Orange County homes can be 27% more affordable than Realtors say

By Jeff Lazerson

8/18/17

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: The 30-year fixed rate improved, averaging 3.89 percent, one basis point better than last week’s 3.90 percent. The 15-year fixed improved to 3.16 percent, two basis points better than last week’s 3.18 percent.

The Mortgage Bankers Association reported loan application volume was unchanged from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.43 percent and payment of $1,888 was $110 less than this week’s payment of $1,998.

What I see: Locally, well qualified borrowers can get the following fixed-rate mortgages at zero cost: A15-year at 3.25 percent, a 30-year at 3.875 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.50 percent, a 30-year agency high-balance at 4.125 percent, a 15-year jumbo (over $636,150) at 4.375 percent and a 30-year jumbo at 4.50 percent.

What I think: The California Association of Realtors (CAR) recently stated that only 21 percent of Orange County households could sustainably afford a $788,000 median priced Orange County house.

CAR assumes you’ll need $157,950 annual income to afford this median priced home with a monthly housing payment of $3,950 using 20 percent down and an interest rate just over 4 percent.

At best, CAR is using ultra-conservative math compared to the mortgage standards Fannie Mae, Freddie Mac, FHA and VA allow. At worst, I think they are drinking too much CAR Kool-Aid, and it’s purely political posturing to gain local, statewide and federal legislative sympathy for increased housing subsidies.

Here’s why:

1) CAR assumes you need 30 percent of your monthly gross income to qualify for sustainable homeownership (that’s principal, interest, property taxes and homeowners insurance, assuming zero monthly homeowner’s association dues).

2) Fannie Mae allows well-qualified borrowers to use 50 percent of monthly gross income for your house payment.

3) With as little as 3.5 percent down, I have seen the Federal Housing Administration go to about 46 percent of gross income for your house payment.

4) The Veterans Administration primarily relies on a more practical monthly residual income formula. That can still translate to a house payment that’s 60 percent of monthly gross income to qualify with zero down.

My math says you need just $95,000 of annual income (not CAR’s $157,950) to afford the $788,000 median priced Orange County house (assuming Fannie’s 50 percent rule).

From a different angle, using CAR’s income example, an Orange County family can very easily qualify for payment of $5,661 on a $1 million sales price using a more conservative 43 percent housing and debt ratio (which is the Consumer Financial Protection Bureau ability-to-repay benchmark).

When using automated underwriting for Fannie, Freddie and FHA, there is a safe harbor exemption allowing borrowers to exceed the 43 percent rule.

This $1 million example assumes a 20 percent down payment, a maximum Fannie Mae first mortgage of  $636,150, and a 15-year fixed-rate second of $163,850 at a 6.0 percent interest rate (and you can find cheaper seconds than this interest rate pretty easily).

In the real world of every day industry loan approvals, that’s easily a 27 percent higher home price affordability number. My example uses a 43 percent house payment-to-income ratio, certainly lower than Fannie’s 50 percent max.

Even with the Fannie example of higher housing ratios, the U.S. is enjoying the lowest mortgage delinquency rates in the last 10 years. Sustainable homeownership for sure, as CAR likes to emphasize!

Let’s have some median income fun. According to 2015 census data, the median Orange County household income is $76,509. With 20 percent down and the same 4 percent interest rate, the median income borrower will have a 50 percent ratio, enough to afford a $630,000 sales price.

Orange County home affordability is challenging to say the least.

Whatever CAR’s intention, I see its math conclusions scaring more folks away from California homeownership. In my view, it’s needlessly unproductive data for homebuyers and its membership.

If you have questions or comments, please contact Jeff Lazerson by clicking here.