| Title Determining “Acceptable Risk” to Enter the Housing Market in Sacramento County | |
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Author Katie McClister American River College, Geography 26: Data Acquisition in GIS; Spring 2003 | |
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Abstract Combinations of different factors have resulted in a housing surge in Sacramento County. Low interest rates driving house prices up and skilled workforces with high earnings have left many first time homeowners feeling the pressure to jump in the market. Folsom, home to a division of the Intel Corporation is an example of this kind of situation. Can the average worker in Sacramento County afford to be a homeowner without taking on unacceptable risk? Even if the risk is unacceptable can the average person wait to become a homeowner? | |
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Introduction Sacramento County housing costs continue to rise. Many people who plan to have a future in Sacramento are faced with a troubling dilemma: to purchase now or wait out the seller’s market in hopes of lower prices. Unfortunately mortgage rates are against those who are planning on waiting. Since September 11th, 2001 interest rates have been at 30 year lows. Faced with this pressure how many people have taken a greater risk then is typically recommended? Looking into purchasing a home myself recently the standard formula for calculating “acceptable risk” is having a mortgage payment that does not exceed a third of the buyer’s monthly gross income. Originally the objective of this project was to compare several cities in Sacramento County and evaluate the risk of its residents. This approach proved to be too broad. Narrowing the comparison to one city to the county overall proved to be a more feasible approach. The city of Folsom was chosen. Folsom’s appeal came from two distinct areas. Folsom personally appealed because I hope to live there someday. It was also compelling because its home the largest private employer in the Sacramento region. They currently employ 6,500 engineers, technicians and support staff for research and design. The “economic impact of Intel’s job base on the region exceeded $500 million in 1998.” Intel states that their “annual gross payroll of the Folsom campus exceeds $300 million.” Intel’s location creates a concentrated cluster of highly paid employees looking for homes in the Folsom area. These same employees are also subject to risk. Intel in March 2003 shed 100 employees from the Folsom location and is expected to cut 750 more jobs worldwide. Since 2000 Intel has cut 20% of it work force in Folsom. The trend according to a company spokesman is expected to continue. David Lyons, a labor market consultant with the California Employment Development Department projects that these employees “will be hard-pressed to find similar positions in the Sacramento area.” This statement and the before mentioned factors contributed to narrowing the research to the Folsom housing market and the potential risk buyers will incur for this project. | |
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Background DataQuick Information Systems has tracked the resale of homes in California since 1988. According to the Sacramento Bee who states using DataQuick as their source, the resale of homes in Sacramento County in February was at record high. Sales are contributed to low interest rates and a small inventory of homes less then $300,000. In article issued March 21, 2003 in the Sacramento Business Journal the Freddie Mac’s Weekly reported that the 30-year fixed mortgage rate rose less then two tenths of a percent from a record low of 5.61%. Freddie Mac’s has been surveying lenders since 1971 to obtain an average 30-year fixed mortgage rate and its finding are used by the Federal Reserve Board. Cheap money has increased the demand for homes and as a result the median cost for a single-family home in Sacramento County is approximately $225,000. In comparison the median price for a single-family home in Folsom in March of 2003 according to DataQuick is $318,000. That is $93,000 more then the average for Sacramento County. Several assumptions where made in preparing this project. The sale of new homes is not a factor for this project. Each homeowner has set variables that affect their degree of risk. This project assumes that the full selling price of the home will be financed. To even the comparison all monthly mortgage payments will be calculated on a fixed 30-year payment schedule. The interest rate will be the monthly average calculated using the data provide by Freddie Mac’s Weekly. The median sale price per single-family home will be provided by DataQuick Information Systems for Folsom and for all of Sacramento County. Median income for the residents of Folsom and Sacramento County was obtained from the 2000 census. These figures will be used to determine to level of risk of homeownership for Folsom residents in comparison to the rest of the county. | |
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Methods Freddie Mac provides on a weekly basis average mortgage rates for nationwide. The Primary Mortgage Market Survey (PMMS) survey 125 lenders. The table 1 below provides the number of weeks each month was reported and the average fixed 30-year interest rate for that month based on the figures provided by the PMMS. Table 1 Average Interest Rates in 2003 for the month of: January 5.92%* 5 Weeks February5.84%* 4 Weeks March 5.75%* 4 Weeks *These figures were rounded to the nearest thousand of a percent DataQuick Information Systems provides statistics on reasles of detached single-family homes by zip code. They offer a free three-year analysis of a single zip code if the inquirer is willing to part with their email address. Fortunately the Sacramento Bee uses DataQuick as a source. Unfortunately it is only available as a related chart