The American Dream has become more a toss-and-turn experience for many wanna-be homebuyers who are battling near-record home prices and higher mortgage rates, though they have plummeted in recent weeks with the latest economic and jobless reports (see below).
Fewer than one of every five households could buy a median-priced home during the first quarter in California, according to the California Association of Realtors. And those buying would need to earn at least $200,000 based on a 20% down payment, though the figure has likely dipped lower with the mortgage rates the past several days.
So, many California households are renting their homes – either living in apartments or single-family homes – rather than buying a house. For some, it’s just a matter of playing the waiting game for lower mortgage rates and prices or finding just the right house at a price that works.
But, for a large majority of renters, it’s simple math – they cannot afford to buy a home.
RENTERS ARE THE MAJORITY IN LOS ANGELES AND SAN DIEGO
About 44% of Californians rent, one of the highest figures in the U.S. Los Angeles and San Diego have the two highest rental rates in the nation at 53% and 52.4%, respectively, according to a Redfin report. (New York City is in third place at 50%).
Nationwide, about 34% of households rent, or 45.2 million people – a 1.9% increase compared to a year ago. The growth in households renting is three times greater than the paltry 0.6% increase in ownership.
The reason is simple: Buying a home is far more expensive. Plus, many renters struggle with saving enough money for a down payment, especially as home prices soar.
The average mortgage payment has increased 90% since June 2019 (pre-pandemic level), while rents have moved up 23%, according to Redfin.
And the difference between buying and renting can be thousands of dollars every month in some cities in California. For example, mortgage payments are at least $5,000 more than rent in the Bay Area, according to a recent Bankrate and Zillow report.
Percentage of households that rent in California
- Fresno: 49%
- Los Angeles: 53%
- Riverside: 31.6%
- Sacramento: 34.5%
- San Diego: 52.4%
- San Francisco: 41.8%
- San Jose: 44.8%
Source: Redfin
“The cost of both renting and buying a home has skyrocketed in recent years, but the affordability crunch isn’t quite as severe in the rental market,” says Sheharyar Bokhari, senior economist for Redfin. “That’s because America has been building a lot of apartments to keep pace with robust demand from renters.”
A SUPPLY AND DEMAND SLAM FOR APARTMENT OWNERS
Fewer than half of new apartments completed during the fourth quarter were rented within three months, down from 60% a year ago. That’s a record low, except for first-quarter 2020 when the pandemic pounded the housing market.
America – and California – has an abundance of apartments, as more were completed during the past year. Almost 90,300 apartments were completed in the fourth quarter, the second-highest on record.
With the increased supply, Bokhari says renters should compare apartment rents – and negotiate. The dollars saved could be used for a down payment on a house down the road.
“If you’re looking for a rental and you’ve noticed a lot of new apartments popping up in your neighborhood, it may mean you have room to negotiate on price or ask for concessions like discounted parking or a free month’s rent,” Bokhari says.
Feature photo of apartments in the Bay Area/Shutterstock
Your first home could cost $1 million in California
The California dream of homeownership has become a million-dollar nightmare for first-time buyers in parts of the state.
The aptly named Golden State has 117 cities where the so-called starter home costs at least $1 million, compared to 84 in 2019, according to a Zillow report.
California has twice as many million-dollar starter-home cities than New York and New Jersey, combined.
ALMOST 100 STARTER-HOME CITIES IN THE BAY AREA AND LOS ANGELES
Now, the New York City region has the most million-dollar communities at 48, but San Francisco and Los Angeles are close behind at 44 and 35, respectively. And San Jose, where fast-rising stock prices mint many millionaires, has the fourth most million-dollar cities at 15.
Zillow identifies a “starter home” as a home in the lowest one-third of home values in a region. The dramatic increase in home prices – up 54% nationwide during the past five years – has delayed homeownership for many. The average first-time homebuyer is 35 years old, and 49 in California, according to the University of California, Berkeley.
Or, consider this – the average first-time homebuyer in California is only a year younger than when they can qualify for AARP membership.
Own a home? Feeling $64,000 richer?
Buying a home is arguably the best – though not always the easiest – way to build generational wealth.
In California, it’s almost money in the bank if you buy and hold for a decade or longer, according to a recent ATTOM Data report. In many cases, a lot of money.
But even if you buy and sell within a year, head-turning gains are possible. The average California homeowner enjoyed a $64,000 increase in equity during the first quarter, compared to a year ago, according to CoreLogic.
The figure is the highest in the nation, followed by New Jersey at $59,000.
EQUITY IS A ‘FINANCIAL BUFFER’
Los Angeles-area homeowners had the largest increase at $72,000, or almost as much as the average household income in Los Angeles County, according to the Census Bureau.
“With home prices continuing to reach new highs, owners are also seeing their equity approach the historic peaks of 2023, close to a total of $305,000 per owner,” says Selma Hepp, chief economist for CoreLogic. “Home equity is key to mortgage holders who have seen other homeownership costs soar, including insurance, taxes and HOA fees, as a source of financial buffer.”
Higher home prices allow homeowners to build equity and wealth – and tap money in the case of an emergency or help pay for a home-improvement project or a personal-improvement effort, also known as higher education.
It’s worth noting that CoreLogic’s home-equity report tracks homes with a mortgage. But almost two-thirds of California homeowners have a mortgage, though a majority are considered equity rich – they have more equity than debt based on the venue of their house, according to ATTOM Data.
Mortgage rates plummet and homeowners scramble to refinance
A bad day on Wall Street could help you land on a new street – and into a new home or a cheaper current one.
The average 30-year mortgage rate dropped to 6.55% on Wednesday (Aug. 7) compared to 6.82% a day earlier, according to the Mortgage Bankers Association.
And homeowners with a mortgage – especially those who have bought within the past two years – noticed. Applications to refinance a home increased 16% from a week ago, and were up 59% from a year ago.
However, applications to buy a home inched up 1%, and were off 11% from a year ago. But buyers often play the watch-the-rate game in hopes that the cost of owning a home will drop.
Total mortgage applications – new purchases, refis and home equity loans – increased 6.9% from a week ago.
BAD NEWS IS GOOD FOR RATES
Concerns about a slowing economy, largely because of lower-than-expected job growth, and one of the worst days on the stock market in recent years prompted lenders to cut mortgage rates.
The current rate of 6.55% will save homeowners about $600 every month compared to the modern-day peak of 7.79% reached in October 2023, according to Freddie Mac.
But the current rate is far from the 5% rate of two years ago, when the mortgage payment was about $$4,300. The figures are based on a 20% down payment for a $900,000 home, the median price in California.
Many economists and home loan experts believe the Federal Reserve will soon cut interest rates amid growing concern for the economy, and mortgage rates could drop into the 5.5% range.
The recent rate decline followed “doveish communication from the Federal Reserve and a weak jobs report, which added to increased concerns of an economy slowing more rapidly than expected,” says Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association.
The demand for mortgages may not last very long, especially for current homeowners. Fewer than 1 million homeowners can benefit from a refinance and reduce their rate by at least 75 basis points.
And big cuts are often followed by hikes on industry news.
“This is how things often play out when the bond market forces a quick move to extreme rate levels,” says Matthew Graham, chief operating officer at Mortgage News Daily. “For example, several of the biggest drops in daily mortgage rates have followed quick moves to long-term highs.”
