The Curse of the Median Home Price

by Barbara E. Hernandez

About once a week I get one of those calls. “My name is Jenae Carpenter,” she said, “I’m calling you because I don’t know what to do.”

They always start off by telling me their name. The next part is how much their new monthly mortgage payment adjusted to and how much money they make. In this case, the house was $600,000 and her husband made less than $50,000 a year. “Our monthly payment is now $4,800 a month. We can’t pay that. We’re being foreclosed on.”

I tell them that I’m only a reporter, not a lender or a lawyer. I try to help but there’s not much I can do. Their best bet is going through their lender and trying to convince the company they are not willfully withholding money. It will still take months before the lender decides to believe them.

Maybe it’s these weekly calls that make business writers seem like we’re tough on the real estate market. It’s also the reason we question the affordability of high-priced areas like Southern California and the Bay Area. Who is able to buy these homes?

According to the quarterly National Association of Home Builders/Wells Fargo Housing Opportunity Index, California had nine of the 10 least affordable metro areas in the nation. The least-affordable metro area in the nation was Los Angeles County, where only 3 percent of new and resale homes sold during the first quarter were affordable to the county’s median-income household of $61,700. The second least affordable place was Orange County, where only 4.4 percent of homes were affordable to its $78,700 median income.

In comparison, the Bay Area seemed reasonable. San Francisco and the Peninsula ranked 7th, Contra Costa and Alameda counties ranked 18th, Santa Clara county ranked 22nd, and Solano County, where I lived, ranked 30th; 15.7 percent of homes were affordable.

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I bought my first house with my husband for $209,000 in a small town 10 minutes from Palm Springs in 2003. The winds rattled the windows at night and you could see the lights of the Agua Caliente Casino on the Interstate, but it was almost 1,800 square feet and it was ours. We never thought we would buy a tract home in a place with 120-degree summers and sand that somehow managed to slide into your house, car and upper respiratory system, but that year we watched prices climb to heights that fed into the fear that we would be priced out forever. We lost out on $145,000 and $170,000 homes because we hadn’t committed within 48 hours. Maybe this was our last chance.

“$209,000!” I remember my husband whispering. “Do you think we can afford it?”

Together we only made $76,000 a year. We paid a small down payment and committed to $1,852 a month, which was 40 percent of our combined take-home salaries. Essentially one of us—me—paid the mortgage and we lived off the other paycheck. It made me feel relieved that if one of us died we would be able to pay the mortgage.

In 2006, I took a job in the Bay Area, where I was given what I thought was a great salary, and, combined with my husband’s paycheck, we made $120,000 a year. We were rich!

We sold our house in the desert early this year by undercutting the competition and took home a $120,000 profit. Wow, we thought, we might actually be able to afford those $300,000 to $400,000 houses now.

Except in June 2006, the Bay Area median home price was $648,000. A $550,000 house, even with a $100,000 down payment, would still have a 30-year fixed-rate mortgage around $3,400 a month—or 56 percent of our take-home income. Despite making more money, we would be spending more than half of our take-home pay to feed the beast.

As I did the math, I realized we couldn’t even afford the monthly payment using my whole paycheck. We would be giving approximately $40,800 of our annual income to our mortgage company. We would be gambling nothing would go wrong, no financial emergency would occur.

“If you die, me and the cats are homeless shelter bound,” I told my husband. “I better put more life insurance on you.”

I may have missed a couple paychecks in our take-home pay, but that extra money was going towards liquor and ulcer medication.

There was always the possibility of “creative financing.” Lenders told me I could go the adjustable-rate route or even try negative-amortizing loans for a lower monthly payment, because wasn’t I a savvy business reporter who understood how finances worked? I knew that a 30-year, fixed rate was a racket, right? I would never be trapped in a paralyzing prepayment penalty that kept me in a horrific yield-spread premium hell that lined the pockets of a former Payless Shoe Source salesman, right?

“Do you see yourself making more money in five to seven years?” a mortgage broker asked. “Is your work affected by the time of year?”

I do freelance occasionally and he gets bonuses from time to time, but we both can’t foresee our financial situation improving so much in the next five to seven years that $3,400 a month is laughable. Nor do we see the benefit of paying a few hundred dollars less a month and owing 10 to 25 percent more on the house than when we bought it.

“How comfortable are you with risk?” he continued. “And how long do you intend to live there?”

I always wonder why they ask these questions. I’m not playing blackjack in Vegas and why would I buy a house I have no intention of living in for a significant period of time?

“I’m now living in the city I can see myself living in for the rest of my life,” I told him. “I plan to raise children in that house and grow old in it.”

“Then go with the 30-year, fixed rate,” he sighed. “Normal people with option-ARMs are too tempted to pay the lowest payment [which doesn’t even cover the interest on the loan].”

This month DataQuick Information Systems Inc. announced the median home price in the Bay Area was $665,000, a 2.6 percent rise from last year—fueled mostly by high-end sales. Purchases of so-called “starter homes,” or homes under $600,000, dropped.

We’re making six figures and it seems as if we would be struggling to make that payment. How can a single parent making $45,000 a year do it?

Almost all of the $120,000 is sitting in a high-interest savings account now. Last month we signed a year-long lease on our $1,150 a month apartment so we could concentrate on things other than buying a house. It was too scary, like getting married to a gambling addict without the codependent goggles.

But sometimes I check the real estate listings and see a home slashed $100,000 and wonder, “Should we? Or should we wait?” We’re better off than a lot of people and we might be fine.

Then I get a call. “Hi, this is Yolanda Andrade. I’m calling you because I don’t know what to do ...”

Barbara E. Hernandez is a Bay Area journalist who left Southern California in 2006 only to find even higher home prices. Read her real estate blog, Property Lines, at www.cctextra.com/blogs/propertylines.

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