Study: Californians, banks taking big risks on real estate

By: GILLIAN FLACCUS - Associated Press | Wednesday, August 17, 2005 8:51 PM PDT ∞

LOS ANGELES ---- Soaring home prices in California haven't deterred first-time buyers from entering the market in record numbers ---- and many of them are going to extraordinary lengths to dive in, according to a study released today.

Fueled by the promise of a market that seems to only go up, Californians are increasingly affording the unaffordable by sinking more than half their incomes into mortgage payments, taking on enormous debt, forgoing downpayments and signing interest-only or adjustable-rate mortgages, according to the study by the Public Policy Institute of California.

Although California still lags behind most states in terms of home ownership, the buying frenzy has lifted it to its highest level ---- 59 percent ---- since 1960, the study found.

The statewide median home price in July was $451,000, with median prices in San Francisco hitting $606,000 and in Southern California $469,000, according to real estate research firm DataQuick Information Systems.

Using a slightly different set of numbers based on Multiple Listing Service data, the North San Diego County Association of Realtors reported last week that single-family homes in North County sold for a median price of $624,000 in July; condos and town houses sold for a median $398,000.

Many first-time buyers are low- and middle-income families or young investors who wouldn't be able to afford such expensive homes without bucking traditional financing guidelines, said Hans Johnson, lead author of the study, titled "California's Newest Homeowners: Affording the Unaffordable."

"I thought what we would find was that it was only people who had equity or very high incomes who were getting into the market," Johnson said. "But that's simply not true."

People younger than 35 now make up 33 percent of all recent homeowners statewide, and the rate of homeownership increased more among that age group than any other between 2000 and 2003, the study found.

The median household income of those who have bought a house in the last two years was $68,000, the study found. Nearly 13 percent of recent buyers made between $25,000 and $40,000, while nearly 19 percent made between $40,000 and $60,000 a year.

Johnson said many of these families are able to afford a home by compromising on size or by buying inland instead of on the coast.

But a growing number, he said, have resorted to risky financial tactics that could pay off if the housing market continues to expand ---- or backfire if it slows.

More than half of Californians who purchased a home in the last two years ignored federal guidelines and spent more than 30 percent of their income on housing. One in five spent more than 50 percent of their income, the study found.

Seasoned real estate agents say such financial risks were unheard of just years ago, but the superheated California market has lured a glut of first-time investors hoping to get rich quick.

"You're a first-time buyer and all you know is that for the past five to 10 years, anyone who's bought a piece of real estate has made money. All they've seen is the market go up, up, up," said Stephanie Vitacco, a Coldwell Banker real estate agent in Los Angeles' San Fernando Valley.

"That's the mentality. But what they haven't experienced is that the market also goes down," said Vitacco, a 17-year veteran who specializes in first-time buyers.

Vitacco says she now routinely shows homes to clients who have agreed to 100 percent or 110 percent financing.

She said she is working with a young couple forced to sell their three-bedroom home after just a year because they can't make the payments, which included a "teaser" interest rate.

The home has appreciated enough that they will be able to afford a security deposit and rent for a new apartment, but not much more, Vitacco said.

"Somebody talked them into it," she said. "But they're barely able to make ends meet, they can't afford to stay there. They should have never been told to buy; they were much better off renting."