Housing Affordability Dips, Rate Drop Offers Little Help.

The surprise cut in interest rates by the Federal Reserve Board may offer scant relief to potential homebuyers out kicking the tires in Los Angeles County. Homes are scarce and prices remain high.

Housing affordability in Los Angeles fell to 34 percent in November, down 5 percentage points from November 1999, according to the California Association of Realtors.

That means that just' 34 percent of the households in L.A. County can afford to purchase a median-priced home here.

Although housing affordability in L.A. still compares favorably to the Bay Area, where it has fallen to 17 percent, and to San Diego, which was down to 23 percent, it is far below the national average of 54 percent.

The reason fewer Angelenos can afford a house here is primarily that no new ones are getting built even as the local economy continues to grow and create jobs. The result is right out of Economics 101: more people are chasing a limited supply of available homes and prices are going up. In November, the median home price in L.A. was $228,800, according to CAR, up 13.2 percent from the prior year.

Last week's cut in interest rates is not likely to significantly impact that trend.

"It will help, everything else being the same, and it is going to make a little more affordable to buy a home here," said Leslie Appleton-Young, chief economist with CAR. "But it is not going to compensate for double-digit price appreciation."

"Every little drop in interest rates is going to help us," agreed Jeff Mezger, chief operating officer of Kaufman & Broad Home Corp. "Our niche market in L.A. County is mainly entry-level buyers who are really sensitive to any softening of mortgage rates."

Extending the trend

Fixed mortgage interest rates have already started to inch down the last few months, a trend Appleton-Young expects to continue. This, in turn, will bring more buyers into the market even as home prices are likely to continue climb, ending up just beyond the grasp of many buyers as fast as they seemed to have gotten within reach.

"It is a vicious circle," said Appleton-Young. "Every month more people get priced out of the market."

Home builders point to local governments as the main impediment on their building activity.

"The affordability crisis is driven by the cost of land and that of entitlement permits," said Mezger.

As the approval process for new subdivisions has gotten longer, costlier, and less predictable, builders are discouraged from undertaking new development and fewer new homes get built.

The most important result of the Fed's actions may not be that it is going to make homes much more affordable, but that it will make people more confident in buying a new place. After three months of mostly negative economic news, consumer confidence had started to slip and the Fed's unequivocal signal that it's paying attention may make more people comfortable in making a decision to buy.

"The psychological effect cannot be underestimated," said Scott Gibson, executive vice president and general manager for Southern California with Coldwell Banker. "Potential buyers have gotten more discerning and taken more of a wait-and-see attitude recently. This will encourage people to buy, because it sends a signal that the economic future is going to be stable."

Gibson expects however that the price appreciation of homes in Los Angeles is going to slow down this year, as buyers will be more reluctant to pay top prices. In addition, as mortgage rates come down, at least some buyers will be tempted to hold out to make sure that they get the lowest possible rate.

"Inventory will start building up towards summer," said Gibson. "It will still be very low, but it is going to steady prices a little more."

                             Getting in the Door
                Households able to buy median-priced home.
Location                      Nov.'00 Oct.'00 Nov.'99
California - single family      31%     30%     36%
United States - single family   54      54      55
Los Angeles                     34      35      39
San Fransisco Bay Area          17      17      25
Orange County                   28      28      32
Santa Clara                     17      18      26
San Diego                       23      23      31
Sacramento                      51      52      57
Riverside/San Bernardino        47      56      51
Ventura                         33      31      40
Palm Springs/Lower Desert,      33      34      41
San Luis Obispo                 25      20      32
Source: California Association of Realtors