By Les Christie, CNNMoney.com staff writer

August 14, 2007

NEW YORK (CNNMoney.com) — The binge that many housing markets went on in the early- to mid-2000s is over, and some of the hottest markets like California are now experiencing the worst hangovers.

But other areas, especially many that recorded slower home price growth earlier this decade, have seen little increase in foreclosure rates, according to the latest data released Tuesday from RealtyTrac, the online marketer of foreclosure properties.

Most Ruthless Foreclosure States

“While foreclosure activity has skyrocketed over the past year in many cities, particularly in California, Ohio and the Northeast,” James Saccaccio, RealtyTrac’s chief executive, said in a statement, “foreclosure activity seems to be subsiding in parts of Texas, South Carolina and other states.”

“Still,” he said, “the overall trend is toward escalating foreclosure rates, with 82 of the top 100 metro areas reporting year-over-year increases in the number of homes affected by foreclosure.”

Stockton, California now leads the nation in foreclosures. Of RealtyTrac’s top 10 metro areas for foreclosures, four are in Central California.

Coastal California cities are doing relatively well, although foreclosures are up there too. San Francisco had one foreclosure for every 263 households, a fairly low rate, but up 83 percent from the first six months of 2006.

Stockton city drew thousands of home buyers to the Central Valley area from the prohibitively expensive Bay-area markets during the housing boom and saw home prices nearly double in the four years ended December 31, 2005, according to the Office of Federal Housing Enterprise Oversight.

Because of California’s outsized home prices, option and hybrid adjustable-rate mortgages (ARMs) interest-only loans became widespread. They enabled home buyers to get into properties they could not otherwise afford.

But often these loans were time bombs; hybrid ARMs, for example, reset to much higher rates - and payments - after the first two or three years of low fixed rates.

Many buyers were also approved for expensive mortgages based on applications in which income or assets went unproven, the so-called no- or low-doc loans, AKA “liar loans.”

Lenders underwrote mortgages for these borrowers based on their income or asset claims without proof and many times the claims were exaggerated. When hard times hit, these borrowers had fewer resources to fall back on than the lenders anticipated and foreclosures followed.

Seven of the nation’s top 10 metro areas are in the Sun Belt. Only three are in economically hard-hit areas, historically the kinds of places that once produced the highest rates of foreclosure filings.

Stockton recorded one foreclosure filing for every 27 households during the six months ended June 30, a 256 percent increase compared with the first six months of 2006.

Number two in the nation was Detroit, where job losses in the auto industry drove foreclosures higher. One of every 29 households recorded a foreclosure filing there, almost double the rate of a year ago. Las Vegas (one of 31, up 142 percent) was third.

The other California cities in the top 10 were Riverside/ San Bernardino (one in 33, up 198 percent), Sacramento (one in 36, up 231 percent) and Bakersfield (one in 47, up 222 percent). Rounding out the top 10 were Denver at No. 6, Miami at No. 7, Memphis at No. 9 and Cleveland ranked 10th.

The lowest foreclosure rate recorded by RealtyTrac among the 100 metro areas surveyed was in Richmond, Virginia. It had just one for every 2,319 households, about the same as a year ago and a rate barely more than 1 percent of Stockton’s.

Other low foreclosure metro areas included Greenville, South Carolina (one in 1,721, down 66 percent), McAllen, Texas (one in 1,494, down 35 percent) and Honolulu (one in 1,151, up 68 percent).

Most Ruthless Foreclosure States

“David Bach” “The Automatic Millionaire”

by David Bach

Posted on Monday, August 13, 2007, 12:00AM

I’m often asked if it’s a good move to pay down high-interest credit card debt using a lower-interest home equity loan or line of credit.

My short answer? No.

From Dream to Nightmare

According to the Mortgage Bankers Association, Americans had more than a trillion dollars in outstanding home equity loans in the first quarter of this year. It’s estimated that one in every three homeowners borrowing against their home use the proceeds to pay down credit card debt.

While this may make sense on paper considering the interest savings and tax deductibility, in my opinion using home equity to pay off credit cards could result in a financial nightmare.

So here are seven tips to help you make smart decisions about using — or not using — the equity in your home:

1. Don’t rely on home loans to pay credit card debt.

The primary difference between credit card debt and home equity loans is that the latter are “secured” loans. You’ve pledged your house as collateral against the amount you borrow. If you fall behind on your payments for any reason, you could potentially lose your home.

