San Diego’s home affordability index increased to the highest level in years in the second quarter of 2009. This was good news for first-time home buyers who managed to realize their dream of home ownership. The median price of homes in San Diego CA was $295,000 in the second quarter 2009, down from $369,700 in the second quarter of 2008. Assuming a purchase price of 85% of the median home price, 59% of San Diego households (with a minimum income of $52,550) can now afford to buy an entry-level home. This affordability ratio is up from 46% in 2008 and only 23% in 2007.
The affordability index in San Diego is coming back into line with California as a whole. The median price of all homes in California at the end of the second quarter 2009 was $224,180, down from $329,120 in the second quarter of 2008. Again assuming a purchase price of 85% of the median, 67% of California households can now afford to buy a home in the state, up from 48% in 2008. The median price differential of $70,820 ($295,000 minus $224,000) seems sustainable considering the many advantages that San Diego County enjoys over other counties in California, including the perfect weather and relatively strong economy. Plus, San Diego’s affordability index of 59% remains better indexes of 56% in Los Angeles, 55% in San Francisco, and 53% in Orange County.
Compared to the United States as a whole, California still commands higher median home prices. The median price of a home in the U.S. was $147,990 at the end of second quarter 2009, down from $175,530 at the end of second quarter 2008. Using the same affordability standard of 85% of the median price, 76% of households in the U.S. can afford to buy homes (minimum income $26,360), up from 67% at the end of the second quarter 2008.
A family buying a median-priced home in San Diego for $295,000 would have an estimated monthly house payment (including mortgage, taxes, and insurance) of $1,750. At the 2008 median price of $369,700 the monthly house payment would have been around $2,269. That $500/month differential has made all the difference to prospective home buyers, as buying a median-priced home in San Diego is now more affordable than most rents in the area. Add the mortgage interest deduction, and the median priced home-buyer in San Diego can now expect to be ahead of the game after taxes.
In recent months it has gotten more and more difficult to find entry-level homes at the median price point. There has been a persistent shortage of inventory of homes for sale in San Diego since January 2009, and the result has been heavy competition, quick sales, and overbidding by desperate home buyers. The median price of homes in San Diego was as low as $280,000 in January 2009, and has steadily risen to $314,250 in June, and still further in July. A large release of more San Diego foreclosure properties out of the bank inventories is expected in September and October, and this should slow the rate of median price appreciation for the remainder of the 2009.
Low interest rates combined with the reduced prices have effectively resurrected the San Diego entry-level housing market. Sales of San Diego luxury homes are lagging, and the inventories of homes for sale in Rancho Santa Fe, La Jolla, Del Mar, and other high-end neighborhoods has continued to grow. The upper-level homes have also come down in price, but the mortgage market has prevented the kind of recovery that is being experienced at the lower end. Jumbo loans carry higher interest rates and more difficult qualification standards. This contrasts sharply with the looser standards and lower rates for FHA loans and conforming loans up to $697,500 in San Diego County. Banks could learn a lesson from the resurgence of demand at the lower end, and loosen jumbo loan standards in order to similarly stimulate demand and support prices at the upper end.