Market Update
 As promised, from time to time I will explain some of the key economic indicators that are used to discuss market trends. The last indicator I explained was the Unsold Inventory Index, which, as you recall, measures the number of months it would take to exhaust the current available inventory on the market based on the current number of homes being sold per month. In this issue I will discuss the California Association of Realtors First Time Buyer's Housing Affordability Index (FTB-HAI).
The point of this index is to measure how much buying power there is in the market. It measures buying power by determining what percentage of working families could afford to buy a house based on current interest rates and home prices. This indicator is important because it is often cited as one of the most important ways of determining whether the market is poised to rebound.
To arrive at this figure, CAR goes through the following steps:
Step 1. Determine the median price of a home and then assume that an entry-level home is 85 percent of the prevailing median price for existing homes. So, if the median price is $400,000, the entry level home would be $340,000.
Step 2. DOWNPAYMENT: The first-time homebuyer is assumed to make a 10 percent down payment. Therefore, the loan amount needed to purchase a home would be 90% of $340,000 which is $306,000.
Step 3. A FIRST-TIME BUYER is assumed to finance the home purchase with an adjustable rate mortgage (ARM), therefore this rate is used to calculate the FTB-HAI. So let's assume the effective composite ARM for previously occupied homes, which is reported monthly by the Federal Housing Finance Board is 5%.
Step 4. The monthly payment for PRINCIPAL, INTEREST, TAXES AND INSURANCE (PITI) is computed as the sum of three parts:
Monthly mortgage payment, based on $306,000 at 5% = $1642.
Monthly property taxes are assumed to be 1 percent of the median home sales price ($400,000) divided by 12 = $333.
Monthly insurance payments on the house are assumed to be 0.38 percent of the median home sales price ($400,000) divided by 12 = $126.
Step 5. It is then assumed that the monthly PITI can be no more than 40 percent of a household's income. The monthly housing payment is divided by .4 to come up with the minimum income needed to qualify for a loan on the median-priced home ($5,254).
Step 6. Finally, census data is used to determine the percentage of people in California earn $5,254 or more. So, at the peak of the market the affordability dropped as low as 24%. By the end of 2008, affordability had returned to 51% because of the precipitous decline in home prices.
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LOL - Laughs OnLine
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What's the Big Idea?
A new form of class warfare is emerging in the United States and I'm appalled to watch it unfold. It seems that people are being stratified by their choice of antioxidant and it's just not acceptable. I discovered this disturbing undercurrent during a recent a conversation about blueberries at a networking mixer. During the course of a conversation with an insurance agent, I happened to mention that not only do I like blueberries, I like anything flavored with blueberries. A sudden look of disapproval came over her face as she said, "You know, blueberries don't have nearly the antioxidant power that Brazilian Acai berries have." "I don't doubt that" I conceded "but I just happen to think that blueberries are delicious." "Well, they are not even as good for you as pomegranates" she replied indignantly. Now, my problem is this - I know that antioxidants remove free radicals and free radicals are bad. But I was proud of myself for eating blueberries instead of donuts until this conversation. And sometimes in life it's ok to be a little free and a little radical. So, as a form of protest I will be having blueberries with as many things as I can think of for the next week.
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Share If You Care
Our goal with this newsletter is simple: Cover every important topic that might help homeowners and investors make more informed decisions concerning real estate. You can help in two ways:
1) Send us any articles or information you come across that might be of interest to other readers
2) Forward this newsletter to anyone and everyone you know that owns or plans to own real estate!
Sincerely,
Kwame J. Granderson
Equinaire
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Investor Tip
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If you own multiple properties, consider using an umbrella insurance policy instead of carrying high-dollar liability coverage on individual policies.
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