The use of a 1-year ARM is illogical, but the truth is that 1-year ARM rates are not substantially lower than 30-year fixed rates. During the last 6 months the spread between a 1-year ARM and the 30-year fixed (as reported by Freddy Mac) was fluctuating between ZERO and 0.5%. They used 4.92% for the last release.
They are NOT using interest-only in their calculation.
They seem to forget about PMI, but their insurance premium estimate is quite generous (my own insurance bill is 0.23% of purchase price).
Mello-Roos and HOA are rare in the lower and middle tier. Mello-Roos are almost nonexistent among houses built before 2000 or so.
If you do the math using Freddie’s latest reported average 30-yr rate (5.29%) and the latest median price (362k), you’ll get PITI around 2220/month. At 40% DTI that corresponds to the income of 66,700/year. Which is still slightly below the median household income (last pre-recession estimate was 68,400).
Can a household with that kind of income afford 2220/month in payments? I’d say it is borderline affordable. They could put 500/month to 401k and keep 2150/month after housing payment (less health insurance, dental insurance etc.)
Here’s a deeper question:
Should we at all try to compare a median household income and a median house price?
11% of all residents of San Diego County are 65 or older. They have negligible incomes (whatever they pull from social security / 401k / other investments), and they are not in the market for homes. So they pull down the median household income compared to the median homebuyer income.
33% of all households in the county are non-family households. They include students, single professionals, military, … Most of these are probably not interested in owning detached houses. (362k figure we just used is a detached median – if we were to include condos, it would dip into 200’s).
4-5% of all adults are in the military. Many of them are single, but those that aren’t, live in military housing anyway (since you get shipped around a lot). Makes no sense to buy a house if you’re likely to be shipped to Iraq or relocated to a different state in the next few years. If, say, half of them are married to non-military people, that’s additional 50,000 or 5% of seemingly low-income households that aren’t interested in homeownership.
Once we drill down to the actual group of homebuyers, their median income will not be 70k any more, it will probably be closer to 100k.
