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CAR’s new affordability formula questioned

San Diego is known throughout the country as an expensive place to live, and a recent study by the California Association of Realtors seemed to prove it, showing only 21 percent of first-time home buyers could afford the average home in the area, lower than the state average of 23 percent.

Some industry watchers, however, found fault with the compilation of CAR’s data, saying the organization didn’t take enough factors into account, such as what percent of a person’s salary is put down on a house and how much principal, interest, taxes and insurance (PITI) is paid per month.

CAR has changed its methodology over the years. The company began publishing its Housing Affordability Index (HAI) in 1984. At that time, fixed-rate mortgages were the prevailing form of financing a home purchase, while the calculations used to produce the HAI reflected a 20 percent down payment, according to the organization. The methodology also assumed a monthly payment for principal, interest, taxes and insurance that was no more than 30 percent of a household’s income.

However, in the more than two decades since the CAR's first conceived the HAI, the range of mortgage products available to buyers, as well as the underwriting criteria, has changed. Now, down payments are assumed at 10 percent. Buyers are expected to use adjustable rate mortgages and CAR factors in a PITI of no more than 40 percent.

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.

“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.”

Giles said it’s even common in the San Diego market for first time buyers to put as little as 5 percent down, and pay as much as 45 percent PITI.

Leslie Appleton-Young, chief economist for CAR, said there are numerous ways to look at affordability and her organization has heard many of them. But, as far as they’re concerned, the method they use is the best way to show what first-time buyers are up against. “What we’re trying to do is tell a story and that’s that affordability for first-time buyers is down,” Appleton-Young said.

CAR calculates median home prices and factors in average salaries in regions as well.

“There isn’t a right way or a wrong way,” she said when it comes to choosing a definition of affordability. “You just have to pick one."

Send your thoughts and comments to Elizabeth.Malloy@sddt.com

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