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Imagine this: In Oakland, Calif., the cost of homeownership relative to income has fallen 67% from its July 2007 peak. The ratio has fallen 59% in Sacramento and Las Vegas, 59% in Phoenix, 56% in Los Angeles, 54% in Miami, and 53% in Washington, D.C.
These are huge numbers. They mean that buying a home has gone from way unaffordable to actually pretty reasonable in the span of two years. Great news for first-time homebuyers.
The figures were compiled by John Burns Real Estate Consulting in Irvine, Calif. The improvement comes from three factors: falling prices (of course), falling mortgage rates, and rising incomes. Add them up and they make for a more affordable monthly payment.
Those of us who are in the housing business know that the monthly payment is far more important than the price for entry-level buyers. Entry-level buyers compare the cost of homeownership to the cost of renting and have no idea what a Case-Shiller index means. Once the word gets out that homeownership is less expensive than renting, which is now also true in 54 of the 88 markets where we track this information, we expect buying activity to increase substantially (even in a horrible economy).
Sticking with Oakland, where affordability improved the most, here’s how the math works: At the height of the bubble in 2007, a median-income family in the Oakland metro area needed a preposterous 84% of its income to pay for a median-priced single-family home. (That’s assuming a 20% down payment and a 30-year fixed-rate mortgage.)
In the most recent tally, the same median family needs only 28% of its monthly income. Dividing the new 28% by the old 84% gives the 67% improvement that Burns cites.
Nationally, Burns says, the monthly cost fell from a 2006 peak of 44% of income to 25% now. That’s a 43% improvement.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.