New math for home buyers

YOU PROBABLY DIDN’T REALIZE IT, but your home -- your overpriced, over-leveraged Los Angeles home -- became more affordable last week. Yes, you’ll probably still have to stick to macaroni-and-cheese dinners if you want to make your mortgage payment every month. And no, that mid-century gem in the Hollywood Hills will still be out of reach, unless you win the lottery. But on paper, thanks to long-anticipated adjustments to the California Assn. of Realtors’ housing affordability index, homeownership now appears to be more attainable for first-time buyers.

The association’s affordability index is cited often. When a news article or affordable housing advocate mentions that some shockingly low number of households (say, 8% in Santa Barbara in 2005) were able to afford a median-priced home, the index is often behind the analysis. Developers lean on affordability index numbers to push for new projects; businesses sometimes look at them to determine whether relocating employees to California can pay off. And the affordability index has helped to fuel the housing frenzy, ratcheting up status anxiety by reminding us all that that most American of pursuits, homeownership, is sliding further from our grasp.

Before Thursday, however, the index applied 20-year-old assumptions to today’s housing market. To compute affordability, the association assumed that purchasers were making 20% down payments, getting fixed-rate mortgages and spending no more than 30% of their incomes to finance their houses. These days, few buyers are that conservative--so the California Assn. of Realtors now assumes that first-time buyers make 10% down payments, secure adjustable-rate mortgages and devote 40% of their incomes to housing costs. (Different parameters, still to be determined, will measure affordability among repeat buyers.)

The new computation is more relevant. It also makes houses seem cheaper, just slightly. Last year, 14% of Los Angeles households made enough money to buy a median-priced house. In the second quarter of this year, 19% of first-time buyers made the cut to buy at 85% of the median price.

For some, it will be tempting to suggest that “more affordability,” at least on paper, will keep the housing juggernaut rolling. For others, it will be tempting to wonder if this is more proof that the market is at its peak. Back in the ‘90s, eager equities investors began looking for new metrics, such as EBITDA -- earnings before interest, taxes, depreciation and amortization -- to justify their passion for buying stocks that were overpriced by all the usual measures.

Then again, that might be over-thinking things. The simple truth, as economists at the California Assn. of Realtors admit, is that the outlook remains bleak for buyers. According to the new figures, the median price for first-time buyers in Los Angeles was $489,860 in the second quarter of this year. The required income a family needs to afford a house at this price, according to the new criteria, is $100,320. In L.A., even an affordable home is still pretty expensive.