Solano County’s distinction as Bay Area’s affordable home market weakens as prices and interest rates jump

While housing demand is strong, affordability declined in 2022 for all California ethnic homebuying groups as home prices and interest rates increased to record levels not seen in more than 10 years, according to a recent report from the California Association of Realtors.

At the same time, new federal cross-subsidization policies and the recent suspension of California’s Dream for All Shared Appreciation Loan Program have put a damper on the hopes of many first-time homebuyers as demand for such loans outpaces available funds.

These changes are being imposed on a significant group of those in the housing market that has already experienced a major downturn — with the 30-year average mortgage rate recently at 6.27% — which, according to Freddie Mac data, is an increase of some 5% since 2022 and double that seen in 2021.

Affordability declines rapidly as interest rates rise

The California Association of Realtors report showed only about 21% of Californians earned the minimum income required enough to buy a statewide $822,320 median-priced home last year, down from 27% in 2021. For white and non-Hispanic households, affordability declined from 32% in 2021 to 26% in 2022.

Only 12% of Black and Hispanic/Latino households could afford the same home in 2022, down from 16% and 17% in 2021 respectively. At the same time, 31% of Asians could buy a median-priced home, down from 38% in 2021, based on the Association of Realtors Affordability Index.

But homes were more in reach for buyers in Solano County, the only North Bay locale where the trade group tracks affordability by ethnicity. Last year, 28% of all Solano buyers in the county could purchase a median-priced home (at $600,000).

But in one year the proportion who could afford Solano homes dropped 16 percentage points, from 44% in 2021. In that time, the county median price rose 5%, yet rapidly rising interest rates pushed up the qualifying household annual income by 29%.

From 2021 to 2022, the Solano affordability gap widened to 18 percentage points for Blacks and Hispanics, up 14 and 4 percentage points, respectively.

The difference in affordability for Black and Hispanic/Latino households is evidence of the homeownership gap and wealth disparity for communities of color, which could worsen as the economy slows and rates remain high in 2023, the report stated.

Affordability to purchase a median-priced $822,320 home assumes a 20% down payment, and a minimum annual income of $186,800 needed to make monthly payments of $4,670 including principal, interest and taxes on a 30-year fixed-rate mortgage at a 5.47% interest rate (not counting mortgage insurance).

According to the Census Bureau’s American Community Survey, the 2021 homeownership rate for all Californians was 55%, 63% for whites, 60% for Asians, 44% for Hispanics/Latinos and 37% for Blacks.

‘Dream for All’ loan program stalled

The April suspension of the California Dream for All Shared Appreciation Loan program was seen as another major setback for first time home mortgage borrowers.

In a statement April 11, state Realtor association President Jennifer Branchini said, “The association strongly supports Senate Pro Tem Toni Atkins' California Dream for All Shared Appreciation Loan and advocated for the $500 million that was allocated to the program in the 2022-2023 state budget. However, the initial funding was significantly reduced (to $300 million) in the governor's proposed 2023-2024 budget.”

These “dreamer” loans provided funding for a 20% down payment then required payback of this up-front loan plus 20% of the appreciated value of the property when eventually sold.

"The fact that the $300 million in funds was fully committed in less than two weeks of the program’s launch clearly illustrates the demand and desire for working Californians to become homeowners. It’s critical to support this program that creates a pathway to homeownership. We urge the state to honor the full commitment over the next few years as proposed so more working Californians can take advantage of this innovative down payment assistance program,” Branchini said.

With so many unfunded Dream for All loan applications left on the table, real estate brokers immediately focused on reapplying for first time mortgage assistance for their disappointed clients.

New cross-subsidized mortgage model

A pending federal policy change will implement what resembles a “Robin Hood” surcharge approach to taking from the credit score rich to support those in higher risk FICO credit score categories to increase initial mortgage funding across a broader range of credit ratings.

In keeping with the Federal Housing Finance Agency’s ongoing campaign for affordable housing, Fannie May and Freddie Mac will impose changes in fees — known as Loan-Level Price Adjustments — as of May 1 that will impact mortgages originating at private U.S. banks nationwide. This move is designed will make it possible for prospective homebuyers with lower credit scores to obtain mortgage loans at a more attractive rate.

In essence, this policy dramatically cuts fees for high-risk borrowers while increase fees for buyers with better quality credit scores.

With the new federal cross-subsidization model, high-credit buyers with credit scores of 680 to above 780 will see an increase in mortgage costs — with applicants who place 15% to 20% down payments will see a 1% surcharge (an increase of 0.750% compared to the old fees of 0.250%). Those with scores of 679 and lower will see more favorable rates. Proceeds from this surcharge will be reallocated to reduce mortgage costs for those with lower scores.

“FICO” stands for the Fair Isaac Corporation. FICO was a pioneer in developing a method for calculating credit scores, used to predict how likely a borrower is to payback a loan on time, based on information collected by three U.S. credit reporting agencies, Equifax, Experian and TransUnion LLC.

“The changes do not make sense,” according to Ian Wright, senior loan officer with Bay Area Equity Home Loans in the San Francisco Bay Area. “It overcomplicates things for consumers during a process that can already feel overwhelming with the amount of paperwork, jargon, etc. Confusing the borrower is never a good thing,” as reported by The Washington Times.

In 2022, the Federal Housing Finance Agency eliminated upfront fees for first-time buyers who are at or below 100% of their area’s median income, or 120% in areas that are identified as “high cost.” The agency also raised upfront fees on second homes and some larger mortgage loans. The increase is the equivalent of less than a quarter percentage point in mortgage rate.

Debt-to-income fee pending in August

In March, the agency announced it would postpone the introduction of a new controversial upfront fee charged to Fannie Mae and Freddie Mac mortgage borrowers with debt-to-income ratios of 40% or more. This new fee was originally set to take effect May 1 but has been delayed until Aug. 1 at the earliest.

“The timing of these changes in an already stressed housing market is making affordability a challenge as approaching peak home buying season draws near,” according to Bob Broeksmit, president and CEO, of the Mortgage Bankers Association, in a letter sent to agency director Sandra Thompson last month, as reported by HousingWire.