Many homeowners are ‘house rich, cash poor’
California homeowners should feel pretty good, with a ton of equity and near-record home prices.
But there are some cracks forming in the foundation, especially for financially strapped homeowners.
The average California homeowner endured a $24,700 drop in equity during the fourth quarter compared to a year ago, the second-largest tumble in the U.S., according to Cotality.
Feeling a little nervous? Maybe this will make you feel a bit better.
A majority California homeowners are considered equity rich, with their current mortgage debt being less than half of the home’s current value. And the median equity in the state is $596,000, the second most behind only Hawaii at $667,000 – and almost twice the nationwide equity rate of $295,000.
‘Thinner equity cushions’
But the sluggish housing market could have a lingering effect on homeowner equity going forward, at least for a while, said Cotality chief economist Selma Hepp.
“As home price growth has slowed, homeowner equity has largely leveled off, but it remains historically high,” she said. “Looking ahead, muted home price appreciation could limit additional equity gains, and any deterioration in the labor market could pressure household balance sheets, particularly for more recent buyers with thinner equity cushions.”
Fewer than 2% of California homeowners have negative equity – also known as an underwater mortgage – and less than 1% in the Bay Area and Los Angeles, where home prices have soared in recent years.
Again, many California homeowners have more than enough equity to tap to buy a car, pay off credit-card debt or deal with a job loss, economists say. But much of that wealth is connected to older homeowners, who often are more financially stable and less likely to tap their wealth.
‘Locked behind the walls of stable, older households’
U.S. homeowners have a combined $11 trillion in equity, but only a paltry 3% has been tapped. California homeowners alone control 25% of the equity but only represents 12% of the home-equity line of credit nationwide.
“We are looking at a fundamental barrier to economic resilience,” said Thom Malone, principal economist for Cotality. “The wealth is there, but it’s locked behind the walls of stable, older households. This leaves a massive portion of the younger population exposed to economic shocks.”
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Younger owners have so-called golden handcuffs, making them “house rich, cash poor.” Many have 4% or lower mortgage rates, so a HELOC would come with a higher interest rate. Also, many younger owners are gig workers – such as driving for Lyft or Uber – and cannot meet the much-tougher credit score and income verification requirements set by traditional lenders.
So, if those homeowners want to access equity – perhaps to deal with a job loss – selling their home is the best but far from perfect solution. And if they want to buy a home, mortgage rates and prices will likely be higher.
“As market uncertainty builds, the job market softens and home prices remain high, there will be fewer buyers but also more incentive to tap into stored equity,” said Cotality principal economist Archana Pradhan.
More sellers than shoppers — and homes are sticking around a lot longer
Buyers are in the driver’s seat and can take their time shopping for their first – or that dream – dream home.
There are far more sellers than shoppers in California, as buyers continue to hold the power. Only San Francisco has a so-called balanced market in the state, with just about the same percentage of buyers as sellers (see table, below).
The difference allows buyers to take their time as more homes remain on the market longer. In some cases, a lot longer. At least 40% of the homes listed in Los Angeles, Riverside and Sacramento have been on the market for more than two months, according to Redfin.
The fastest-moving market is San Jose, where only 20% of homes listed are “stale,” on the market for at least two months – and the average home entering escrow in less than two weeks. San Francisco is also faring better for sellers, with the average home fetching a deal in two weeks.
The current market, where sellers easily exceed shoppers, is an about-face from several months ago. Of course, real estate is about location and pricing, so some hyperlocal markets are faring much better than others.
| City | % more sellers than buyers | Days before escrow | Days vs. a year ago | % of listings on market for 2 months |
|---|---|---|---|---|
| Anaheim | 37.2% | 46 | +5 | 34.0% |
| Los Angeles | 52.6% | 63 | +8 | 44.1% |
| Oakland | 24.4% | 16 | +1 | 31.1% |
| Riverside | 59.8% | 71 | +10 | 48.8% |
| Sacramento | 41.0% | 37 | +6 | 41.8% |
| San Diego | 18.8% | 35 | +6 | 37.7% |
| San Francisco | 2.4% | 14 | -1 | 24.0% |
| San Jose | 10.5% | 12 | +2 | 19.8% |
Source: Redfin
Home shoppers in several Northern California counties are at a disadvantage as a majority of homes are sold to cash buyers — and mortgages are few and far between. ADOBE STOCK
California’s most rural counties are often ‘mortgage deserts’
California has several so-called “mortgage deserts,” where many homes are bought with cash, greatly affecting the ability for lower-income residents to buy homes.
In these counties, many in the northern part of the state, credit scores are low and good-paying jobs are few. Quite often, real estate investors – including publicly traded companies – are buying homes with cash, leaving even pre-approved homebuyers out in the cold.
In Humboldt, Modoc Plumas, Sierra, Siskiyou, Trinity counties, about half of the home sales are cash deals, according to the Consumer Federation of America.
Mortgage deserts could also have a lingering economic effect on renters as well, since investors control the market.
The state has three urban mortgage deserts – San Luis Obispo, Santa Cruz and Tulare counties. About one of every three homes sold are cash deals in these counties.
While alarming, California is in better shape than many other markets nationwide, said Sharon Cornelissen, housing director with the Consumer Federation of America. In Hudspeth County, Texas, and Macon County, Georgia, more than 90% of home sales are cash transactions.
The Newport Coast — the area between Corona Del Mar and Laguna Beach — has the highest-priced homes in California. ADOBE STOCK
SoCal has the highest-priced ZIP codes in U.S.
California dominates a list of the most expensive ZIP codes in the U.S., with six of the top 10 spots.
But to be more specific, Southern California owns the rankings.
The Newport Coast – the area between Corona del Mar and Laguna Beach – finished in first place, with a median list price of $12.5 million, according to Realtor.com.
Beverly Hills was in second place at $10.5 million, followed by Bel-Air at $7.95 million.
The other California cities in the top 10:
- Montecito (just south of Santa Barbara): $6.5 million.
- Rancho Santa Fe (north of San Diego): $6 million
- Newport Beach: $6 million
Worth noting: Home prices in ZIP codes are a bit different than citywide figures. Several Bay Area communities – like Corte Madera and Hillsborough – boast multimillion-dollar homes as well.
