Financial pundits agree that the Irrational Real Estate Extravaganza of the past few years is kaput. The blazing housing market may have filled some pockets with a surfeit of shekels, but it also left a ravaged swath of rampant foreclosures, fraudulent loans and people with homes now worth less than their mortgages in its wake. As Sandy Haney, CEO of the Monterey County Association of Realtors, admits, “Some of us knew this market was not sustainable. It didn’t make sense. And now anybody who bought or refinanced at the high level (’05-’06) is hurting.”

Today’s lenders are unwilling to fund those exotic (some say toxic) stated-income, no-doc, zero-percent-down loans that are currently giving the global economy indigestion, and the possibility of easy home ownership has evaporated for many. Like Elvis, the buyers, especially first-time buyers at the lower end of the market, have left the building. With home sales languishing, many in real estate construction, sales, appraisals and mortgage brokering have also headed for the exits.

For those non-homeowners who remained on the sidelines during this frenzy, and didn’t sign up for a three-bedroom, two-bath financial disaster they couldn’t afford in the first place, what’s left in the aftermath is still a highly unaffordable home buying market.

In late August, the California Association of Realtors (CAR) published their First-time Buyer Housing Affordability Index for the Monterey Bay Region, which includes Santa Cruz and Watsonville. According to their chart, only 17 percent of households can afford to buy a median-priced home of $642,740. Based on a down payment of 10 percent and an adjustable interest rate of 6.29 percent, the minimum qualifying income for this house is $129,480. The monthly payment, with taxes and insurance, would be $4,320. One can rent a house in Pebble Beach for less.

On Aug. 21 of this year, the National Association of Homebuilders (NAHB) and Wells Fargo Bank released its Housing Opportunity Index, dubbing Salinas the least affordable smaller city (population under 500,000) in the US. Salinas was followed by – not surprisingly – three other California areas: Merced, the Santa Barbara area, and San Luis Obispo/Paso Robles. According to the NAHB, only 3.7 percent of homes in the Salinas area are affordable to households earning the median annual income of $63,000. Oh yes, Salinas won this stinky moniker in 2006 as well.

Since 2002, the cost of a median priced home in east Salinas has gone up 60 percent, homes in north and south Salinas rose 80 percent, while median incomes have increased by only 27 percent. Whenever home prices escalate faster than income, affordability takes a nosedive. Commenting on the Salinas affordability quagmire, Stephen Melman, the NAHB’s director of economics, says, “Obviously if housing prices are so high that people stretch themselves beyond their ability to pay, it is not a sustainable solution.” “Sustainable” is a word that professional housing folks bandy about a lot these days when speaking about home ownership.

Both the NAHB and the CAR indices use data from all households, even those 55 percent or so who already own a home. Hmmm – makes one wonder how many potential first-time buyers there actually are, or if it’s even possible to buy your first house in Monterey County if you aren’t a double-income, six-figure professional household with parents flush enough to fork over a hefty down-payment on your behalf. What about regular working Janes and Joes – do they resign to renting forever, or move to Turlock? What does affordable housing truly mean, dollar-wise, anyhow?

After speaking with several local professionals in the business of helping people find homes, I discovered that hope for the would-be homeowner is not lost; it just takes some digging to find it and some willful intention to follow it through.

Haney points to statistics on falling prices, especially in the South County and Salinas, as an indicator that more people will be able to afford to buy in the future. Russ Miller, manager of the mortgage department at First National Bank of Central California, sees potential opportunities for first-time buyers as home prices and loan rates soften. CAR reports that the median price for Salinas homes and condos dropped 7.6 percent from August ‘06 to August ‘07, from $595,000 to $550,000.

But how far prices will fall and when they will hit bottom is anybody’s guess. Financial and economic analysts at Moody’s Economy.com now predict home prices will drop 7.7 percent nationally, and Salinas area prices will fall just over 8 percent, between now and the end of 2008. Moody’s has already doubled last October’s prediction of a 3.6 percent national drop. Many economists think prices will fall much further, especially in bubbly areas such as ours, where the flurry of foreclosures will bring prices down as banks put discounted homes on the market.

