sizeable profit. They now can not sell the place and have no money to pay the mortgage. Their idea to raise some short term cash is to buy another place for 700K and get the seller to have it appraised for 800K. Then pocket the 100K to make payments until it sells! I told my friend it was fraud and he said the guy trying to do this was a CHP Officer! How do people rationalize these actions?
Rob
December 4th, 2006 13:08
Today’s report on Boston has been released on both my blog and our new website. History has shown us that Boston is a great indicator of what will happen here in California.
thebubblebuster.com
or
Daily Home Price Analysis
December 7th, 2006 00:25
Rob Ranger…
They get greedy and end up digging the hole even bigger for themselves. Leverage is great when things are booming…but it will crush you when going the other way.
Not to mention what they are doing is illegal…
SoCalMtgGuy
September 4th, 2008 10:46
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