In my experience, when people borrow against their homes to eliminate credit card debt, they typically just slide right back into it — at the same level or worse — within two to three years. That’s because even after wiping the slate clean, they don’t change their spending habits. They max out their credit cards all over again and find themselves in an even deeper hole.

Is it possible to use your home equity to pay down debt and then stay out of debt? Of course, but generally those disciplined enough to pull this off don’t let their credit cards run amok in the first place.

Instead, I suggest calling your credit card company today and asking to have your interest rate lowered. It’s a simple phone call that takes all of five minutes. For more details, read my earlier columns “Five Steps for Ditching Credit Card Debt” and “What Credit Card Companies Don’t Want You to Know,” and check out the reader comments for more great tips on getting out of credit card debt without using your home equity.

2. Use home equity credit to build assets.

Besides a financial emergency, the most worthwhile reason to tap your home’s equity is for the purchase of, or investment in, appreciating assets. Buy an income-producing property or a second home and you’ve got a great investment.

Adding onto or upgrading your present home can be another good use for your home equity, if done carefully. According to Remodeling magazine, remodeled kitchens and bathrooms usually hold their value the best.

However, I think remodeling should be done primarily so that you and your family can better enjoy your home, not simply to try and increase its value. There’s always the possibility that the money you spend on home improvements won’t be recouped.

In addition, investing in your business or financing the startup of a smart new business could change your life. But notice the word “smart”: Many new businesses fail, so there are no guarantees. Still, this kind of investment is wiser than using home equity to pay for a credit card maxed out by unnecessary impulse purchases.

3. Learn how different home equity loans work.

There are two primary types of home equity financing:

• Home equity loan: Generally called a second mortgage, this type of loan allows you to borrow a set amount that you receive in a lump sum up front. You pay it back over a specified period (typically 10 or 15 years) in monthly repayments. The interest rate is usually higher than a first mortgage but lower than most credit cards, and fixed for the life of the loan.

•HELOC: This stands for “home equity line of credit,” and generally works like a credit card. Your lender assigns you a maximum amount up to which you can borrow. You can use only what you need if and when you need it, up to the limit. Interest is typically variable, but usually lower than credit cards because the credit is secured by your home.

4. Know your interest rates and terms.

First, shop around for the best rates (check out Bankrate.com or LowerMyBills.com to compare lenders’ rates). Then, see if your primary mortgage lender can offer you a deal. But make sure you understand how it works.

For instance, is the loan tied to the prime rate? Is it fixed or variable? Variable rates can hurt if rates keep going up. Determine when that variable rate adjusts and what your new payment amount will be when it does.

Read the fine print: Is there an origination fee (even if you don’t use the loan)? Is there a property appraisal or application fee? Will you incur closing costs? Will your payment amount increase if you’re ever late? And finally, are there fees if you pay the loan back early?

5. Get the tax deductions.

Just like with your first mortgage, the interest you pay on your home equity loan or HELOC may be tax deductible — by up to $100,000 — even if you’re not using the loan for home-related expenses.

Your deduction may be limited if the combined amount of your first mortgage plus any home equity loans totals more than the property’s actual value. For more information, check out IRS Publication 936.

6. Borrow no more than you need.

Ideally, I recommend keeping a minimum of 20 to 25 percent of equity in your home to ensure that you have a cushion should you ever find yourself in an emergency where you absolutely need to tap equity. This approach also grants you the peace of mind in knowing that you have some insulation against a declining real estate market.

To calculate your equity, simply take the current market value of your home and subtract all outstanding mortgages and home loans.

7. Don’t use your home loans like an ATM.

Over the past several years, lenders have made it excessively easy to pull money out of your house. Many new first mortgages come with complementary pre-approvals for generous home equity lines, often equipped with fast-access tools such as checkbooks and ATM cards.

While these are great tools of convenience, be honest with yourself about whether you’re responsible enough to handle the temptation.

The Ultimate Piggybank

Your home is very likely to be the foundation of your financial security. If you live off the equity in your home every three to five years by using it to pay off credit card debt, and then find yourself in a down real estate market like we’re currently experiencing, you could wind up owing more on your home than it’s worth.

This could lead to you being one of the millions who will lose their homes to foreclosure in the next few years. I don’t want that to happen. So please be careful, and think twice before you borrow to pay down those credit cards.

Your home is the ultimate piggybank — don’t break into it unless it’s a true emergency, or if doing so can truly help you live a richer life.

