Something off in Stanton?

Photo credit: OC Register

Each Sunday, the OC Register publishes a feature in its Marketplace (formerly Business) section called "Buying it in..." where it features a recently sold property and describes various types of financing that would be needed to purchase the subject property at the sales price.

It's a nice little feature - and informative as well, because it gives one a snapshot of the type of income needed and financing options available to buy different types of homes around Orange County.

Today's subject property was particularly intriguing since it is located in Stanton. A little background: Stanton (ZIP code 90680) is the No. 7 poorest ZIP in OC, according to the Register's analysis of IRS 2005 income data. The Register pegged the median income in that city in today's story as $45,445. The 4th quarter median resale home price there was $400,000.

Suffice to say, Stanton and its 32,188-person population is a working-class area with a fairly low average income - at least for Orange County standards. Now, to the subject property, 10160 Fern Avenue.

Size: 3 beds, 2 baths, 1,127 sq ft (built in 1958)
Purchase price: $430,000
Purchase date: 1/24/08
Price/sq ft: $382

Financing options

(all assume market interest rates as of Thursday, with no points and $4,000 in closing costs)

30-year fixed
Assumes 5% down, 7.25% interest (7.28% APR)
Down payment: $21,500
Loan amount: $408,500
Monthly payment: $2,787
Required income: $128,724
Cost as % of income: 33%

30-year due in seven
Assumes 10% down payment, 7% interest (7.03% APR)
Down payment: $43,000
Loan amount: $387,000
Monthly payment: $2,575
Required income: $117,830
Cost as % of income: 33%

30-year adjustable
Assumes 20% down payment, 1.5% interest (8.14% APR). Adjusts annually with 7.5% cap per adjustment and a life ceiling of 9.95%, tied to 12-month Treasury average (4.662%), plus a 3.45% margin.
Down payment: $86,000
Loan amount: $344,000
Monthly payment: $1,187
Adjusted payment: $2,551
Required annual income: $110,872
Cost as % of income: 33%

Notice the required income for all these financing options? To afford the adjustable loan option, you would need $86,000 in savings and an income of $110,872.

That is to say, you would need to be making $65,427 more per year than the Stanton median income, or $44,000 more than the countywide median household income, and have an $86,000 down payment just to be able to afford this property, which appears to be a fairly standard (though small) starter home.

If you were to go the "more conservative" 30-year fixed route and had 5% to put down (a much more realistic scenario, since 5% is about the average down payment these days), you would need to make $128,724 per year to afford this house.

Judging by similar properties for rent on the MLS, this would rent for about $1,900 per month. If we were to assume a gross rent multiplier of 160, this property "should" be worth $304,000.

It also means that if you bought this property with a 30-year fixed loan, you would be paying $887 more per month to buy as opposed to rent, not including insurance, property tax, maintenance, or accounting for the mortgage interest tax deduction.

Nobody is arguing the median income household has to be able to afford the median property. But, someone making nearly three times the local median income should sure as heck be able to afford a bit more than a modest, 50-year-old resale starter home in that community.