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Big down payments follow huge home price gains

Plus, Fannie and Freddie increase loan limits, multimillion-dollar markets, record home equity gains in the third quarter, and the risk of a housing bubble.

Estimated reading time: 9 minutes

California homebuyers are digging deep into their pockets to plunk down as large-as-possible down payments, as they compete in bidding wars for homes and are faced with record-high prices.

Four of the five cities in the nation with the largest average down payment were in California during the third quarter, with San Jose leading the way at $336,700.

Of course, San Jose-area buyers benefit with the largest annual household incomes in the state but they need every dollar living in the fourth-priciest market at $1.63 million in October, according to the California Association of Realtors.

San Francisco-Oakland finished in second with an average down payment of $253,000, followed by Los Angeles-Long Beach at $166,500 (see list below).

Mortgage activity slows in higher-priced markets

Those sky-high prices are hurting wanna-be buyers — and mortgage lenders — especially in the most expensive parts of the state, according to ATTOM Data Solutions.

Mortgage activity — purchases and refis — have significantly slowed in some areas and surged in others. Mortgage loans in Los Angeles and Ventura County (Oxnard-Ventura) were down 11.3% and 17.7% compared to a year ago, respectively. San Diego also had a double-digit decline at 11%, followed by Santa Barbara County at 8.3%.

But more affordable markets — such as the Central Valley and the Inland Empire — have benefited greatly from higher prices in other regions during the pandemic.

Mortgage activity in Merced County jumped 31% during the third quarter compared to a year ago, followed close behind by Fresno at 30% and Bakersfield at 28%. Even Tulare County, often one of the most economically struggling regions of the state, had a 26% increase in mortgages.

Nationwide, mortgage lenders issued about 3.59 million loans during the third quarter, an 8.4% decline from the second quarter — the largest quarterly drop in more than a year. It’s also the first time mortgage activity dropped during the second and third quarters since 2000. However, even with the bad news, loans were up 3.2% from a year ago. 

“The overflow stack of work that was hitting lenders for several years shrank again in the third quarter,” says Todd Teta, chief product officer for ATTOM Data in Irvine. “It’s still too early to say if the trends point to major shifts in lending patterns or the broader housing market boom. But the drop-off is significant, especially for home buying, which could suggest an impending housing market slowdown.”

CityDown payment% of purchase price
San Jose$336,70023.2%
San Francisco-Oakland$253,00021.6%
Los Angeles-Long Beach$166,50019.2%
Ventura County$145,54018.6%
San Diego$134,00016.8%
Santa Rosa$110,50015.8%
Sacramento$76,13314.1%
Riverside-
San Bernardino
$47,0009.4%
Fresno$23,9506.6%
Bakersfield$16,7505.3%
Source: ATTOM Data Solutions

Fannie, Freddie give buyers a gift

Uncle Sam has an early holiday gift for home shoppers, but it won’t arrive until the new year — and it comes with a ton of paper to unwrap.

The maximum amount for a mortgage-backed by Fannie Mae and Freddie Mac will increase to $647,200 and to as much as $970,800 in high-cost areas such as the Bay Area and Southern California starting Jan. 1, according to the Federal Housing Finance Agency.

It’s the largest-ever jump of the conforming loan limit for the federal agency — up from $548,250 and $822,375 in 2021, respectively.

There are some counties in California, such as Sacramento and Sonoma, where the conforming loan limit is slightly higher than the $647,200. You can check specific counties here

Higher prices, higher lending limits

Double-digit price gains prompted the increase and will make it easier for some home shoppers to become homeowners. FHFA’s Fannie Mae- and Freddie Mac-backed mortgages are generally cheaper, require a smaller down payment and lower credit scores than so-called jumbo loans from mortgage companies.

“With California home prices climbing so significantly during the pandemic, CAR commends the FHFA for recognizing the record-setting home price increase and raising maximum conforming loan limits in high-cost markets,” says Otto Catrina, president of the California Association of Realtors. “Conforming loans provide safe and affordable mortgages to California’s homebuyers across the state.”

Home prices were up 12.3% to $798,400 in October compared to a year ago, a healthy but smaller pace than in recent months, according to CAR. Fannie Mae and Freddie Mac’s conforming loan limit increase is just slightly more than the $90,000 gain during the past year.

Only three regions of the state — the Central Valley, the Far North (about Chico to Eureka) and the Inland Empire — have median home prices below the new conforming loan limit of $647,000. And most Bay Area counties easily exceed the high-cost area conforming loan limit of $970,000.

But the annual increase at least helps homeowners keep pace with the rising prices, real estate officials say. 

“If loan limits were not allowed to increase every year to keep up with home prices, first-time and moderate-income homebuyers across the state would not have access to affordable mortgage capital, which reduces homeownership opportunities for those who need it the most,” Catrina says.

