A big payday, thanks to your home

California’s equity gain is the largest in the nation and could help financially strapped homeowners

Estimated reading time: 7 minutes

California homeowners made more money in equity than working during the past year, according to a just-released report from CoreLogic.

The average homeowner with a mortgage enjoyed equity gains of $116,000 during the second quarter compared to a year ago, easily the best in the nation followed by Washington ($103,000) and Idaho ($97,000). California’s equity was more than double the national average of $51,500.

The average California household income was $75,000 in 2020, according to the latest data from the U.S. Census Bureau.

Fewer than 1% of Bay Area, Los Angeles homeowners have an underwater mortgage

Of course, in order for homeowners to enjoy the dollars made from their home, they would need to sell, but the gains — even merely on paper — definitely boost consumer confidence and provide an opportunity to tap some of the money through refinancing.

The eye-opening equity gains greatly reduce the number of negative equity  mortgages, also known as underwater or upside-down mortgages.

Only 2.3% of homeowners are dealing with an underwater mortgage. The Bay Area and Los Angeles boast the lowest underwater mortgage rates among major metro regions in the nation at 0.6% and 0.7%, respectively. 

The homeowner equity increase “provides a strong financial cushion for tens of millions of Americans,” says Frank Martell, president and CEO of CoreLogic. “For those most impacted by the pandemic, equity gains will help play a critical role in staving off foreclosure.”

But few homeowners in California are at risk of losing their homes to foreclosure since a large majority can sell and enjoy a nifty payday, RealtyTrac executive vice president Rick Sharga said during a recent webinar.

In fact, about half of California homeowners are considered “equity rich,” where they owe less than half of the current value of their home.

A flood of foreclosures? More like a trickle 

Certainly, the foreclosure moratorium helped many financially strapped homeowners during the first 18 months of the Covid pandemic. About 6.5 million homeowners nationwide entered and exited the foreclosure moratorium program, and quite a few stayed current throughout the process, Sharga said.

About 1.7 million homeowners nationwide were in forbearance at the end of August, and a large majority — an estimated 1.2 million mortgages — reached the 18-month program limit at the end of September, according to CoreLogic. But the chance of a flood of foreclosures hitting the market is highly unlikely, say housing experts.  

There will be some foreclosures, but nowhere near the housing collapse during the Great Recession, when the nation averaged 800,000-plus foreclosures for eight straight quarters in 2009 and 2010, according to ATTOM Data Solutions.

Fresno is the most affordable major market in California, even with its low wages. Grant Porter/Unsplash

Home prices rise faster than wages — a lot faster in some markets

Got a big pay raise the past year? Congratulations, great news.

Guess what? You will need every one of those dollars — and likely even a few more — to qualify for a home in California.

Affordability continues to decline for the everyday employee in California, despite near-record-low mortgage rates during the past two years, according to ATTOM Data Solutions. Home prices are outpacing pay gains in much of the Golden State.

The company determines affordability based on the average wage earner by calculating the income needed to meet monthly home ownership expenses — including mortgage, property taxes and insurance — for a median-priced home, assuming a 20% down payment and a maximum 28% debt-to-income ratio. Home prices and income are based on the specific housing market.

‘Affordability keeps inching in the wrong direction’

Average employees had to pay more than 30% of their income to purchase a house in eight of the largest markets in the state. Most lenders prefer that homeowners allocate 30% or less of their income to the mortgage and other housing-related expenses.

Only employees in Fresno and Santa Clara counties were below 40%.

In fact, the average employee in San Francisco and Santa Clara enjoyed 28% and 22% pay raises during the third quarter compared to a year ago. But even with a slight dip in home prices in San Francisco and a modest increase in Santa Clara, home ownership costs exceed the maximum many mortgage lenders like to see.

Basically, home prices exceeded pay raises in five of the eight counties, making affordability tough. And just more evidence of inflation worries, say many economists.

Affordability has increased to the highest level since third-quarter 2008. Sound familiar? Yep, that is the middle of the Great Recession, prompted by the boom-to-bust housing market and a plunge in the value of many mortgage-backed securities. 

“Affordability keeps inching in the wrong direction as the housing market boom keeps roaring ahead,” says Todd Teta, chief product officer with ATTOM Data “That’s pushing average workers closer and closer to the point where lenders might be reluctant to give them a mortgage. With much still uncertain about how the pandemic and many other forces could still affect the economy, affordability remains a crucial measure of market stability that could easily keep going in the same direction or swing back the other way.”

Affordability by major markets in California (ranked by median price)
CountyAnnual income% of wages to buyMedian pricePrice growthWage growth
San Francisco$165,88040.7%$1.39 million-2%28%
Santa Clara$170,59936.7%$1.3 million6%22%
Los Angeles$74,23050%$757,00010%9%
San Diego$73,33347.2%$710,00011%13%
Inland Empire$51,76651.1%$520,00020%10%
Source: ATTOM Data Solutions
assorted color wall paint house photo
Photo by Jessica Bryant on Pexels.com

Getting a jump on Uncle Sam to help borrowers

Several mortgage lenders are anticipating higher lending limits from Uncle Sam in the next several weeks, raising their so-called “conforming loans” in recent days.

Fast-rising home prices — up 17% in August compared to a year ago, and 34% since August 2019 — are causing PennyMac, United Wholesale Mortgage, Rocket Cos., Finance of America Mortgage, Homepoint and a few others to increase their lending limits. 

The action benefits home buyers and homeowners looking to refinance since they can qualify for conforming loans and avoid jumbo loans, which are harder to qualify for and have higher interest rates because they’re not guaranteed by Fannie Mae or Freddie Mac. 

Nationwide — and in much of California — the conforming loan limit is $548,250. But in higher-priced counties, think Marin and Orange, the limit is raised to $822,000. 

In August, the median home price was $828,000 in California. Only about half of California counties have median home prices below the $649,250 conforming loan limit.

Of course, borrowers should contact their mortgage provider for the latest information on conforming loan limits and whether they qualify, or if they need to opt for a jumbo loan.

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Closing costs increase, but percentage of the transaction declines 

Closing costs, an often-overlooked part of the home buying process, are increasing with the higher home prices.

And the additional dollars needed to close the deal are just one more reason why affordability continues to slide. 

California has the fourth-highest closing costs, excluding taxes, in the nation at $5,772 — almost $2,000 more than the national average during the first half of the year, according to ClosingCorp

But the state’s closing cost percentage increase is smaller than the national average. Closing costs have increased 7.6% percent during the past year in California, much less than the 10.5% jump nationwide, according to ClosingCorp.

The San Diego-based company’s cost calculations include a lender’s title policy, the owner’s title policy, appraisal, settlement, recording fees, land surveys and the transfer tax.

Home prices soar, percentage slips

While closing costs increase, the percentage of closing costs based on home prices declined in the first half from a year ago. In California, closing costs were 0.74% of the price of the home ($780,000) during the first half of 2021, compared to 0.79% a year ago.

“So, in addition to keeping up with high demand, the mortgage industry is doing a good job holding down the costs it can control,” says ClosingCorp CEO Bob Jennings.

Perhaps, but as mentioned in the previous item, affordability is a critical issue in California, especially for low- and middle-income families.

Ron Trujillo

Ron Trujillo

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

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