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Home-sellers pocket huge profits, buying at the dip

Plus, bidding wars are definitely the norm, home-improvement projects that (mostly) pay off, affordability drops as prices soar, and CalHFA will boost income limits in some counties.

Estimated reading time: 8 minutes

Buy and hold has been an investment strategy for generations, helping create impressive gains for some of the best-known investors on Wall Street, including Warren Buffett, Benjamin Graham and John Bogle.

Guess what? It can also work on your street.

The average California homeowner held on to her home for about a decade, and enjoyed a nifty profit when selling during the first quarter, according to a recent ATTOM Data Solutions report.

Among the six largest cities — Los Angeles to Sacramento — the smallest gain for a home seller was 52% in Fresno. San Jose and San Francisco home-sellers had 80%-plus returns, among the largest in the nation.

It’s a dramatic turnaround from a decade ago (also known as first-quarter 2011), when the average owner in the state sold his home after five years and endured a hefty loss. Some of the financial losses are hard to imagine. Fresno-area homeowners sold at an average loss of $63,400 in first-quarter 2011, Riverside and Sacramento owners lost $80,000 and $90,000, respectively.

Average profit, percentage gains by sellers
  • San Jose: $575,000, 89.8%
  • San Francisco: $420,000, 81.6%
  • Los Angeles: $290,000, 63%
  • San Diego: $241,250, 57.6%
  • Sacramento: $169,250, 56.8%
  • Riverside-San Bernardino: $165,000, 60%
  • Modesto: $150,000, 68.2%
  • Fresno: $108,000, 52.2%
  • Bakersfield: $92,000, 52%

Foreclosures to nifty profits

The Great Recession caused about 1 million-plus foreclosures in the state, creating much pain for financially strapped homeowners — but also an incredible opportunity for those able to purchase.

Those who bought a decade ago are enjoying huge gains when they sell now, from $108,000 in Fresno to $575,000 in San Jose.

“The latest data on home prices and seller profits across the U.S. provide the latest markers of how the U.S. housing market keeps roaring ahead even as major parts of the broader economy try to overcome the impact of the pandemic,” says Todd Teta, chief product officer for ATTOM Data Solutions. “The next few months will speak huge volumes about whether the market keeps barreling ahead. For now, though, sellers remain in the driver’s seat, ringing up great profits.”

Todd Teta, chief product officer for ATTOM Data Solutions

Well, unless they turn around and buy another home at the peak. Then, it’s more about building equity.

Three of four homes were in bidding wars in April.

Bidding wars heat up

Want to buy a house? You better move fast. Like super-fast. And you better be ready to fight … for the right … to the property.

OK, enough homage to the Beastie Boys. The housing market is more than beast enough.

According to Redfin, almost three of every four (72%) homes sold nationwide in April faced a bidding war, easily a record, and the latest evidence of a red-hot spring housing market.

And five of the 45 most competitive markets are in California. The reason is simple: supply and demand. Too many buyers and not enough homes.

Active listings plummeted 51% in March compared to a year ago, the third consecutive month of 50%-plus declines in homes on the market, according to the California Association of Realtors.

redfin offers that faced bidding wars in april vs. a year ago
  • San Diego: 83%; 54%
  • San Francisco-San Jose: 73%; 54%
  • Sacramento: 69%; 59%
  • Los Angeles: 64%; 54%
  • Bakersfield: 50%; NA

‘Home sale boom is nowhere close to over’ 

More than four of every five (83%) of buyers in San Diego had to compete for their home, the second-largest percentage in the U.S., just a tick below Salt Lake.

San Francisco-San Jose was the 17th most competitive market in the U.S. at 73%.

Now, if you are waiting until the red-hot market cools, you may be disappointed, says Redfin chief economist Daryl Fairweather.

“The housing market has gone from one extreme (at) the onset of the pandemic to another — the rush to buy primary and second homes while mortgage rates remain near historic lows,” she says. “Later this year the dust will settle to reveal the new normal for both the economy and the housing market. Many people are getting new clarity on what their personal new normal will be like and oftentimes that new reality will involve a new home to match their new lifestyle. So I expect home sales to continue to grow for the foreseeable future, even as home price growth slows a bit. This home sale boom is nowhere close to over.”

best home improvement projects

The best (and worst)
home-improvement projects

Embrace the idea of a new garage door or replacing the windows. Forget the big kitchen remodel or the master suite addition.

