Homeowners are enjoying record profits when selling their homes nationwide, with Bay Area cities at the top of the list for hefty gains based on dollars and percentages.
The average homeowner in San Jose-Santa Clara had an 82% return on investment — or $473,500 — when selling a home, both figures were the highest in the nation, during the first quarter, according to ATTOM Data Solutions. The equity gain was based on the original purchase price and the selling price during the first three months of the year.
San Francisco-Oakland had the second-largest percentage and price return — 68% and $331,000. Los Angeles-Long Beach and San Diego had the third- and fourth-largest dollar profits nationwide, at $232,000 and $184,500, respectively.
Stockton’s 56% profit was the seventh-highest percentage in the nation, followed by Los Angeles-Long Beach at 55%.
“The national housing market continued at full throttle in the first quarter, setting new price and profit records as it entered its ninth straight year of gains,” says Todd Teta, chief product officer at ATTOM Data. “After it looked like things were settling down last year, the market has again roared ahead, with significant increases. It is extremely important to note that the latest momentum is likely to hit a wall and reverse because of the drastic economic slowdown caused by the coronavirus pandemic.”
More than two of every five California homeowners are considered equity-rich
The big gains in home prices are also helping more homeowners in California — and nationwide — become equity-rich, where the money owed on the mortgage is 50% or less than the estimated market value of the home. Again, the data is before the COVID-19 pandemic and the shelter-in-place order, which has affected sales but, so far, not prices, according to the California Association of Realtors.
About one of every four homeowners (27%) nationwide is considered equity rich, with California leading the way at 43%, according to ATTOM Data Solutions. Four of the cities with the largest percentage of equity-rich homeowners are in California, including San Jose at 65.9%, followed by San Francisco (57.5%) and Los Angeles (47.8%). Santa Rosa finished in fourth-place nationwide at 45.9%.
The top 25 equity rich ZIP codes are all in California, mostly in the Bay Area, with San Francisco neighborhoods taking six of the top-10 spots. San Francisco ZIP code 94116 had the largest percentage of equity-rich homeowners at almost 83%, followed closely behind by Mountain View at 82%.
Many equity-rich consumers can tap into the equity to refinance mortgages and pay off everything from higher-interest auto loans and credit card debts to college loans. However, mortgage lenders are tightening their lending requirements with the COVID-19 pandemic (see the next item).
Higher credit scores required, tighter lending limits with the recession, job losses
The COVID-19 pandemic has created a far-reaching effect on the housing market, from fewer homes listed to limited home tours — and, now, much-stricter lending requirements.
With the governor’s stay-at-home order in effect, the economy has been turned upside down and has led to millions of Californians losing their jobs. As mortgage forbearance and foreclosures increase, more lenders will likely follow with tougher requirements, experts say.
The action could have a dramatic effect on homebuyers, especially first-time buyers, in California.
Bigger down payment a huge hurdle for first-time homebuyers
Now, credit scores should be a concern, but it’s also worth noting that the average Californian had a credit score of 708, which is in the so-called “good” category, according to an Experian Consumer Credit Review.
The down payment threshold should be more of a worry, especially in price-sensitive markets.
For example, almost half (47%) of homebuyers in Riverside bought with less than a 20% down payment, according to Redfin.
The percentage of consumers that bought homes with down payments of 20% or less dips to 44% in Sacramento and 42% in San Diego. Los Angeles (36%), Oakland (31%) and Anaheim (27%) had lower but still a significant percentage of homebuyers with down payments of less than 20%.
San Jose, where the average household income is more than $100,000, has few homebuyers (15%), with below 20% down payments.
Record-low mortgage rates — 3.23% for a fixed, 30-year loan for the week ending April 30 — will attract and help buyers, but some may not qualify with the more stringent requirements. They will either have to dig deeper for a down payment or delay a purchase until they meet the new requirements. Of course, they also could look for lenders with lower requirements.
“Thousands of Americans who were priced out of the housing market due to the affordability crisis of the past decade might finally see homeownership as within reach, especially given historically low mortgage rates,” says Redfin senior economist Sheharyar Bokhari. “But, unfortunately, they are now faced with another roadblock and may not be able to get a loan. Home equity is the primary way for Americans to build wealth. It’s important that policymakers address this tightening of credit, as it has raised the barrier to homeownership.”
California dreaming, at least when it comes to building 3.5 million homes
When Gov. Gavin Newsom was on the campaign trail seeking the highest state-elected office in California and even soon after the Capitol became his workplace, he detailed a housing goal of 3.5 million new homes by 2025.
Now with the COVID-19 pandemic, building more housing seems unlikely. But even before Californians knew about the coronavirus, a goal of 3.5 million during the next several years was improbable.
Not to be a naysayer, but California has never even come close to building 3.5 million homes, or even 2 million units, during any six-year period.
Sure, we’ve built 3.4 million homes before — over 30 years
In fact, California has only built 1.5 million homes once over a six-year period — from 1959 to 1964, according to the Construction Industry Research Board. Yes, that 1959-1964, a period that started before the opening of Dodger Stadium, now the third-oldest stadium in Major League Baseball.
A couple more figures to consider that details the 3.5 million-home-goal by 2025 (or even 2030) is extremely unlikely.
California has added only 628,000 housing units in the past six years, and 864,000 during the past decade, according to CIRB. In fact, California has only exceeded 200,000 housing units twice during the past 30 years.
And how many homes have been completed since 1990? Uh, just a little more than 3.4 million units.
There’s almost across-the-board agreement, California definitely needs more housing, especially more affordable housing for low-income families. But it’s a complex issue, with no easy solution.
More people, fewer available homes
Research firm McKinsey and Company cited several reasons the 3.5 million mark needs to be reached — and how it could be accomplished during the next several years:
- Home prices increased 15% while the median household income only improved 5% between 2009 and 2014. (Please remember, the Great Recession hurt job growth and pay during the first part of the five-year period.)
- The state added 544,000 households between 2009 and 2014, but only built 467,000 household units, from single-family homes to multifamily housing.
- Few, if any, low- and very-low-income households can afford housing in their communities. And about seven of 10 of those households would need to spend at least half of their income to afford a home.
- A lack of housing affects California’s economy — and state government. The state loses about $140 billion with the housing shortage, or 6% of the state’s growth domestic product (GDP). For example, bare land nets much-lower property tax revenue for state and local governments than multifamily or single-family homes.
So, how do we turn available land into much-needed homes for residents?
McKinsey and Company says the state should identify local “hot spots,” where there is housing demand and vacant land. Also, public-private partnerships can help pave the way for more units. And shortening the land-use approval process would cut more than $12 billion from the cost of housing by 2025 and increase construction timelines by four months. Curbing the construction permit process can save about $1.6 billion per year, while embracing modular construction techniques can save another $100 billion.
But, let’s be honest, it’s much easier said than done, with several decades of evidence that the 3.5 million goal is likely unattainable by 2025.
Department of Real Estate warns homeowners about mortgage scams
With the COVID-19 pandemic and all of the pain that has followed, from the millions of Californians jobless to homeowners worried about making their mortgage payments, there is a much greater risk for scams.
The California Department of Real Estate recently issued a consumer alert, warning homeowners about those approved to help consumers with loan forbearance and modification issues. The detailed alert helps homeowners on how to protect themselves and report problems.
Scams were prevalent during the Great Recession, when more than 2 million Californians were jobless and home prices plunged more than 40%. About 1.1 million homeowners in the state lost their homes to foreclosure during the Great Recession, with some being the victim of scams as they looked for much-needed help.
Featured photo is a cluster of homes in Simi Valley. Trekandshoot/Shutterstock