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Chapman University
A. Gary Anderson Center for Economic Research
FOR RELEASE:
April 15, 2008
CONTACT:
Esmael Adibi,
Director of the Anderson Center for Economic Research
(714) 997-6693
Housing Prices Likely to Continue Falling
at a Double-Digit Rate
Orange, CA The Chapman Econometric Model, forecasting the direction of housing
prices, consists of a number of explanatory variables. These variables include job and income
growth, housing affordability index, fixed and adjustable mortgage rates, supply of new homes,
and inventory of unsold housing units. The model is constantly revised to capture the
structural changes in the economy. We will be releasing our comprehensive forecasts of key
national, state and local economic variables at our update conference on June 24. This release
presents an analysis of housing affordability, one of the explanatory variables impacting home
prices.
In spite of sharp declines in home prices, housing affordability continues to be an important
factor dampening home sales activity and placing further downward pressure on home prices.
Percent of Median Family Income Needed
to Purchase a Median-Priced Home
ORANGE COUNTY
Percent 52.0
‘06Q2
60
50
35.4
40
Historical Mean = 32.6
30 39.4
20
10 21.7
’96Q1
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Housing Affordability
April 15, 2008 Page 2
Our measure of housing affordability shows that a homebuyer with a median family income of
$76,300 in the second quarter of 2006 needed to allocate about $39,700 annually to pay for
property taxes, interest and principal payments on a loan to buy a median-priced home – 52.0
percent of gross family income. This annual payment is based on the assumption that a home
buyer uses a 30-year fixed rate mortgage with 20 percent down payment.
An annual payment of $38,000 is computed after taking into account federal and state tax
savings resulting from the deduction of mortgage interest and property taxes from taxable
income. Over the 2003-06 period, the rapid decline of housing affordability was masked by
homebuyers obtaining interest-only, option-ARMS, and stated income mortgages, purchasing
homes they could not have qualified for using conventional mortgages.
In spite of recent declines in home prices, a potential homebuyer with an estimated family
income of $78,300 in the first quarter of 2008 needed to allocate 39.4 percent of his family
income to purchase a median-priced home. This figure is above the historical average of 32.6
percent and substantially higher than the figure of 21.7 percent registered in early ’96.
Assuming no change in fixed 30-year mortgage rates and annual increase of 4.0 percent in family
income, Orange County home prices need to decline by an additional 13.7 percent by 2009 for
our affordability measure to hit the mean of 32.6 percent. It is likely, however, that home prices
will decline even greater than 13.7 percent since correction usually drops affordability index
below the historical mean.
The following two figures show our housing affordability measures in the Inland Empire and Los
Angeles County.
Percent of Median Family Income Needed
to Purchase a Median-Priced Home
INLAND EMPIRE
Percent 40.4
50 ‘07Q2
40
25.6
30
Historical Mean = 22.8
20 28.7
10
14.7
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Housing Affordability
April 15, 2008 Page 3
Percent of Median Family Income Needed
to Purchase a Median-Priced Home
LOS ANGELES COUNTY
65.2
Percent ‘07Q3
70
5541.2
40 Historical Mean = 35.7
48.6
25
10 22.4
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Using the same methodology as presented for Orange County, the results show that home prices
in the Inland Empire and Los Angeles County have to drop by 8.2 percent and 23.3 percent,
respectively by 2009, for our affordability measure to reach their corresponding historical
average.
Housing Affordability
April 15, 2008 Page 4
ABOUT THE ANDERSON CENTER FOR ECONOMIC RESEARCH
The A. Gary Anderson Center for Economic Research (ACER) was established in 1979 to
provide data, facilities and support in order to encourage the faculty and students at Chapman
University to engage in economic and business research of high quality, and to disseminate the
results of this research to the community.
ANNUAL SCHEDULE OF CONFERENCES AND PRESS RELEASES
JANUARY Economic Forecast Conferences for Los Angeles County and the
Inland Empire
California Purchasing Managers Survey
FEBRUARY California Leading Employment Indicator
MARCH California Consumer Sentiment Survey
APRIL California Purchasing Managers Survey
MAY California Leading Employment Indicator
JUNE Economic Forecast Update Conference for the U.S., California,
Orange and Los Angeles counties, and the Inland Empire
California Consumer Sentiment Survey
JULY California Purchasing Managers Survey
AUGUST California Leading Employment Indicator
SEPTEMBER California Consumer Sentiment Survey
OCTOBER California Purchasing Managers Survey
NOVEMBER California Leading Employment Indicator
DECEMBER Economic Forecast Conference for the U.S., California and Orange
County
California Consumer Sentiment Survey