Bankrate.com

Wednesday August 15, 6:00 am ET
George Saenz

Dear Tax Talk:
I own a rental property that has no mortgage. If I refinance the property and use the cash to invest in other real estate or other investments, can I deduct the loan interest and expenses as investment expense? Or am I required to offset any loan cost against the financed property?
– Bill

Dear Bill,
We need to clarify some terms before I get to your question. Interest expense for tax purposes is divided into five categories:

1. Business interest, which is related to an operating business.
2. Investment interest, which is related to investments other than rental activities.
3. Passive activity interest, which is interest related to rental activities.
4. Home mortgage interest, which relates to a first or second personal residence.
5. Personal interest, which is none of the above and not deductible.

The use of loan proceeds determines the category of interest expense. Tracing rules exist to determine the use of your loan proceeds. If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account.

If you refinance the debt-free property to buy another rental property, then the interest on that loan is deducted against the new rental property’s income. Overall rental activity losses are subject to current deduction limitations depending on your adjusted gross income or profession.

If you use the proceeds to buy stocks, then the interest is treated as investment interest. Investment interest is an itemized deduction and is only deductible against investment income. This generally includes your gross income from property held for investment (such as interest, dividends, annuities and royalties). It does not include qualified dividends (dividends taxed at the preferential 15 percent rate) or net capital gain unless you choose to include them. Use Form 4952 to claim an investment interest deduction. If you use your proceeds to buy tax-free investments such as municipal bonds, the interest is not tax-deductible.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

But analysts warn number is misleading as potential borrowers file multiple applications.

August 15 2007: 7:44 AM EDT

NEW YORK (Reuters) — U.S. mortgage applications rose for the second straight week, driven by growing demand for refinancing and home purchase loans, an industry group said Wednesday.

The Mortgage Bankers Association’s seasonally adjusted mortgage application index rose 3.4 percent in the week ended Aug. 10 to 678.7, its highest level since the middle of May.

The rising applications figures seem to fly in the face of a spate of reports pointing to a crisis of confidence in the mortgage industry.

Dems take on mortgage meltdown

But potential borrowers may be filing multiple applications as more mortgages get rejected, probably distorting the total applications figures, analysts have said.

“Recent upheavals in the mortgage industry may be temporarily increasing the level of retail application activity at the large lenders that participate in the MBA survey rather than representing a system-wide increase,” Doug Duncan, the MBA’s chief economist, said in a statement.

The MBA says its mortgage application survey covers approximately 50 percent of all U.S. retail residential mortgage originations.

Lenders shut doors

Rapidly rising defaults and foreclosures that emanated from the subprime mortgage market have been seeping into higher-quality loans.

Dozens of mortgage lenders have shut their doors and most others have tightened lending standards.

Foreclosures and late payments on home loans serviced by Countrywide Financial Corp. (Charts, Fortune 500), the largest U.S. mortgage lender, rose in July to their highest in at least five years. The company said Tuesday it made 14 percent fewer home loans last month than in June after tightening its lending standards.

On the refinancing side, borrowers continue to take advantage of relatively low loan rates - especially homeowners with adjustable-rate mortgages who opt to switch into fixed-rate mortgages.

Borrowing costs rose across the board last week, with 30-year loan rates up 0.04 percentage point to 6.45 percent excluding fees. These loans were slightly less expensive compared with the year-ago rate of 6.54 percent, the MBA said.

One-year adjustable-rate mortgage rates increased to 5.81 percent from 5.69 percent.

The MBA’s overall mortgage application index includes the purchase and refinance subcomponent indexes.

The MBA’s purchase index rose 3.9 percent to 464.9 for the week ending Aug. 10. The refinancing gauge climbed 2.6 percent to 1,929.6 on a seasonally adjusted basis in the same week.

CNNMoney.com

Wednesday August 15, 3:29 pm ET
By Les Christie, CNNMoney.com staff writer

The price of a typical home in the United States continues to drop but at a slower pace, according to a new survey.During the second quarter, the median single-family home price was $223,800, 1.5 percent less than a year ago, according to the National Association of Realtors (NAR). It was the fourth consecutive quarter of price declines. Condo prices rose 1 percent to a median of $226,800.Prices are off 1.7 percent from their peak of $227,600, recorded during the third quarter of 2005. The biggest year-over-year decline on record of 2.7 percent came in the fourth quarter of 2006.

Despite the continued drop, NAR’s senior economist, Lawrence Yun called the results, “encouraging.” 97 of the 149 metro areas surveyed recorded year-over-year price increases.

“Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming-out in the fourth quarter of 2006,” he said. “Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets.”

