Double Jeopardy for Home Buyers: Rising Prices, Interest
A combination of sharply higher housing prices and rising mortgage rates put the typical home beyond the reach of all but 22% of Orange County’s households in April, the California Assn. of Realtors reported Thursday.
Even though the number of households able to afford a median-priced home is down from 24% in March and 31% in April of 1987, housing experts said fears of even higher interest rates ahead are prompting prospective home owners to go on a buying binge.
As a result, demand is far outpacing supply, prices are likely to rise even higher, and first-time home buyers are being priced out of the market in increasing numbers.
The story is the same across the state, with only 29% of state households able to buy in April, compared to 31% in March and 34% in April, 1987, the association said.
“The run-up in housing prices is like a feeding frenzy,” said Grace Wickersham, chief economist for Glendale Federal Savings & Loan.
Said Kathleen Cooper, chief economist of Security Pacific: “People are getting nervous and deciding they better buy now before rates go higher. It’s just going to get more expensive on the interest rate side,” she said.
Some observers said the probable passage next week of a slow-growth initiative could be contributing to the surge in home prices in Orange County.
“There’s no question that this is adding fuel to the fire,” said John R. Shumway, president of Market Profiles, a Costa Mesa market research firm. “It’s causing a lot of pent-up demand. Buyers are stretching now to get larger houses in expectation that there will not be sufficient supply.”
The realtors association bases its “affordability index” on average interest rates for fixed and adjustable 30-year mortgages and the median selling prices of previously owned homes, as reported by a number of local boards of realtors. The index assumes that buyers would make a 20% down payment.
Earlier this month, the realtors group reported that the median home price in Orange County jumped to $198,031 in April from $193,563 in March and $167,663 a year earlier. The county’s median price is the highest in the state, according to the association.
To afford the average $1,536 monthly mortgage payment required after buying a median-priced home with a 20% down payment, an Orange County household needs an annual income of at least $61,426, the association said.
Even though Orange County has the highest median home price in the state, it is not the least affordable market. In the San Francisco Bay region, only 15% of households had the income needed to purchase the area’s median-priced home at $188,976 in April, the association reported.
The intense demand for new housing is not expected to abate anytime soon.
Although the number of Orange County residents who can afford a home may be declining, it still represents a “huge pool” of potential buyers compared to the pool of available houses, said Fred Schlosser, marketing director for Residential Trends, a unit of Market Profiles in Costa Mesa.
“There just aren’t that many new houses coming on line,” Schlosser said.
In past months, houses became less affordable primarily because prices were rising, more than offsetting the benefits of declining or stable interest rates. But home buyers are now beginning to feel a double whammy of both higher prices and rising interest rates.
The primary impact will be on first-time home buyers, said Roger Cruzen, a spokesman for the realtors association.
“A $5,000 increase in prices is of a magnitude to have a serious effect on the ability to purchase a house for the first-time buyer,” Cruzen said, referring to the latest jump in the county’s median home price.
“People who own a home can take their equity and move to a new house,” he said. “But for the first-time buyer, if interest rates follow their current trend, it could become more than just a pinch fairly rapidly,” he said.
At 11%, a fixed-rate mortgage for $100,000 requires a monthly payment of $952. At 12%, the monthly payment would increase to $1,029, according to Grace Wickersham of Glendale Federal Savings.
Rates on adjustable mortgages currently range between 8% and 9% and continue to attract buyers, housing authorities said, but the buyers may have problems meeting payments if interest rates continue to rise. Depending on prevailing interest rates and the terms of the mortgage, adjustable rates can increase by as much as 2 percentage points a year.
The monthly payment on a $100,000 adjustable mortgage could increase from $716 at 7.75% to $1,087 at 12.75% over a period of several years, Wickersham said.
Fixed mortgage rates, currently averaging about 10.5%, are expected to rise to the 11% to 11.5% range by the end of the year, according to Joel Singer, chief economist for the realtors association.
Singer expects that economic indicators will remain strong for the rest of the year, prompting fears of inflation. That, in turn, will push long-term interest rates higher.
“Clearly, as long as mortgage rates are in the low 11% range, the market will be strong,” Singer said. “But the housing market is increasingly sensitive to interest rates. By the end of the year you are going to see some slowing in real estate activity.”
Nonetheless, Singer said there will continue to be more buyers than sellers, and housing prices are likely to rise through the year.
AFFORDABILITY INDEX FOR EXISTING HOMES
Only 22% of Orange County households could afford to buy the median-priced resale home in the county in April, compared with 24% in March and 31% in April, 1987.
Median Monthly Selling Price Mtg. Pymt. April March April April March April ’88 ’88 ’87 ’88 ’88 ’87 Orange County $198,031 $193,563 $167,663 $1,536 $1,484 $1,281 United States 87,700 87,900 85,000 680 674 649 California 157,033 151,725 137,925 1,218 1,163 1,054 S.F. Bay Area 188,976 184,309 166,031 1,465 1,413 1,268 Los Angeles 170,457 163,840 144,030 1,322 1,256 1,110 San Diego 137,560 136,483 126,688 1,067 1,047 968 Riverside/ San Brdino. 101,270 96,536 93,371 785 740 713
Minimum Percent Annual Income Qualified April March April April March April ’88 ’88 ’87 ’88 ’88 ’87 Orange County $61,426 $59,368 $51,230 22% 24% 31% United States 27,203 26,960 25,972 48% 49% 50% California 48,709 46,535 42,144 29% 31% 34% S.F. Bay Area 58,617 56,529 50,731 15% 17% 20% Los Angeles 52,873 50,251 44,009 22% 25% 29% San Diego 42,669 41,861 38,710 29% 30% 33% Riverside/ San Brdino. 31,412 29,608 28,530 46% 49% 49%
Source: California Assn. of Realtors
