Posted on: Friday, October 31, 2003

1st-time home buyers pinched out

By Thomas A. Fogarty
USA Today

FONTANA, Calif. — Stacey and Sean Castillo are part of a vanishing group in sky-high housing markets such as Southern California: first-time buyers.

The couple, in their early 30s, last February managed to buy a $221,000 starter house in this distant Los Angeles suburb, where home prices have been advancing 28 percent a year. Similar houses in the neighborhood now fetch close to $300,000.

Beyond their perfect timing, the Castillos represent much of what it takes these days to overcome barriers to homeownership: They're a two-income household with 100 percent financing for a house far outside the coastal counties of Orange and Los Angeles.

When home prices revved up in the nation's big-city markets in the mid-1990s, renters had to travel deeper into the suburbs to find an affordable house to buy or take a fixer-upper close in. Now, nothing's cheap. The result: Shoppers in high-priced markets who can't bring equity from a previous home to the closing table are increasingly being locked out of the market. Their choice: move to an affordable city or face a lifetime of renting.

"Unless you already have a house, it's hard to get a house," says Stacey Castillo, 33, a hospital department manager.

Although the affordability problem is most acute in California, strong price growth across the United States is creating similar situations elsewhere. First-time buyers in Boston, New York, Miami, Honolulu and Washington face similar barriers. Consulting firm Economy.com in West Chester, Pa., calculates that in 34 metropolitan areas, the typical household lacks sufficient income to buy the typical house. That's up from 14 metro areas in 1999.

Yet dire affordability problems are not the norm nationally. Ultralow mortgage rates — less than 6 percent for most of the past year — have trumped rising prices in most markets. First-time buyers represent 40 percent of the national market, down from 42 percent in 1999, reports the National Association of Realtors. And a Harvard University study issued in June said buyers nationally are committing 21 percent of their income to house payments, far below the peak of 36 percent in 1981.

But in Southern California, the rapid run-up in prices is forcing tough choices for close-in renters who aspire to own a home.

Mark Martinez, 40, plans to give up his apartment in Orange County and buy a house in the next several months so his two children can have their own space. There's no way he can manage the $650,000 he estimates it would cost for a house nearby, he says.

Martinez, who isn't married, will give up his three-block walk to the Pacific Ocean and 20-minute drive to work and move 60 miles out into Riverside County. Even there, Martinez says, he expects to pay more than $250,000. "I like it here (in Orange County) more, but not $400,000 more," he says.

A recent study by the California Association of Realtors finds that 31 percent of home buyers in the state are first-timers, down from 42 percent in 1999. The slide is not hard to explain. The statewide median price for single-family homes in August for the first time punched through $400,000, more than double the national figure.

Lenders are adapting. Agent Ingrid Nadon says lenders no longer require that house-related debt consume no more than 33 percent of income and total debt, no more than 38 percent. Nadon says she has seen loans with payments as much as 50 percent of income if the borrower can show a history of setting that much aside for rent and savings.

Builder John Young says affordability problems have reached the point that he plans to diversify into multifamily homes. To buy and prepare land for construction on a single-family lot in Fontana, Young estimates he spends $67,000. Only by spreading that cost over several homes is there hope of returning new home sales to the sub-$200,000 range.

Scott Syphax, CEO at non-profit Nehemiah Corp. of California, a housing advocate, says higher-density home building will be necessary if California is to make housing affordable. And that, he says, means changing the prevailing notion that homeownership involves "a split-level ranch on a quarter-acre."