Realty statisticians at DataQuick reported that between the second quarters of 2006 and 2007, the number of properties foreclosed upon in Monterey County rose more than 1,800 percent, from 8 homes to 154. These numbers have grown, according to Realtytrac, with 482 homes now bank-owned, 221 properties to be sold at auction and 639 in pre-foreclosure. Areas outside of Monterey, Carmel, Pacific Grove and Pebble Beach – essentially North County and the Salinas Valley – make up 97 percent of all foreclosure activity in the county, with the city of Salinas making up a full 60 percent.

Alfred Diaz-Infante, president and CEO of CHISPA, a nonprofit community-based housing development organization in Salinas, says prices will have to fall much further to become truly affordable. “We need to see significant drops,” he says. “For a family of four making $76,000 a year, which is considered a moderate income or 120 percent of the median income, a house would have to be priced at or below $320,000 to be affordable by HUD standards, the standard we use at CHISPA.” HUD, or the US Department of Housing and Urban Development, considers payment of more than 30 percent of gross income toward housing unaffordable.

The percentage of family gross income to housing cost used to calculate affordability varies quite widely. The NAHB assumes a conservative 28 percent of household income to determine their housing opportunity index, which it calls “a conventional wisdom in the lending industry.” However, many local lenders use a much higher percentage of gross income to housing to determine whether a buyer is qualified. Miguel Martinez, loan agent at Malvini Mortgage in Salinas, says 40-45 percent income to housing is standard in their office, and 50 percent is not unheard of. Russ Miller at First National Bank says 35-40 percent for a household making $50,000 a year would be tops, but for a household making $200,000, this percentage could be pushed higher, since the remaining income after housing costs can be much greater.

Local mortgage brokers and lenders agree that the days of acquiring a deed to a home with no money down, a sketchy credit history and improbable income are no more. With much tighter lending standards now in place, a first-time buyer will need to tackle these hurdles the old-fashioned way. While this might take effort and time, in an extended buyer’s market, which is what most are forecasting, time is on your side. Now, if you’ve never bought a house before, where do you start?

Even if, by some stroke of luck, nice Uncle Stewart left you a down payment in his will, you haven’t mangled your credit with expensive toys you couldn’t afford, and your job or business has been a good cash cow, do you jump in the car and make the rounds of Sunday open houses? You could, but you wouldn’t want that granite counter and jacuzzi to dazzle you into becoming yet another victim of a mortgage mistake.

Haney says buyers have a responsibility to educate themselves about mortgages and home ownership, and thinks that educational classes might have made a difference in the current foreclosure fallout. “The problem is that so many buyers went though the buying process and didn’t survive. They were more gullible, less sophisticated. But if we had had the chance to work with them over a couple of years, we could have gotten them into homes that were sustainable.”

Miller says some loan customers don’t understand the terms of their loan, but won’t ask questions for fear that visible ignorance puts them at risk for being taken advantage of. And, Martinez adds, knowing exactly what one is signing is more important than appearing knowledgeable. “There are good loan agents and bad loan agents,” Martinez says. “I recommend seeking good advice and asking as many questions as you need to until you understand. Don’t be afraid to ask the same question several times. Do whatever it takes to understand what you’re getting into. It’s your life that’s on the line. Don’t screw it up.”

Alfred Diaz-Infante agrees that consumer education is vital to putting people in homes they can afford to stay in, and so he helped to found Monterey County Housing Alliance, or MoCHA, as a one-stop place for home buyers to become informed before making what may be their biggest purchase of all. Veronica Navarro, who heads the agency, says MoCHA works with renters over a period of time to help them purchase homes that are affordable to their incomes. MoCHA gives workshops and financial counseling to educate consumers about credit and credit scores, teaching them how to generate budgets, and working with trusted loan agencies to pre-qualify first-time buyers for mortgages that can be sustainable. It also works with local agencies to help people get into low to moderate income inclusionary housing – that is, housing that has either been set aside or built specifically to be affordable.

Both Diaz-Infante and Navarro believe that in order to become a successful home owner – who can enjoy her abode without stretching a budget to the breaking point – one needs due diligence to become informed, to correct and improve personal credit history, and to save or borrow a down-payment. Now that the housing market is not the hot potato it was two years ago, buyers have the option to take it slow. “With prices falling,” says Diaz-Infante, “and so many foreclosures, and more expected in the next year when the adjustable mortgages re-adjust to higher rates, I’ve even suggested that people rent while the market corrects itself.”