Housing affordability drops to lowest level in about 17 years

Fast-rising home prices and higher mortgage rates are slamming the door on many wanna-be homebuyers, and the one-two punch will last at least through the remainder of the year.

Add a critical shortage of homes available to buy – some California cities had fewer than 10 homes sold for every 1,000 homes, according to Redfin – and you have a trifecta of trouble.

The competition for the few available homes has increased home prices, and the 7%-range mortgage rates are lifting the average monthly payment to more than $5,000 in California.

BACK TO 2006, BEFORE THE HOUSING BUBBLE

The bottom line – about one of every six California households could buy a home during the second quarter, the lowest affordability rate in almost 17 years, according to the California Association of Realtors.

The 16% affordability rate compares to 19% in the first quarter – and 17% a year ago. The current affordability rate is one-third of the record peak of 56% in first-quarter 2012, according to CAR (see table for specific counties).

“The demand for housing continues to outpace the availability of homes for sale,” says CAR president Jennifer Branchini.

(The post continues after the table)

Percentage of households that can buy a home by county, the monthly mortgage payment and income needed to qualify

County% of households that can buy a homeMonthly mortgage payment, plus taxes and insuranceMinimum annual household income to purchase
California16%$5,200$208,000
Fresno29%$2,630$105,200
Kern31%$2,380$95,200
Los Angeles15%$4,950$198,000
Orange12%$7,830$313,200
Riverside20%$3,920$156,800
Sacramento26%$3,320$132,800
San Diego13%$5,900$236,000
San Francisco20%$10,090$403,600
San Jose18%$11,280$451,200
San Luis Obispo11%$5,510$220,400
Shasta

Source: California Association of Realtors

HOUSEHOLD INCOME OF $208,000 NEEDED TO BUY

The pain is being felt from Northern California cities like Crescent City and Eureka to San Diego. Some of the most affordable cities are evidence of the far-reaching problem with higher mortgage rates and a shortage of homes.

Kings County, better known as Hanford and Lemoore in the Central Valley, had its affordability rate tumble from 39% to 32% during the past year, the largest drop in the state.

There are 16 counties where the annual household income needs to exceed at least $200,000 in order to purchase, outpacing the 13 counties where income of less than $100,000 can open the door to ownership. The statewide average is $208,000. 

‘A SUPPLY-CONSTRAINED MARKET’

And CAR’s affordability index is based on a 20% down payment, a hefty chunk of money, especially for first-time homebuyers, say housing experts. Even with the large down payment, the monthly mortgage would be $5,200 based on the statewide median-priced home.

Four counties, all in the Bay Area, have an average mortgage payment of $10,000. 

There are “no real signs of price declines because of the limited supply,” says Michael Simonsen of Altos Research. “It’s a supply-constrained market. There’s just not enough existing homes to buy.”

Home prices are likely to rise as those able to buy compete for the few homes on the market. 

It’s a bad situation for everyone, except for homeowners who sell and move out of state or purchase a lower-priced home, though there could be some tax implications as well.

GO WEST, YOUNG MAN. AND PREPARE TO RENT UNTIL YOU REACH MIDDLE AGE

The affordability crisis hits younger buyers – those between the ages of 25 and 34 – the most, according to a recent study by the University of California, Berkeley Terner Center for Housing Innovation. A majority of Americans become homeowners by the age of 35, but the figure increased to 49 in California.

The Golden State has the seven regions with the lowest percentage of homebuyers between the ages of 25 and 34 in the U.S., according to a Bay Area News Group report based on U.S. Census Bureau data. Los Angeles-Long Beach has the lowest percentage of young buyers at 20%, followed by Santa Barbara and Santa Cruz counties.

Saving money for the down payment is the biggest hurdle for homeowners, especially first-time buyers who are often paying 30% or more for apartments and rental homes in California. So, with the higher mortgage rates and rising prices, the goal of homeownership has become harder.

“The quick increase in mortgage rates created an uphill battle for many Americans who want to buy a home by locking up inventory and making the homes that do hit the market too expensive,” says Taylor Marr, deputy chief economist with Redfin. “The typical home is selling for about 40% more than before the pandemic.”


Percentage of homes owned by 25- to 34-year-olds by region
Region% of homeowners 25-34 years old
Los Angeles19.9%
Santa Barbara County21.0%
Santa Cruz County22.5%
San Jose 22.8%
Salinas23.3%
San Francisco23.4%
San Diego 23.8%
Ventura County28.6%
Chico 29.2%
Fresno29.5%

Source: Bay Area News Group based on U.S. Census Bureau data