Looking ahead, Yun’s forecast is one of the most optimistic among economists. He predicts home prices will turn slightly positive again by spring of 2008 and rise about 2 percent that year. He said prices will pick up more in 2009.

The number of home sales dropped a lot more than prices. The pace of single-family house and condo sales came to 5.91 million units annualized. That was down 10.8 percent compared with the second quarter of 2006 when sales were at a 6.63 million annual rate.

NAR’s results were widely expected, coming during a time when most housing market indicators have pointed to negative territory.

Home sales have fallen in many markets, inventories have stretched to a nearly eight-month supply, and new-home builders have been reporting big losses.

Mortgage rates rose from about 6.17 percent at the beginning of April to about 6.67 percent by the end of June for a 30-year, fixed-rate mortgage. The mortgage meltdown, spurred by problems with subprime loans, has led to a liquidity squeeze - many potential buyers can no longer qualify for a loan.

An increase in delinquencies among mortgage borrowers has also resulted in big spikes in foreclosure filings around the nation, unleashing a flood of vacant houses on the market.

Among individual metro areas, prices plunged furthest in Elmira, N.Y., down 17.9 percent to $71,700. Other big losers included Palm Bay, Fla. (down 15 percent to $183,300), Davenport, Iowa (down 11.3 percent to $103,300) and Sarasota, Fla. (down 11.3 percent to $311,400).

Pockets of strength included Salt Lake City, where prices rose 21.9 percent, the most of any metro area, to $233,100. In the Pacific Northwest, Salem, Ore. prices rose 16.7 percent to $227,900, and Spokane, Wash. prices went up 10.4 percent to $197,700.

Several small cities just outside the giant shadow of New York City enjoyed outsized price increases.

Reading, Penn. recorded an 11.2 percent increase to $157,800, and in nearby Allentown, prices jumped 12.8 percent to $274,500. Binghamton, N.Y. homes soared 19.8 percent to $111,200, and Glens Falls, N.Y. prices ramped up 10.7 percent to $175,700.

The New York metro area itself recorded a much more modest increase of 1.7 percent to $482,300.

The most expensive metro area was San Jose, California, where the median single-family house sold for $865,000. The bottom of the list was Elmira, with its $71,700 median.

Strong condo markets were again led by Salt Lake City, up 25.2 percent to $162,200, and included Texas cities Austin (up 14.9 percent to $171,100) and Dallas (up 12.2 percent to $133,200).

Syracuse, N.Y. recorded the largest condo losses of 13.9 percent to $123,000.

Three of the four U.S. regions experienced lower single-family home prices with the lone exception, the Northeast recording a 0.7 percent rise to $298,000.

The Midwest saw the largest regional downturn, 2.2 percent to $163,500. The West has the highest median prices, $349,400, up 0.4 percent. The South’s median home is $185,000 and fell 1.6 percent.

by Dana Dratch
Thursday, August 9, 2007provided by

Here are 10 features that can add value to your home, and another 10 that could reduce the sales price.

Increase home’s value

1. An updated kitchen
2. Modern bathrooms
3. A well-appointed master suite
4. Natural materials
5. Curb appeal
6. A light, airy spacious feel
7. Good windows
8. Landscaping
9. Lots of storage
10. Basement

1. An updated kitchen. “Kitchens are critical,” says Robert Irwin, author of “Home Buyer’s Checklist.” “Today, people like a big kitchen with a lot of workspace.”

They look for solid surface counters and high-quality flooring, such as wood, laminate, tile or stone. And they want newer appliances in working order.

Even if it’s not huge, it should have “countertops that are servicable, that aren’t going to have to be replaced soon and cabinetry in good condition,” says Alan Hummel, past president of the Appraisal Institute. “It has to be well-appointed and large enough to fit your needs.”

It also doesn’t hurt if it opens onto another room. “A lot of families are looking for that openness,” says Hummel.

It helps to have a window over the sink, says Don Strong, a remodeler with Brothers Strong Inc., a Houston remodeling firm.

Be wary if renovations are out of character with the community, such as granite countertops in a subdivision where plastic laminate is the norm.

“Will you sell faster? Yes,” says Hummel, CEO of Iowa Residential Appraisal Co., in Des Moines. “Will it sell for more? Not if the appointments you’ve done are significantly higher quality than the rest of the neighborhood.”

2. Modern bathrooms. Buyers are looking for “master baths that give a little room to roam,” says Hummel.

A big asset is a spa or a whirlpool tub. “I’m always entertained by the people who have them in the master bath and don’t use them,” says Ron Phipps, principal broker with Phipps Realty & Relocation Services in Warwick, R.I. “But it’s a big feature.”

