Only 36% of Buyers Can Afford a Home in California, Lowest Share Since 2008

Posted on August 12th, 2013

As I warned over the past few weeks, affordability is becoming a major issue for the overheated housing market.

And we’re finally beginning to see a few pieces of data that back up these concerns.

This morning, the California Association of Realtors released a troubling report about housing affordability in the Golden State.

The group noted that only 36% of home buyers could afford a median-priced, single-family home in California during the second quarter, a steep decline from both the first quarter of 2013 and the second quarter of last year.

During the first quarter, 44% could still afford to purchase a median-priced home, and a year ago that figure was a much healthier 51%.

The current reading marks the first time their Traditional Housing Affordability Index (HAI) has been below 40% since the third quarter of 2008, back when the housing crisis was in full swing after an intense run-up.

Affordability was lowest in San Francisco, with only 17% of would-be buyers actually able to afford a home purchase where the median was a hefty $902,420.

Conversely, 69% could afford to buy a home in once hard-hit San Bernardino County, where the median price was just $169,760 last quarter.

Making matters even worse is the fact that the data relies on much lower interest rates and home prices. Let me explain.

To come up with the affordability numbers, CAR assumed a prospective buyer would need to make $79,910 annually in order to purchase a $415,770 home.

With 20% down, the monthly housing payment is around $2,000, with taxes and insurance included, using an effective composite interest rate of 3.64%.

Unfortunately, the average rate on a 30-year fixed mortgage is now closer to 4.5%, so that would push the mortgage payment up another $150 or so.

At the same time, asking prices are higher, so the buyer would be stuck with a larger loan amount and a higher tax payment.

In other words, I wouldn’t be surprised if less than 30% of buyers will be able to afford a home in California going forward.

Does this mean we’re going to repeat history in just five short years?

Things Are Different, But Risks Remain


This isn’t the same housing market we saw during the previous boom. For one, inventory is still highly constrained.

During the bubble years, it wasn’t difficult to find a home to buy. The home builders were going nuts buying land and throwing up new communities seemingly overnight, and plenty of people could sell because there weren’t any negative equity issues yet.

[Five Reasons Why Housing Inventory Will Rise]

Today, there are still very few properties on the market, though that too is beginning to shift as would-be sellers see a golden opportunity presenting itself.

At the same time, mortgage lending standards are still quite rigid, with high-risk products (option arms, cash out refis, limited documentation loans) still largely absent from the market.

In other words, not just anyone can qualify for a mortgage like they could during the lead up to the great bubble burst.

Finally, many of the mortgages held by homeowners these days are quite superior to those held before things went so very wrong.

Most loans today are fixed at very low rates, though there are plenty of homeowners with high-LTV loans, thanks to programs like HARP 2.0.

But all in all, the credit quality of mortgages these days is pretty darn solid, even if home prices do pull back.

It’ll definitely be interesting to see how the market reacts to affordability concerns. Will more stated income and high-LTV stuff return, or will lenders be more prudent this time around?

One thing is for sure; the next year or two will be very telling for the housing market going forward.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


A Quick Guide to Buying Land

Whether you crave the seclusion of country acres or a quaint residential lot in a subdivision, buying a piece of land is a bit different than buying a house.

Whether you’re buying land as an investment or for residential use, ask yourself the following questions before making any decisions.

What are the zoning rules and long-term plans?

Nothing bulldozes plans like zoning issues, so before you buy land, pay a visit to the county zoning and planning office.

Look at the long-range general use plan for the area surrounding the lot, which will outline permissible use of the land and what the future holds for the immediate area.

If you intend to build a home, look for things such as a future plans for a landfill or power plant in the area that may affect your home’s value and your family’s lifestyle.

Have you ever driven down a major highway and wondered why anyone would build a home so close to it? Chances are the house was built before the highway, and the homeowners had no idea it was in their future.

If you can’t decipher the general use plan enough to tell whether road improvements or highways are planned, ask one of the county planners for assistance.

Are there deed restrictions?

