Affordability hit by higher mortgage rates and home prices

As mortgage rates soar to the highest level in more than two decades and the demand and limited supply of homes for sale keep prices near record levels, affordability continues to drop in California.

The average California homebuyer would need to spend at least half of their income on the mortgage during the third quarter, the latest evidence that the hard-hit housing market has gone from bad to worse with 7%-plus mortgage rates. 

And many economists say long-term mortgage rates are more likely to climb to 8% than drop below 7% by the end of the year, as the Federal Reserve battles inflation. Better-than-expected job growth in September helps job-seekers but hurts home shoppers facing mortgage payments that often top $4,000 per month in much of California.

“The dynamics influencing the U.S. housing market appear to continuously work against everyday Americans, potentially to the point where they could start to have a significant impact on home prices,” says Rob Barber, CEO of ATTOM Data. “We clearly aren’t there yet, as the market keeps going up and the slowdown we saw last year looks more and more like a temporary lull. But with basic homeownership now soaking up more than a third of average pay (nationwide), the stage is set for some potential buyers to be priced out, which would reduce demand and (put) upward pressure on prices.”


In California, the average homebuyer would need to spend at least 43% of their income in Bakersfield to as much as 95% in Orange County, based on the area’s income and median home price, according to ATTOM. The figure is for a 20% down payment and a maximum 28% debt-to-income ratio. 

Bottom line: Few Californians can afford to buy their first home whether in Eureka or San Diego. 

For example, the average household in Bakersfield would need to earn at least $86,000 to buy the median-priced home in Kern County to as much as $358,000 in San Jose. 

But as mortgage rates and prices rise, the number of Californians able to buy falls. Nationwide, mortgage applications have dropped to the lowest level since 1996, according to the Mortgage Bankers Association

Fewer buyers could boost the near-record-low number of homes for sale, even as many homeowners continue to hold off selling as they enjoy their 3% mortgage rates of a few years ago.

“Inventory will climb as interest rates climb,” says Mike Simonsen of Altos Research. “But we don’t see a flood of sellers … or new listings. Headlines are going to be pretty bearish.”

Affordability declines and housing costs soar with higher rates

CityMedian sale price Q3 2023Affordability rate decline from a year agoAnnual income needed to buy a homeIncome needed for mortgage payment
Los Angeles$847,750-15%$206,27673%
Orange County$1.08 million-22%$260,55395%
San Diego$855,750-19%$207,67674%
San Francisco $1.3 million-13%$319,67356%
San Jose$1.48 million-22%$357,88960%

Source: ATTOM Data