A Look at the Least Affordable Housing Markets

Forget coffee when it’s time to sober up.

Instead, check out the real estate listings in New York or Los Angeles.

There, buyers pay $1 million for a house that might fetch merely half that in other parts of the U.S. The disparity illustrates how affordability has been spiraling out of control in places on the East and West coasts.

For example, in the first quarter of 2001, 42.3 percent of homes sold in the Los Angeles housing market were available to the median household.

But in the first quarter of 2007, only 3 percent of homes sold were considered affordable to those households earning the median income.

This is based on data from the National Association of Home Builders (NAHB) and Wells Fargo that assumes a 10 percent down payment, a 6.1 California mortgage, and tax and insurance costs.

Given those numbers, it’s no surprise that Los Angeles tops the list of the nation’s least affordable real estate markets.

Yahoo! Finance determined the ranking by combining NAHB/Wells-Fargo index data with our rating of home price to earnings, which measures how many years of gross income it would take to buy a home at the median price.

The lower the number, the more affordable a house is.

Ten years ago, San Francisco was the only city above a 4.5. Today, there are 13. The more out of whack prices are with income, the more buyers are forced to rely on credit to make up for the market’s unaffordability.

That could mean trouble. Look no further than the current tightening of credit standards; less accessible mortgage loans are expected to create problems for markets trying to recover from a slump.

That’s because without a strong influx of new buyers it’s difficult for a market to grow. Homes sit on the market longer, and prices go down.

This should, in turn, make markets more affordable, but that won’t do much good if median-income families have too many barriers to getting a loan.

“The credit barrier affects all strata, but it’s more critical at the lower end,” says Jonathan Miller, president of Miller Samuel, a New York-based real estate appraisal and consultancy firm.

He points out that recent bank struggles with bad credit home loan lending have resulted in tighter lending standards. “And the success of the market’s lower strata is critical to recovery of the whole market.”

Also contributing to an area’s unaffordability are local policies that jack up the cost of building new homes. This increases price pressure.

“A lot of it has to do with regulations and zoning,” says Robert Bruegmann, a history and urban planning professor at the University of Illinois.

“The higher cost of doing business - and the uncertainly of business - in places like California drives up home prices. The cost of building isn’t that different in Houston versus Los Angeles, yet L.A. prices are so much higher… One of the few variables you can look at is regulatory burden.”

Affordability also has a great deal to do with where a city is in its growth cycle. Five years ago the Las Vegas hosing market was one of the nation’s most affordable, thanks to a rash of development.

Today, growth has slowed enough that less than 20 percent of home sales last quarter were available to households at the median income level.

Unaffordability is also relative.

Few residents of Sacramento, Calif., and Seattle can afford home mortgages in the areas, but property there is still reasonable by regional standards.

Both cities are experiencing strong growth and immigration patterns, in no small part due to the fact that they’re less costly than West Coast cities like San Francisco, San Diego or Los Angeles.

Yet seven of the 10 least affordable cities are seeing negative domestic migration, meaning more people are leaving than coming in. Affordability drops, therefore, cannot be attributed to an increase in demand.

Rounding out the top ten least affordable markets are San Diego; New York, Miami, Fla.; Sacramento, Calif.; Las Vegas, Nev.; Seattle, Wash.; Boston and Orlando.

SOURCE: Yahoo! Finance