One statistical index that is watched with care by the real estate and lending community is the California Association of Realtors “Affordability Index.”

The calculation of this index has not changed, but given the current economy the reality of estimated home affordability requires greater scrutiny. Often with statistics what is left out can be as significant as what is included.

The Housing Affordability Index is expressed as a percentage of the households within a region that can afford to buy the median-priced home in that area. (All costs of home purchase and household income are included in the process).

For example, Napa County falls within the Northern Wine Country category, and affordability has moved from 22 percent in the first quarter of 2008 to 42 percent in the first quarter of 2009. When

20 percent more households presumably can afford a home, that’s a positive sign.

Clearly, a posting of a 17.4  percent drop in price during the same June to June period, added to previous declines, tells us that when price goes down affordability goes up.

With falling prices and interest rates holding in the 5 percent level, greater affordability resulted in an 8.7 percent increase in Wine Country sales from June to June.

All welcome news, but there is one forgotten factor in the index that affects the reality of the numbers and, more importantly, the reality on the street: the vast changes in the requirements to qualify, income aside, for a home loan.

Forty-two percent of households may qualify on basis of income, but can they meet all of the other lender requirements? In response to the financial crisis and irresponsible lending practices of the past, lenders have made broad changes in qualification that exclude a large portion of these would-be home buyers.

Mark Savitt, past president of the National Association of Mortgage Brokers, stated that “a lot of good, well-qualified people are being turned away for no good reason.”

Said George Hanzimanolis of Bankers First Mortgage, “I get as many phone calls as I got two years ago, but I bet you 40 percent of the people calling in we can't do anything for, versus

5 percent a year ago.”

Qualification has gone from easy to an overreacting extreme where even the fully qualified are denied.

Changes such as increased FICO credit scores, higher borrower down payments (excluding Federal Housing Authority), verification of income and tax returns, proof of funds, required reserves and tighter appraisal standards and increased loan to value ratios have often been excessive.

Some type of reform  certainly is necessary to avoid the past criteria of loan qualification that ran out of control by placing funds in the hands of those lacking the knowledge and financial ability to meet their contractual obligations. 

The degree to which borrower qualification reform becomes overreactive is the equal degree to which the housing recovery will be delayed. Only lender confidence and time will determine overreaction.

As the economy, residents and the country welcome the news of increased home sales, it is critical that households added to the Housing Affordability Index not only statistically qualify for a home but are actually able to buy one.

Bogue is a real estate broker in Napa. He can be reached at 486-5511 or cbnapa@napanet.net.