It may seem like Sacramento-area home prices are in the dumps, but experts say we may in fact have hit a rare sweet spot where median home prices and family incomes are more or less in sync.
At these prices, "people in the Sacramento region can actually afford the housing that's here," said Suzanne O'Keefe, an economist at California State University, Sacramento.
An analysis of home prices and incomes around the region shows that affordability is at its highest level in more than two decades.
At the end of 2005, the peak of the housing boom, a family in the four-county Sacramento region with a median income could afford only about 7 percent of homes sold here, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index. The index measures housing affordability nationwide.
In the second quarter this year, the same family could buy nearly 79 percent of houses sold in this area.
"The customer today has a lot more purchasing power than before," said Chris Cady, Central California division president for KB Home, which is building houses aimed at middle-class buyers in Lincoln, Roseville and Folsom.
How well median home prices and incomes match up varies by community.
An El Dorado Hills family earning the median income of about $120,000, for example, could afford a 30-year-mortgage of $465,000, O'Keefe estimated. The median home price in that community in July was $459,000, as reported by market watcher DataQuick.
In Davis, where the median home price in July was $452,000, a family earning the median of $101,000 could handle a $375,000 loan, O'Keefe said.
Houses are a comparative bargain in Roseville, where a family earning the median income of $88,000 could afford a $360,000 mortgage, well above the July median home price of $290,000, she said.
These estimates are based on today's ultra-low interest rates, which remain below 4 percent for 30-year fixed mortgages. They also assume buyers could come up with a 20 percent down payment and wouldn't have to pay for mortgage insurance, and that they could afford to spend about a third of their gross income on housing.
O'Keefe pointed out that many people would not feel comfortable spending that much. "People need to be aware of their own spending. They may feel house poor at a third of their income. If there's day care, car payments and other expenses, it adds up quickly. Think of a third as a maximum and work down from there."
One place where median incomes and median home prices diverge significantly is the city of Sacramento, where a family earning the median income of nearly $55,000 could theoretically afford payments on a $235,000 mortgage, yet the median home price in July was only $138,000.
Prices in the city are being held down by a high number of foreclosures and the difficulty for many families of obtaining credit, said Jeffrey Michael, an economist with the University of the Pacific in Stockton.
"People don't have down payments because of a loss of home equity, and unemployment is still in the double digits," he said.
Even so, Michael said, today's prices are much more in line with area incomes than they were during the housing bubble, when a flood of buyers from the Bay Area and the proliferation of exotic mortgages some of which charged only interest at first contributed to an overheated market.
"I think prices are closer to normal now," he said, "than they were in 2005," when home values became "completely detached from reality."
"Using income to determine what you could afford went out of style for a while," Michael said.
In the fourth quarter of 2005, the median home price in the four-county region soared to $415,000. By the middle of this year it had dropped to $197,000, the Wells Fargo index showed.
The last time homes were so affordable was in 1998, when the median price was $139,000 and families earning the median income of $51,000 could buy about 70.5 percent of homes sold, according to the index, which goes back to 1991.
Over time, Michael said, he thinks Sacramento-area home prices will rise by up to 20 percent. The higher cost of building new homes in California and the demand for homes here will invariably drive prices up.
But he thinks prices may stay more closely linked to incomes than they did during the housing boom.
Local mortgage broker Mark Gale said today's fledgling housing recovery is based on fundamentals.
"Before, you were looking at housing and income levels and something was amiss. You're seeing a recovery in housing now based on who's got jobs. If you just put the numbers together, you see a lot of logic."