Median Schmedian

There's been a lot of discussion lately about the American Dream in LA. Renters are worried about condo conversions, rent stabilization is being discussed more, and, of course, housing prices continue to top the headlines.

But what's gone unnoticed is last year's mysterious 11-percentage-point increase in the affordability of housing, as reflected in the California Division of Housing Policy Development's 2007 report titled "California’s Deepening Housing Crisis."

The report, released last month, said:

"According to a newly developed index by the California Association of Realtors® (C.A.R.), the percentage of first-time buyers in California able to afford a median-priced home stood at 25 percent in the fourth quarter of 2006, compared with 24 percent for the same period a year ago."
The problem is that the 2006 report didn't say anything about 24 percent affordability. It said this:
"As of December 2005, only 14 percent of California’s households could afford to buy the median priced single-family home, while nationwide, affordability was 49 percent."
So what gives?

That 14-percent figure was quoted a great deal during the past year, and the same will likely be said of the 25 percent figure a year from now. People will draw conclusions based on the totals and probably conclude things are looking up.

Things aren't looking up. Only the math, and a few words, have changed.

"Median price" is not what it seems when CAR speaks of affordability these days. It doesn't use "median price" in so many words anymore. Instead, it uses the "first-time buyer median price," a term it introduced last year.

In August 2006, CAR, a trade association that represents more than 185,000 members, announced in a news release it had changed the 22-year-old formula used to calculate the percentage of Californians who can afford a median-priced home.

At the time of the change, the old formula was producing results that threatened to slip into the single digits. But, the new index improved the outlook.

Using the new methodology, CAR determined that 25 percent of Californians could afford to buy the median-priced home. Except, it wasn't exactly a "median-priced home" because the association also decided that the "median price" wasn't a fair reflection of reality. So, it created a median-like price and renamed it the "first-time buyer median price," which was set at 15 percent less than the "median price."

They did this because "[...] first-time buyers typically purchase a home equal to 85 percent of the prevailing median price."

As for the forumula, CAR explained that the alteration was necessary because "the range of mortgage products available to buyers as well as underwriting criteria has changed."

The old formula assumed a 20 percent downpayment and a monthly payment of no more than 30 percent of the household's income (a time-honored industry standard). But, the new formula sought to "better reflect" the reality of loan products that made it possible for buyers to stretch beyond those old limits with smaller down payments and larger monthly payments.

So, another way of describing the new result is that it shows 25 percent of Californians can afford a house that costs as little as 15 percent less than the median-price because they have the option of borrowing the downpayment and can choose to spend more than 30 percent of their monthly income on the mortgage payment.

Nonetheless, that's not how it's put when quoted in the 2007 report from the state Division of Housing Policy Development. Instead, the report presents 25 percent as being able to afford the "median price" and that's just not the case.

For some reason the 2006 report from the DHP (the one with the 14-percent figure) is no longer available on the DHP Web site, but I kept a copy.

Of course, none of this suggests any attempt to downplay the housing crisis. The 2007 report points out in detail that housing costs are still increasing while homeownership is decreasing. It highlights "Growing Income Inequality," "Rent/Wage Gap/Tight Housing Market," and "Overcrowding." The report says more than four out of 10 California households are renters, and that they face "the greatest affordability challenges."

But it would be helpful for the state to have noted the semantical issues, and to have calculated what CAR's affordability index would have been using the old formula. It would be helpful to know if affordability increased or decreased from 14 percent.

The unfortunate reality is that figures from multiple industry sources are not always interchangeable.

Readers, just like house buyers, must pay close attention to the terms.

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