to online articles and is not provided in the archives. Using Google as search engine the charts were located. The table 2 below provides the median price for single-family homes for the first three months of 2003 for both Folsom and Sacramento County. Table 2 Median Price for Single-Family Median 2003 for the month of: Folsom Sacramento County January $315,000 " "$205,00" February"$311,000 " "$210,250 " March "$318,000 " "$232,750*" *Figure was calculated with available data rounded to nearest 50 dollar increment The final piece of data needed for comparison is median income data of Folsom and Sacramento County. The acquisition of this data proved to be the most interesting and challenging aspect of this project. Data for the 2000 Census is available online and is easy to access. The challenge came in discovering that Census data does not contain U.S. Postal Zip Code information. Fortunately he U.S. Census is developing Zip Code Tabulation Areas (ZCTAs) for the 2000 Census. ZCTA are generalized versions of the boundaries that create ZIP Codes. They are calculated on two levels, the 3-digit ZCTA code and the 5-digit ZCTA code. If an area warrants a 5-digit ZCTA code then the premise to is match census block data with its corresponding zip code. In areas were little data is collected for a zip code it is assigned a 3-digit ZCTA that corresponds to the first three numbers of this zip code. Folsom’s zip code is 95630 as well as its ZCTA code. Using the following step-by-step directions provided by the website income information collected during the 2000 Census was accessible by Zip Code. 1. At www.census.gov, select "American FactFinder" in the left column. 2. In the righthand column, under the "Data Sets" heading, select one of the following: "2000 Summary File 3" (migration, education, employment, income, housing characteristics). 3. On the Data Sets page, 1. At the right, select "Quick Tables" 4. On the Select Geography page, In the "select a geographic type" box, pick "5-digit ZIP Code Tabulation Area" 1. Select the first 3 digits of the ZIP code 2. Select one or more 5-digit ZIP codes and click "Add". 3. Click on "Next" (If you don't see the "Next" button, scroll right until you do.) 5. On the Select Tables page If you are using SF1, select "DP-1 Profile of General Delographic Characteristics" or other table, and click "Add" 1. If you are using SF3, select one or more of the following, and click "Add" DP-2. Profile of Selected Social Characteristics DP-3. Profile of Selected Economic Characteristics DP-4. Profile of Selected Housing Characteristics 2. Click "Show Table" After downloading the income data for ZCTA 95630 similar steps were used to download income data for Sacramento County. The data receive showed that resident of Folsom made on average $29,424 more a year then the average resident of Sacramento County. Table 3a and 3b show income data collected in 2000 for both areas. | |
| Table 3a Folsom (95630 ZCTA ) INCOME IN 1999 Median household income "$73,240 " Table 3b Sacramento County Income IN 1999 Median household income "$43,816 " |
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Results In determining the risk associated
with homeownership the following calculations were made with the data
provided above. Using loan calculators found online monthly payments were
determined for a 30-year fixed mortgage using the average interest rate
for each month with the corresponding median price for both Folsom and
Sacramento County. Theses figures provided estimated monthly payments on
the mortgage. Monthly income was then determined by dividing the yearly
median income by twelve. The final calculation to determine “acceptable
risk” divided the estimated monthly mortgage payment by the monthly
income. In tables 4a and 4b the percentage of monthly income allocated for
mortgage payments is displayed.Table 4a Folsom Income required for payment January 30.52% February 30.14% March 30.40% Table 4b Sacramento County Income required for payment January 33.20% February 34.06% March 37.19% | |
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Analysis The results of this project
demonstrate to challenge that the average family in Sacramento faces in
the pursuit of home ownership. Based on these figures alone it would
appear that average Folsom resident can afford to be a homeowner of a
median price home in Folsom. However this project does not take into
account additional fees associated with owning a home. Because both areas
come close to or exceeded the one third of monthly income guideline the
average homeowner entering the market under the assumptions made should
not buy a home in Sacramento County .It is an obtainable goal but the risk
of owning a home is growing. As stated earlier the risk for each
individual is different as each homeowner enters the market with
individual circumstances. The point of this exercise was to demonstrate
that in Sacramento growing market buyers must accept that risk is an
essential part of owning a home in Sacramento. | |
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Conclusions This project was designed with
several assumptions being made. It is because of these assumptions that
this project loses much of its analytical value. Conclusions about
“acceptable risk” in the market place should not be made solely from this
study. However this study does demonstrate the dilemma faced by many first
time homeowners. How will new homeowners enter the market in Sacramento
when time will not allow for them to save for a down payment and interest
rates prevent the market for slowing down? Many are faced with taking
larger then “acceptable risk” as their only alternative before they are
squeezed out of the Sacramento Market.. | |
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References www.sacbee.com www.intel.com/community/california/folsom www.sacramento.bizjournal.com www.freddiemac.com www.census.gov | |