According to the California Association of Realtors, the first-time housing affordability index (HAI) measures the percentage of first-time buyer households that can afford to purchase a home in California. Presently the index is at 23 percent. The median price home for first-time buyers in California was $482,000 for the second quarter of 2006. In order to qualify for a loan (assuming 6.48% adjustable rate and a ten percent down-payment) on the purchase of the median price home, the minimum household income was $98,720. The monthly payment including taxes and insurance was $3,290.

How many households can afford this? Not many – just 23 percent of Californians. How does an HAI of 23% compare on a historical basis? Not well. The lowest index for California since 1982 was 18% in May 1989 and again in June 2004. The lowest index for the U.S. was 48% in May 1989 (the U.S. index is currently a healthy 59%, the highest ever was 61%).

What does this data tell me? Not good news for California homeowners. Why? Let’s examine what happened within a year after the low point in May 1989. In 1990, California real estate entered a seven-year downturn in home prices. If you bought a California home in 1990, it took ten years, until 2000, for the price to recover to your purchase price in 1990.

Now take a closer look at June 2004 – again the lowest point in the cycle of the housing affordability index at 18 percent. At that time, I projected sometime in 2005 we would be facing a potential downturn in home prices. And it happened. If history repeats itself, it will take several years for the HAI to recover, and as it does, prices will continue to move down.

What’s the highest the HAI for California homes has been since 1982? 44 percent in February 1997 – within one year after the bottom of the real estate decline in the 1990’s.

My prediction? Prices will continue to fall for the next three to five years, perhaps up to another ten percent. My advice to first-time wannabe buyers – sit tight, save money towards the down payment and wait. Wait until the index reaches 45% and then move into the market. You will most likely be buying at the bottom of the market.

What if you don’t want to wait? Move. Move to a low cost of housing area. In Dallas, the medium price home is $140,000. Just yesterday I saw a new sub-division in the suburbs advertising new homes starting at $90,000. Amazing!

Oh, one last thing – the U.S. median price home for first-time buyers is $193,380 with a monthly payment of $1,320. Minimum qualifying income – just $39,600.

Enough said.

Pierre Cutler
The Sacramento Executive