The California Dream of buying a house or maybe a beachfront condo comes with a big dose of reality – homes here are pricey.
Fewer than one of every five households could afford to buy the median-priced home during the second quarter, according to the California Association of Realtors. The figure drops into the low teens for some markets, such as Orange County.
Near-record home prices – almost $900,000 in July – and the highest mortgage rates in two decades make buying a home tough.
But what if the only challenge was the price because mortgages were available with zero interest? You know, free money. Yep, a dream scenario.
But what if?
How much more affordable – and possible — would be buying a home in California?
Principal-only payments don’t eliminate home-buying challenges
Well, Ziffy.ai crunched home price data based on a 20% down payment and determined that (drum roll, please) … a large majority of households in several regions of the state would still not be able to buy a home with zero-interest mortgages. (The findings are based on limiting mortgage payments to 30% of household income, a longstanding rule of thumb by financial advisers and lenders.)
In fact, seven of the 10 least-affordable housing markets nationwide – even with zero interest mortgages – were in California, despite the state’s residents enjoying some of the best-paying jobs and living in the fourth-largest economy in the world.
The difference between the monthly mortgage and what a household could afford – again, even with interest-free money – was as much as $2,400 in Santa Barbara County, which includes the multimillion-dollar homes of Santa Barbara and Montecito, but also the more affordable subdivisions in Santa Maria.
Households in Salinas, Santa Cruz and Napa were facing a gap of at least $1,900, while Los Angeles buyers would face a slightly less shortfall of $1,500. San Jose had the smallest gap among the 10 least affordable cities in the nation at $800 (see table, below).
Santa Barbara has the largest gap between zero-interest mortgage payments and what the average household can afford in the U.S. ADOBE STOCK
“A zero-interest test separates markets where lower rates could restore affordability from those where they cannot under the model,” said Debjit Saha, cofounder and chief technology officer of Ziffy.ai. “Once principal repayment and recurring costs exceed the household budget, the problem is no longer the mortgage rate by itself.”
A handful of cities in California, including Fresno, Riverside and Sacramento, become affordable with a mortgage rate of 1% or lower, according to Ziify.ai.
Three of every four housing markets are unaffordable even with 5% mortgage rates
Nationwide, 42 cities were not affordable to the average household even with zero-interest (or principal-only) mortgages. Another 110 cities would need rates to drop below 3%.
Only 48 of the 364 cities in the report were considered affordable at the 6.49% mortgage rate used by the study.
None of the 24 largest metros in California were affordable at the 6.49% rate.
Here is perhaps the most sobering figure, at least from a national perspective – only 90 of the 364 markets surveyed would be affordable with a 5% mortgage rate. The American Dream has become hard to reach for many, from the Bay Area to Boston and many places in between.
The affordability challenge won’t change anytime soon, especially with higher mortgage rates and prices.
Mortgage rates have jumped a quarter point since the survey was published in mid-July. Fannie Mae expects mortgage rates to reach 6.8% and remain at that level through at least the first half of 2027.
Yep, stop dreaming.
| City | Median price | Monthly payment with zero interest | What households can afford |
|---|---|---|---|
| Santa Barbara | $1.75 million | $6,212 | $3,822 |
| Salinas | $1.24 million | $4,390 | $2,332 |
| Santa Cruz | $1.29 million | $4,600 | $2,697 |
| Napa | $1.4 million | $4,967 | $3,069 |
| Los Angeles | $1.1 million | $3,911 | $2,410 |
| San Luis Obispo | $1.1 million | $3,822 | $2,518 |
| San Jose | $1.39 million | $4,924 | $4,120 |
Important note: Monthly mortgage is based on a 20% down payment. Affordability is based on 30% of household income per county.
Source: Ziffy.ai
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