by Wolf Richter, Wolf Street:
Bay Area housing affordability nightmare hits home, so to speak.
What happens in a large urban market when a young couple with a household income that is far above median cannot afford to buy even a modest home? What happens to that local economy? That’s what everyone wants to know, because this is precisely the fate San Francisco, Silicon Valley, and surrounding Bay Area counties are contemplating.
The Housing Affordability Index (HAI), released by the California Association of Realtors (CAR), has some bad news for these people – and possibly for the trends in the local economy and the housing market.
The median price – 50% cost more, 50% cost less – in San Francisco of a single-family house hit $1.45 million in Q2, according to CAR. This does not include condos, whose prices are somewhat less deadly. It puts San Francisco in second place in the Bay Area, behind San Mateo County, which comprises the northern part of Silicon Valley. Santa Clara County, in fourth place, comprises the southern part of Silicon Valley. In third place is Marin County, just north of the Golden Gate Bridge:
The HAI measures affordability based on this median price of a single-family house (not condo) by county. It figures mortgage payments based on a composite of national effective fixed and adjustable mortgage rates to finance 80% of the price of the home.
The remaining 20% would be that elusive down-payment – elusive because for a median home in the counties of San Francisco or San Mateo, that down-payment would be nearly $300,000. If you live in an expensive city, it’s devilishly hard to save $300,000. So generally, forget that 20% down-payment. Maybe go for a 3% down-payment ($43,000). In other words, realistically, the payments are going to be much higher and affordability even lower.
After assuming the existence of that 20% down-payment, the HAI then figures the monthly burden of owning that home: the mortgage payment, property taxes, and insurance. It does not include the tax effects of the mortgage interest deduction.
Given historically low mortgage rates – 30-year fixed-rate mortgages are still quoted under 4% – and that elusive 20% down-payment, the minimum qualifying household income needed to buy a median home in the counties of San Mateo and San Francisco would be nearly $300,000 per year:
The report also points out that these minimum qualifying income levels have about doubled for most of these counties since Q1 2012.
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