Palo Alto is one of the priciest markets in California. Hank Shiffman/Shutterstock

Multimillion-dollar madness, but Atherton continues to top the list

California continues to dominate the highest-priced ZIP codes list in the U.S., with 89 of the top 127 spots in the Golden State.

And Atherton — home to Golden State Warriors all-star Steph Curry and wife Ayesha Curry, former Google Chairman Eric Schmidt and one-time HP CEO and gubernatorial candidate Meg Whitman — boasts the highest price in the nation for the fifth year in a row.

The Bay Area community’s average price of $7.48 million is almost $2 million more than a second-place Boston neighborhood, according to PropertyShark’s annual report.

Six of the nation’s 10 most-expensive ZIP codes are in California, and the state’s 10 priciest communities cost at least $3.58 million.

The Bay Area has 47 ZIP codes on the priciest list in the U.S., including Ross at $4.58 million — the second-most-expensive in the state and No. 4 in the U.S.

Despite another impressive performance, California only has two more communities on the list compared to 2020. But the economics of high-priced communities and properties are different. 

Multimillion-dollar markets have much-smaller gains compared to more moderately priced homes and neighborhoods since there are dramatically fewer deep-pocketed buyers. For example, Atherton — which has far fewer home sales than many other neighborhoods — had a modest 7% median home price increase compared to 2020.

The Bay Area has 47 ZIP codes on the priciest list in the U.S., including Ross at $4.58 million — the second-most-expensive in the state and No. 4 in the U.S.

California’s 10 most expensive cities in 2021
  1. Atherton: $7.48 million
  2. Ross: $4.58 million
  3. Beverly Hills: $4.13 million
  4. Santa Barbara: $4.1 million
  5. Santa Monica: $4.06 million
  6. Los Altos (94022): $4.05 million
  7. Los Altos (940424): $4.05 million
  8. Palo Alto: $3.8 million
  9. Huntington Beach: $3.6 million
  10. Newport Beach: $3.58 million

Homes around Lake Mission Viejo. Anthony Sanchez/Adobe Stock

Fall fun: Home equity soars $119,000 from a year ago

California homeowners boasted the biggest equity gains during the third quarter, with the average home value increasing $118,700 from a year ago — the largest jump in the U.S.

Double-digit price gains are powering the huge equity increases, according to CoreLogic.

And as prices soar, the number of homeowners with negative equity — they owe more on the mortgage than the current value of their home — has slid to a record low of 0.6% in San Francisco and 0.7% in Los Angeles.

With the dramatic equity gains and few homeowners dealing with underwater mortgages, foreclosures are of little, if any, concern in the Golden State — and, for the most part, nationwide. For example, Los Angeles had 441 homes enter foreclosure in November, a fraction of the homes with a mortgage in the metro region, according to ATTOM Data Solutions.

“After an initial surge following the end of the government’s moratorium, it appears that foreclosure activity may be slowing down as we move towards the end of the year,” says Rick Sharga, executive vice president of RealtyTrac. ATTOM owns RealtyTrac. “Despite concerns about a pandemic-driven wave of defaults, mortgage delinquency rates and foreclosure starts have continued to decline due to government and industry programs, and a recovering U.S. economy.”

Adobe Stock

A bubble market? Maybe

As mentioned in the previous blog item, California’s white-hot housing market has created a ton of wealth for homeowners during the past two years.

But for anyone old enough to remember the Great Recession and the collapse of the housing market that started in 2008, the words “housing bubble” cause more concern than a letter from the IRS.

And at least one industry tracker wants to throw some cold water on the super-hot housing market. Fitch Ratings says the California housing market is overpriced by 10% to 14% — or about $80,000 to $112,000, according to the latest median home price by the California Association of Realtors.

It’s an about-face from spring 2020 when Fitch found the state’s housing market “sustainable” and prices were overpriced by 5% or less.

California is not alone on the naughty list — 43 states are considered “overvalued,” including Nevada, Oregon and Washington state. Idaho, the destination for many conservative Californians in recent years, tops the list, with prices overvalued by at least 30%, according to Fitch.

Will demand or higher mortgage rates win?

Now, a bubble warning from Fitch is far from a red flag, especially in California, where the demand for homes continues to exceed the limited supply. But it’s definitely worth watching.

Fitch says that if long-term mortgage rates increase 4% — a real possibility during the next 18 months or so, some experts say — the monthly mortgage payment-to-income ratio would jump 19%. Few home shoppers could deal with the increase and would likely pull back on the California Dream.

CAR estimates fewer than one of every four consumers (24%) could afford to buy a home during the third quarter, up slightly from 23% in the second quarter and 28% a year ago. The high prices coupled with higher interest rates could be a serious gut punch for the housing market.

Ron Trujillo

Ron Trujillo

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