Pay raises and smaller price increases make California slightly more affordable in Q4

Average household needs to earn about $148,000 to buy a home

Bigger paychecks and smaller home price increases bumped affordability higher during the final quarter of 2021, but any optimism for first-time buyers has likely given way to the reality that fast-rising inflation will end near-record-low mortgage rates in the coming months.

One of every four (25%) consumers could afford to buy a home during the last three months of the year, a tick higher than the 24% in December – and off from the 27% a year ago (see table below for community-specific affordability rates). But affordability remains a concern, and a huge hurdle, for many buyers and even Realtors.

The average home buyer – or household – would need to earn at least $148,000 to qualify for a mortgage for the $797,470 median-priced home in California, according to the California Association of Realtors. The figure is based on a down payment of 20%, or about $160,000, for a 30-year mortgage. The monthly payment would be about $3,700, including the property tax and insurance.

Homebuyers in only two counties – Santa Clara and San Francisco – averaged 20%-plus down payments during the third quarter, the latest information available, according to ATTOM Data Solutions. So, CAR’s affordability index, considered one of the best in the industry, is a bit on the bright side.

Affordability has plummeted during the past decade

California’s affordability crisis is among the worst in the U.S., and recent double-digit price gains, fueled by a booming demand and limited supply of homes on the market, are only making matters worse. A decade ago, an estimated 56% of consumers could afford to buy a home in the Golden State, the highest-ever percentage, according to CAR.

Interest-rate hikes by the Federal Reserve, the first is expected in mid-March, will likely hurt buyers, owners and mortgage brokers. Mortgage rates are at the highest level since late-2019 – and up almost a percentage point compared to last year, according to Freddie Mac.

Each rate increase closes the door to homeownership for lower-income residents, at least for the short term. Homebuyers on a $2,000 per month budget can afford $13,500 less house today than a year ago, according to Redfin.

‘Sense of optimism … declined’ with higher rates and prices

A recent Fannie Mae survey found that only 25% of respondents believe it’s a good time to buy a house, the lowest-ever percentage for the survey.

“Younger consumers—more so than other groups—expect home prices to rise even further, and they also reported a greater sense of macroeconomic pessimism,” said Doug Duncan, chief economist for Fannie Mae. He added that young Americans’ “sense of optimism around their personal financial situation declined. All of this points back to the current lack of affordable housing stock, as younger generations appear to be feeling it particularly acutely and, absent an uptick in supply, may have their homeownership aspirations delayed.”

California home listings plummeted 25% in January compared to a year ago. With the current number of homes on the market and at the latest pace of sales, the state had only 1.2 months of inventory in December, the lowest figure since January 1988, according to the California Association of Realtors. 

All of these factors greatly influence availability, price – and affordability. But affordability can be a bit confusing. The affordability index is based on the state’s median-home price – meaning half the homes sell for more, the other half for less – and buyers can likely find lower-priced properties. However, there are many communities where finding a home at any price has become near impossible during the pandemic.

Orange and Santa Cruz counties were the least affordable in the state, at 17%. Families had to earn at least $213,000 to qualify for a mortgage in those counties. Lassen County in Northern California was the most affordable at 63%. 

Affordability for select counties and household income needed to purchase in fourth-quarter 2021
RegionAffordability rateHousehold income to buy **
Santa Barbara20%$170,800
Los Angeles21%$148,000
San Francisco21%$331,800
Santa Clara22%$311,200
San Diego23%$156,800
Source: California Association of Realtors. **Income needed to buy is based on a 30-year mortgage with a 20% down payment for the median-priced home in the respective community.
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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