Some home-improvement projects (almost) pay off, others offer a limited return in investment when it comes time to sell, according to Remodeling magazine.

The national publication crunched data on home-improvement projects nationwide — including those on the Pacific Coast and several California cities — and found a new garage door is a good investment. Homeowners will spend an average of $4,050 for a garage door, but they will enjoy a 95% return when they sell.

Adding stone veneer (94%), a minor kitchen remodel (79%) and replacing wood or vinyl windows (77%) are other smart moves.

Now, a bathroom addition, bathroom remodel, major kitchen remodel and a master suite addition may look great and add space, but they generate 60 cents or less for every $1 invested in the project when you sell.

Check out Remodeling magazine’s Cost vs. Value report, which allows you to search by several cities and various home-improvement projects. Plus, the data goes back a couple of years for comparison. 

Of course, if you crave a new bathroom or a larger master suite, go for it. But don’t expect buyers down the road to pay for the project.

home affordability drops in California

Affordability drops as prices rise

Buying a house continues to get more difficult in California, especially as prices are up about 20% from a year ago. 

Slightly more than one of every four households (27%) could afford the median-priced home in the state during the first quarter, down significantly from the 35% in the same three-month period in 2020, according to the California Association of Realtors. The current affordability figure is less than half the rate of the 56% peak in first-quarter 2012.

While near-record-low mortgage rates are helping buyers, they are not offsetting the fast-rising prices. 

$131,000 to open the door

Buyers would need an annual income of at least $131,200 to qualify for a fixed-rate, 30-year mortgage and make the monthly payments of $3,280, which includes principal interest and taxes. The figure is based on a 20% down payment — or about $144,000 — for the median home price of $720,490.

If you need some income sticker shock, San Mateo and San Francisco counties households need to earn at least $318,000 to qualify for a mortgage. 

Of course, affordability depends largely on the market and income levels. 

For example, Santa Barbara is the least affordable major market in the state at 14%, with an income of at least $193,000 needed to purchase. Lassen County is the most affordable at 62%, with many households earning $45,000 able to buy. 

But the price difference — Santa Barbara at $1.06 million is more than four times the cost of Lassen — is only slightly offset by the more affluent buyers with bigger paychecks and pocketbooks in the coastal community.

Also, please remember that affordability figures are based on the median home price — meaning half the homes sold for more, the other half for less. So, you can find more affordable homes and many low- to moderate-income buyers can qualify for mortgage-assistance programs, like down payment programs from the California Housing Finance Agency (CalHFA).

Affordability rates and household income needed to qualify for a mortgage with a 20% down payment
  • Los Angeles: 25%; $124,400
  • San Diego: 25%; $139,200
  • San Jose: 22%: $273,200 
  • San Francisco: 20%; $318,000
  • Fresno: 46%; $62,000
  • Sacramento: 41%; $84,800

CalHFA boosts income limits for 26 counties 

Speaking of CalHFA, the state agency that helps low-to-moderate-income Californians become homeowners will increase income limits for almost half the counties in the state.

The Bay Area and the Sacramento region will be the big winners.

CalHFA will boost household income limits in Alameda, Contra Costa, Marin, San Francisco, San Mateo and Santa Clara by $12,000 to $248,000 effective June 1. 

The 5% increase will help, but buyers should remember that median home prices are up about 21% to $1.23 million in the Bay Area compared to a year ago, according to the California Association of Realtors. Bay Area prices are five times the CalHFA household income limit for the region.

The Sacramento region, one of the hottest housing markets in the nation, will get a $10,000 income increase to $180,000. The action covers Sacramento, Placer and El Dorado counties.

Down payment assistance available

Twenty-six of the state’s 58 counties will have household income limits increased. Many of the rural counties, such as Butte and Tulare, will remain at $139,000.

Homeowners who meet the income requirements should consider CalHFA, which offers down payment and first-time homebuyer mortgage programs.

CalHFA assisted a record 13,000 families to become homeowners during the 2019-20 fiscal year, the second-consecutive record-breaking year — and about 2,000 more than the previous year.

Ron Trujillo

Ron Trujillo

Longtime business journalist-turned-communications executive who enjoys reporting on residential real estate in his spare time.