Pricey Properties: The Nation's Most Expensive Housing Markets

July 27, 2007 Special to ABCNEWS.com — -- Forget coffee when it's time to sober up. Instead, check out the real estate listings in New York or Los Angeles.

There buyers pay $1 million for a property that might fetch half that elsewhere. The disparity illustrates how affordability has been spiraling out of control in places on the East and West coasts.

For example, in the first quarter of 2001, 42.3 percent of homes sold in Los Angeles were available to the median earning household. But in the first quarter of 2007, only 3 percent of homes sold there were affordable to those households earning the median income. This is based on data from the National Association of Home Builders (NAHB) and Wells Fargo that assumes a 10 percent down payment, a 6.1 percent mortgage, and tax and insurance costs calculated by the Federal Housing Finance Board.

Given those numbers, it's no surprise that Los Angeles tops our list of the nation's least affordable real estate markets. We determined our ranking by combining the NAHB/Wells-Fargo index with our rating of home price to earnings, which measures how many years of gross income it would take to buy a home at the median sales price. The lower the number, the more affordable a house is for the median home buyer.

Ten years ago, San Francisco was the only city above a 4.5. Today, there are 13. The more out of whack prices are with income, the more buyers are forced to rely on credit to make up for the market's unaffordability. That could mean trouble down the line. Look no further than the current tightening of credit standards; it's expected to create problems for markets trying to recover from a slump.

That's because without a strong influx of new buyers it's difficult for a market to grow. Homes sit on the market longer, and prices go down. This should in turn make markets more affordable, but that won't do much good if median-income families have too many barriers to getting a loan.

"The credit barrier affects all strata, but it's more critical at the lower end," said Jonathan Miller, president of Miller Samuel, a New York-based real estate appraisal and consultancy firm. He points out that recent bank struggles with subprime lending have resulted in tighter lending standards. "And the success of the market's lower strata is critical to recovery of the whole market."