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The California Association of Realtors (CAR) recently announced a new index to measure home price affordability for first time buyers. The distinguishing feature of this new affordability index appears to lie in its looser definition of what exactly is affordable: whereas the prior index assumed a 20 percent down payment and a maximum of 30 percent of household income spent on housing costs, this new index allows for a 10 percent down payment and up to 40 percent of income devoted to house payments.
This is entirely ridiculous. Buyers now shell out a record portion of their earnings for home payments, as well as taking on previously unthinkable levels of debt in order to purchase their homes. The fact that people are so commonly forced to stretch their fiscal limits does not, as CAR would seem to imply, indicate that it is now more affordable to do so. It means precisely the opposite.
So I was pleasantly surprised when I saw the San Diego Daily Transcript headline reading, “CAR’s new affordability formula questioned” (subscription required). I should note that the surprise was not that someone was heaping well-deserved derision on CAR’s spinmeistering, but that the usually housing-friendly Transcript was the one to do it.
Well, that pleasant sensation didn’t last long. Halfway through the article, I realized that the topic under question was not whether the CAR propaganda mill had finally gone too far, but whether they’d gone far enough! And I quote:
While CAR has changed its standards, some say the organization is still out of touch with key figures when it comes to first-time buyers. Elise Giles, vice president and market manager of Southern California region First Horizon Construction Lending, said factors such as gifts from relatives, tax credits and ability to build equity are all major components when a person is buying a home for the first time.
Gifts from relatives? As above, the fact that new buyers have to beg their parents for supplementary home loans demonstrates that homes are less affordable, not more. Wait, it gets better:
“For most of the median price inventory, the buyers are not first time. They are 2nd or 3rd time move-up buyers, with substantial equity in their homes, that they will use as a down payment,” Giles said in an e-mail interview. “This equity is usually overlooked in the analysis of affordability in our market.”
Let’s work through this. Homeowner equity is largely the result of homes getting more expensive. And when homes get more expensive, they get less affordable. Homeowner equity is thus a direct effect of decreasing home affordability.
Yet we are supposed to believe that the existence of all that equity somehow renders homes more affordable?
If there is some sort of prize for tortured housing bull logic, Ms. Giles should clearly win it. (Don’t worry, CAR, you get second place).