Some other features buyers are seeking are separate showers with steam and/or multiple jets, a double sink, and a separate room for the toilet.

And make sure the plumbing and water heater can handle the job. The pipes have to be large enough to carry an adequate volume of water and the water heater has to be big enough to accommodate it. “You need a bare minimum of a 75-gallon hot water heater and most of my customers have 100 to 150,” says Chicago-based home inspector Kurt Mitenbuler.

“You don’t want to see that false economy of a $30,000 bathroom but nobody spent a few thousand dollars to upgrade the pipes,” he says.

3. A well-appointed master suite. “People are really excited about master suites,” says Hummel. The wish list: A luxurious bathroom, lounging areas and walk-in closets.

4. Natural materials. “People like natural materials,” says Phipps. “Ceramic tile, hardwood floors, granite. We’ve gone back to a real appreciation for historically true materials. And simulated works as well. The look is very popular.”

In floor coverings — especially bathrooms or kitchens — look for ceramic tile or wood rather than linoleum, which can tear, says Strong.

In the rest of the house, wood or laminate products are a plus over wall-to-wall, says Gary Eldred, author of “The 106 Common Mistakes Homebuyers Make (and How to Avoid Them).”

But if you have carpet, it should be a good product and well-maintained so that “a person doesn’t have to walk in and think, ‘I’m going to have to spend five grand right off the bat,” says Strong.

5. Curb appeal. First impressions are everything. A house that appears tidy and well-cared-for will sell more quickly and for more money. A good first appearance can add as much as 10 percent to the value of the home.

6. A light, airy, spacious feel. “People buy space and light,” says Myra Zollinger, owner/broker with Coldwell Banker Realty Center in Chapel Hill, N.C. “I have yet to have anybody walk into a really dark house and say, ‘I love this.’”

Richard “Dick” Gaylord, president-elect of the National Association of Realtors, agrees. “That’s a very big feature,” he says. “I haven’t sold many homes that aren’t bright and airy.”

7. Good windows. “People are looking at exposures and windows,” says Phipps. “It’s been a cold winter for most of the country and energy efficiency is very important.”

Insulated windows are always a plus, says Strong. “Typically, they pay for themselves in five years,” he says. The cost for an average 2,600-square-foot home is estimated at about $10,000 for new windows, he says.

Well-placed skylights are also a good touch to add value, says Phipps.

8. Landscaping. Mature trees “are worth $1,000,” says Strong.

And having outdoor spaces with touches such as pergolas and Victorian garden swings “can be very helpful,” says Phipps.

Appraiser John Bredemeyer remembers one $250,000 home in Omaha that had no landscaping at all. “It was stark,” says Bredemeyer, former national chair of government relations for the Appraisal Institute, a professional group for real estate appraisers. “It just stood out as unappealing.”

Conversely, you don’t have to spend a fortune on plants, either. Just keep it “typical with the neighborhood,” he says.

9. Lots of storage. Nothing beats an oversized garage, some attic space and plenty of closets. “If you have a two-car garage, do you have extra space for those things we all have — bicycles, lawn mower, snow blower?” says Hummel. “Space is important.”

A nice plus in the master suite? “His and hers walk-in closets,” says Irwin.

10. Basement. “If it’s dry, it’s a plus,” says Kenneth Austin, co-author of “The Home Buyer’s Inspection Guide.” “But it’s a negative if it has water problems.”

A finished basement adds even more value. “Ten years ago, nobody cared,” says Mittenbuler. “Now everybody wants them.”

Decrease home’s value

1. A pool
2. No garage or small garage
3. Garbled floor plan
4. Outmoded appliances or systems
5. Stale or overly personal decor
6. A bad roof
7. Bad location
8. Poor maintenance
9. Environmental hazards
10. A long list of needed home improvements

1. A pool. Forget what you might have heard. An in-ground pool in most parts of the country doesn’t automatically raise the value of your home. “I would stay away from pools if you can at all avoid it,” says Irwin.

Having a swimming pool will automatically limit your market when it comes time to sell, he says. “It’s constant upkeep, they get cracks, when the equipment goes down it’s expensive to replace and the liability is high.”

Others consider it a mixed blessing. “For the people who want the pool, they’re willing to pay for it,” says Austin. “But there are an awful lot of people who don’t want a pool.”

