Homes are biggest bargain since 2004

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NEW YORK (CNNMoney.com) -- With prices crashing around the nation, home price affordability has improved dramatically in many U.S. cities.

As a result, 53.8% of all new and existing homes sold nationwide during the first three months of 2008 were affordable to families earning the median household income of $61,500, according to the latest Housing Opportunity Index released Tuesday by Wells Fargo and the National Association of Home Builders (NAHB).

That's up from 44% during the first three months of 2007 with home prices the most affordable they've been since the three month period that ended June 30, 2004.

"Three factors combined to substantially increase housing affordability," said NAHB president, Sandy Dunn, in a press release accompanying the report. "Mortgage rates returning to near the record low levels of a few years ago, a $2,500 rise in family income nationwide (from 2007 to 2008) and lower house prices."

Home prices dropped about 8% compared with a year ago, according to NAHB, but that doesn't mean that buyers are flocking back to the market.

"This measure can only take you so far in implications for the market," said Dave Seiders, NAHB's chief economist. "There're several factors that the index does not capture."

These include buyer expectations. Many are reluctant to act in falling markets. That sentiment can contribute to market overshoot, according to Seiders, in which prices fall lower than would be their logical bottom.

Richard DeKaser, who, as chief economist for national City Corp., runs his own affordability studies, pointed out that three main factors influence housing market trends: demographics, like more families moving into an area attracted by jobs; sentiment, the perception that the housing market is a good investment at any point in time; and affordability.

"While affordability is an important factor that will contribute to recovery of housing markets eventually," he said, "improved affordability is unlikely to lift markets out on its own."

The index also fails to capture the tightening of lending standards, which has been quite dramatic during the past 12 months. The index presupposes constant lending standards.

But today, lenders are requiring much higher down payments, better financial documentation and higher credit scores than they did during the boom, cutting back on the number of potential buyers.

California has been particularly hard hit by a liquidity squeeze in jumbo loan markets. These mortgages of greater than the $417,000 cap limit that Freddie Mac and Fannie Mae imposed (now temporarily raised to $729,250) are especially important to high-priced markets.

"Jumbo markets had essentially shut down, " said Seiders, "and many California markets depend on jumbo loans." These are getting a little easier to find but they still cost a full 1 to 1.5 percentage points higher than other loans.

That has helped make Los Angeles, the least affordable metro area in the United States, more affordable than last year. But still, despite much lower home prices, to a median $412,000 from $525,000, only a little more than 10% of homes sold during the first quarter of 2008 were priced low enough so that households earning the median income of $59,800 in the area could buy.

That, however, is a change from a year ago when only 3% of Los Angeles area homes sold were affordable to the average Joe.

The affordability improvement was even greater for Santa Ana in Orange County, Calif. Helped by a median price drop to $470,000 from $610,000 a year ago there, 17.4% of homes sold were affordable, up from 4.4% during the first three months of 2007.

In San Diego, home affordability rose to 25.2% from 9.4% as prices dropped to $368,000 from $460,000; in Riverside, Calif. affordability went to 26.9% from 9.7% as prices fell to $288,000 from $380,000; and in Stockton, Calif., it soared to 35.5% from 9.7% as prices cratered to $262,000 from 390,000.

The least affordable big city outside California was the New York metro area. There, nearly flat prices - $490,000 this year compared with $500,000 last, led to an increase in affordability to 12.5% this year. Still, that's better than a year ago, when only 6% of homes sold were affordable. New York is the second least affordable area according to this survey.

As has held true for several years, most of the affordable big cities were in the Midwest with Indianapolis leading the way. Homes sold there during the first three months cost about $106,000, down from $116,000 last year and 90.1% of all households living there earned enough to buy a median priced home, up from 89% last year.

Other affordable big cities include Youngstown, Ohio, where a median home price of $75,000 (down from $78,000) makes 89.5% of homes sold affordable; Grand Rapids, Mich,. where 88.7% of homes sold were affordable (up from 84.5%) and Detroit, where 86.9% of homes were affordable, a statistic that actually fell from a year ago when 87.4% of homes sold were affordable.

Although home affordability improved to its best level since mid-2004, Seiders is not predicting a market turnaround anytime soon.

According to him, with job growth slowing, negative consumer sentiment and tight mortgage lending standards, it could be a while before real estate markets start climbing again.

He's predicting that housing starts won't turn upward until early 2009, that home sales will be flat through mid-2009 and that home prices will fall another 10% or so beginning to recover in late '09.