Affordability drops to a 16-year low, but falling rates give some hope to home shoppers

Households need to earn at least $221,000 per year — and then have a $5,500 mortgage payment

Higher mortgage rates and an increase in home prices have landed a one-two punch for home shoppers, with a near-record low number of households able to buy a home – if they can even find one within their price range.

About one of every seven (15%) California households could afford to buy a median-priced home during the third quarter, the lowest level since 2007, according to the California Association of Realtors (CAR). The figure compares to 16% in the second quarter and 18% a year ago, and a dramatic drop from the modern-day record-high of 56% in first-quarter 2012.

And several cities’ affordability rates were at or below 10%, primarily along the Central Coast and Southern California. Bigger paychecks and slightly lower home prices made the Bay Area more affordable than the Central Coast and Southern California (see table, below), a flip from the decades-old trend.

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Affordability rate by county for Q3 2023

City/CountyQ3 affordability rateHousehold income neededMonthly mortgage payment
California15%$221,200$5,530
Bakersfield28%$102,000$2,550
Fresno27%$110,000$2,750
Los Angeles11%$235,200$5,880
Orange11%$342,000$8,550
Redding35%$99,200$2,480
Riverside19%$160,000$4,000
Sacramento23%$142,000$3,550
San Diego11%$256,400$6,410
San Francisco21%$406,000$10,150
San Jose17%$484,800$12,120
San Luis Obispo10%$226,800$5,670
Stockton23%$142,800$3,570

Source: California Association of Realtors

HIGHER MORTGAGE RATES, FEWER CALIFORNIANS ABLE TO BUY

Higher mortgage rates, recently exceeding 7% for the first time in more than two decades, and near-record home prices have made buying a costly and, for many, an impossible dream.

To buy a home, CAR estimates the average California household would need to earn at least $221,200 per year to qualify for a 30-year mortgage with a 20% down payment. The monthly mortgage payment would be about $5,530, several hundred dollars more than a year ago – and about twice as much as before the pandemic.

Bay Area homebuyers in the third quarter had hefty mortgage payments but more could afford the purchase than those on the Central Coast and in Southern California. SHUTTERSTOCK

The average mortgage payment, based on a 20% down payment, tops $8,550 in Orange County and more than $10,000 in Marin, San Francisco, Santa Clara and San Mateo counties, where higher salaries help offset the $1.5 million-plus prices.

“The bad news is that owning a home remains more of a financial stretch than it’s been for many years,” said Rob Barber, CEO of ATTOM Data in Irvine. 



YOUR PAYCHECK … AND MORE IN SOME COUNTIES

Indeed, in some counties, the average homebuyer would need every dollar of their income to make the monthly mortgage payment, according to ATTOM Data. The figure is also based on a 20% down payment, like the CAR report.

The Central Valley, from Bakersfield to Sacramento, is the only major region in the state relatively close to the national average of 34% of household income needed for the monthly mortgage payment. Bakersfield has the lowest rate at 43%, primarily because home price increases were less than wage gains in the third quarter.

But in several cities, home prices easily exceeded wage gains, including a 6.2% decline in paychecks but a 10.4% increase in prices in San Jose, the largest disparity in the state (see table, below), according to ATTOM.

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How much money is needed for the mortgage? Home prices outpace pay gains in several cities

CityPercent of household income needed to buyPercent wage increase/declinePercent rice increase/decline
Bakersfield43%+4.6%+2.0%
Fresno49%+4.8%-1.3%
Los Angeles75%+2.0%+5.0%
Orange County99%+1.2%+14.7%
Riverside74%+4.9%+4.8%
Sacramento48%+3.5%+2.5%
San Diego75%+3.4%+9.5%
San Francisco56%-5.5%-3.0%
San Jose61%-6.2%+10.4%
San Luis Obispo99%+1.2%+14.7%

Source: ATTOM Data

FINDING AN AFFORDABLE HOME IS NEARLY IMPOSSIBLE

The ability to buy an affordable home is a challenge. Finding an affordable home is another – and often an even larger — hurdle, according to a recent Redfin report.

From the Bay Area to San Diego, only one of every 100 homes listed was affordable for the average household in 2023 (see table, below), according to Redfin. Only Bakersfield, Fresno and Sacramento had more than 5% of homes listed considered affordable.

Redfin based the report on a 5% down payment for a 30-year mortgage and limited the monthly mortgage payment to a maximum of 30% of household income.

CityPercent of homes listed were affordable ’23Percent of homes listed were affordable ’22
Anaheim1.1%1.9%
Bakersfield8.4%10.3%
Fresno5.8%9.1%
Los Angeles0.3%0.5%
Oakland2.0%2.5%
Oxnard0.3%1.1%
Riverside3.1%4.3%
Sacramento2.8%4.4%
San Diego0.4%0.9%
San Francisco0.3%0.4%
San Jose0.4%1.4%
Stockton5.2%6.9%

Source: Redfin

SOME HOPE IF THE FED CUTS RATES IN 2024

The affordability crunch coupled with the limited supply of homes on the market could ease in 2024 if the Federal Reserve cuts interest rates. The Fed has announced plans to cut rates three times in the new year, with some economists expecting the first reduction in January.

“Many of the factors that made 2023 the least affordable year for home buying … are easing,” says Redfin senior economist Elijah de la Campa. “Mortgage rates are under 7% for the first time in months, home price growth is slowing as lower rates prompt more people to list their homes, and overall inflation continues to cool.”



But a drop in rates could also increase home prices, especially if more buyers enter the market and owners remain reluctant to sell because of their near-record-low mortgage rates, de la Campa says. 

“Whether that’s just a temporary thing tied to seasonal market patterns is something we won’t know until next year, especially given recent signs that interest rates are coming down,” says Barber of ATTOM. “But for now, there is some break (with the lower rates) into the growing financial stress for house hunters.”

How is the affordability rate determined?

The California Association of Realtors determines the state’s and counties’ affordability rates based on a 20% down payment and the income needed for a 30-year loan for the median-priced home — and to make the monthly mortgage payment. The affordability rate changes based on numerous factors, including long-term mortgage rates and the median home price (for example, more expensive in San Francisco than Fresno). But CAR also crunches household income by region, determining how many people can purchase. Please remember that buyers can have a bigger or smaller down payment — and buy a lower-priced home.