Consider your home value and location. In a million-dollar house, not having a pool is a detraction, says Irwin. “But they won’t give you much more” if you do have one.

2. No garage or small garage. Unless you’re living in a condo, a retirement community, or historical or in-town neighborhood most buyers will look for at least a two-car garage. “If you don’t have a garage, it’s a real negative,” says Austin. “If you have a one-car garage, that’s a problem, too.”

3. Garbled floor plan. Small rooms and bathrooms, an inconvenient floor plan or a layout that requires you to access bedrooms or bathrooms through other rooms will detract value from your home.

4. Outmoded appliances or systems. Who wants an electrical system or plumbing system incapable of handling modern conveniences? Would you buy a home if the appliances were worn or broken?

Phipps remembers walking into one house with clients who casually opened the oven door — and it fell off.

5. Stale or overly personal decor. Sure, red is the hot wall color right now, “but for how long?” says Hummel.

“We’ve gone into houses where they’ve had purple or electric green walls,” says Austin. “It’s a turn-off to many people.”

6. A bad roof. Roofs are expensive to replace, and a good roof is considered standard equipment in a house. If your roof has problems, expect to take a hit in the price.

7. Bad location. Phipps remembers one neighborhood with a significant difference in value between the even- and odd-numbered houses. The reason? The odd numbered ones backed on an interstate highway, as well as some ugly utility lines.

As a result, “the even-numbered houses were worth about 10 percent more than the odd-numbered homes,” he says.

8. Poor maintenance. “If you’ve got an old roof and outdated paint, I don’t care if you’ve updated the kitchen, you won’t even get the buyer out of the car,” says Bredemeyer.

“If you know you’ve got to have something fixed, fix it,” says Zollinger. Otherwise, people “will subtract the cost or not make an offer on the house. And if people think the house hasn’t been taken care of, they will wonder what else they’re not seeing.”

9. Environmental hazards. Besides being a danger to human health, lead, mold or asbestos can kill home value.

10. A laundry list of needed improvements. “It detracts if you have to do work,” says Gaylord. “A house that you can move in today — and it’s livable — is fine.”

But a list of must-dos just to conduct everyday life will scare off a lot of potential home buyers. “Especially with first-time buyers,” he says. “Most of them are (already) scraping just to get in.”

Dana Dratch is a freelance writer based in Atlanta.

By Matt Woolsey, Forbes.com

August 7, 2007

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% of homes sold in Los Angeles were available to the median earning household. But in the first quarter of 2007, only 3% 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% down payment, a 6.1% mortgage, and tax and insurance costs calculated by the Federal Housing Finance Board.

In Pictures: Most Affordable U.S. Real Estate Markets

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,” says 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.”

Regional Restrictions

Also contributing to an area’s unaffordability are local policies that jack up the cost of building new homes. This increases price pressure.

“A lot of it has to do with regulations and zoning,” says Robert Bruegmann, a history and urban planning professor at the University of Illinois at Chicago. “The higher cost of doing business–and the uncertainly of business–in places like California drives up home prices. The cost of building isn’t that different in Houston versus Los Angeles, yet L.A. prices are so much higher. … One of the few variables you can look at is regulatory burden.”

Affordability also has a great deal to do with where a city is in its growth cycle. Five years ago Las Vegas was one of the nation’s most affordable cities, thanks to a rash of development. Today, growth has slowed enough that less than 20% of home sales last quarter were available to households at the median income level.

Unaffordability is also relative. Few residents of Sacramento, Calif., and Seattle can afford homes in the areas, but property there is still reasonable by regional standards. Both cities are experiencing strong growth and immigration patterns, in large part due to the fact that they’re less costly than West Coast cities like San Francisco, San Diego or Los Angeles.

Nationwide, what’s interesting about the fall-off in affordability is that it doesn’t directly correlate to home price increases. Since 2000, Boston area home prices have risen 16.7%. Median-income buyers who make up 50% of the buying pool in 2000 now represent only 28% of it. By contrast, in Raleigh, N.C., home prices have grown by 37% in that time period, and the share of median-income earners buying homes has dropped by only 3%.

This explanation is especially pronounced given that seven of the 10 least affordable cities have negative domestic migration, meaning more people are leaving than coming in. Affordability drops, therefore, cannot be attributed to an increase in demand.

Rounding out the top ten least affordable markets are San Diego , Calif.; New York, Miami, Fla.; Sacramento, Calif.; Las Vegas, Nev.; Seattle, Wash.; Boston and Orlando.

In Pictures: Least Affordable U.S. Real Estate Markets