Tuesday, August 21, 2007

Californians more likely to bite off more than they can chew

The University of the Pacific in Stockton has a great website, in which the Center produces quarterly economic forecasts of the United States, California and 11 Metropolitan areas from Sacramento to Fresno and San Francisco Bay Area. The Eberhardt School of Business is one of a handful of Business schools producing comprehensive quarterly forecasts of the U.S. economy. In addition, the quarterly metropolitan forecasts cover several regions in California's Central Valley not covered by other forecasts.

This week's Graph of the Week discusses two fundamental factors which determine a household's ability to own a house...

There are two fundamental factors which determine a household’s ability to own a house: the price of the house and income. The price of houses in California has always been among the highest in the nation. Data from the California Association of Realtors (CAR) shows that in 2006, the median price of a single family home in the state was over $556K - more than twice the national average of $221K.

In general, the difference between housing affordability index and home-ownership rate represents the gap between the number of households who can afford a house and the number who actually buy a house. The larger the gap suggests that relatively more households, knowingly or unknowingly, are willing to live beyond their normal means. The larger the gap also suggests the higher likelihood that more households are involved in riskier mortgage loans.

Such large gaps in California and San Joaquin County represent the occurrence of excessive demand for housing in the two regions, which tend to make housing highly over-priced. When the market cools down to get back to normal, more market correction is needed in the regions. This partly explains why in the summer 2007 the state of California and San Joaquin County are among those with the largest proportion of sub-prime mortgage loans and the highest number of foreclosures in the nation.

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