If a homeowners association governs the land, you’ll need to follow their restrictions in addition to whatever zoning rules apply. Read the Covenants, Conditions and Restrictions (CC&Rs) carefully. These documents outline what you can and can’t do with your property. If you have any questions about the CC&Rs, consult your attorney, as it’s vital that you understand everything in them.

Are you buying land with easy access?

How will you get to the property? If it’s on a main public road, you’ll likely have no problem.

Many times, especially in rural areas, the only access to a piece of land is over someone else’s property. Without what is known as an “easement,” your property is considered landlocked. Ensure that a right-of-way easement is granted, in writing, before you agree to buy the land.

Additionally, if there is no existing road to the property, you’ll need to factor the cost of building one into the purchase price.

Are there utilities?

In larger planned developments, the builder generally brings utilities, such as water, natural gas and electricity, to the lots. With country property, however, buyers may need to secure the utilities and sewage system, which sometimes requires taking on the cost of drilling a well or installing a septic system.

Get bids on any work that needs to be performed before you sign a purchase agreement, or have your real estate agent make your agreement contingent upon your acceptance of the bids.

How will you finance your land purchase?

If you’re buying raw land — without any utilities or streets — the lender will generally ask for a 20% to 50% down payment, and you will likely have a higher interest rate.

Not all lenders handle vacant land loans, so it may be a bit of a challenge to finance your purchase. Many sellers offer financing. If not, try local banks or credit unions.

One of the biggest mistakes residential land buyers make is failing to consider the cost of developing the land when applying for a loan. So get all the bids required in advance of seeing a lender.


Want To Build Your Own House? The Pros, Cons, and Costs

Building a brand-new home may sound like a dream come true. You get to choose the ideal layout for your family’s needs, and have a say in each and every design element. However, the process may also be daunting if you’ve never done it before.

To help you through it, we’ve created this Guide To Building Your Own Home. It will provide all the detailed information you need at each stage of the home-building process so that everything goes as smoothly as possible.

In this first article, we’ll offer a glimpse into the pros and cons of building a house, including how much it costs, how long it takes, how it’s financed, and much more that will help you decide if this option is right for you.

Pro: You can get exactly what you want

Building a home is a popular option these days. Construction on single-family homes was up 10% in November 2020 compared with the previous year, according to the National Association of Home Builders. And, it makes sense: When you build your own home, you get exactly what you want: an in-law suite for when the grandparents visit, a decked-out office for working from home, midcentury modern style, and more. Anything is possible.

“You get a blank slate,” says Marc Rousso, CEO of JayMarc Homes in Seattle. “The fun part about building a custom home is that it can be whatever you want.”

That might sound overwhelming, so Rousso suggests starting with a vision board. Check out websites like Houzz or Pinterest, and drive around snapping photos of homes you like. Then think through how big you want the home to be, how many bedrooms and bathrooms you need, and the bonus spaces you want to live as comfortably as possible.

The best way to make sure you get what you want (and that it fits within your budget): Hire a great builder from the start. This crucial step sets the best possible foundation (in every sense of the word) for your new home. Builders help you select others on your team (such as an architect, interior designer, and landscaper) and serve as your point person throughout the process.

Not sure how find a homebuilder? NAHB offers an online directory, and its members are committed to ongoing education and ethical standards. Hiring builders who have been in business for several years is also a plus, as they’ve proven they can weather both the highs and lows of economic cycles.

Pro: You can build just about anywhere you want

Have you always dreamed of living by the water or having a mountain view? Or maybe you want no neighbors in sight? Building a home lets you set up your residence just about anywhere you want.

Talk to your builder before making a land purchase, though, Rousso urges. The builder will need to do a feasibility study on the land to make sure it’s a suitable place for the home you want to build.

“We’ve talked more people out of buying land than into buying land, because there are so many pitfalls,” he explains.

Builders help make sure the land is zoned for residential development and identify any issues with building on the site, such as connecting to utilities or developing the land before building can start.

Another thing to note: Land development can be costly. HomeAdvisor estimates it to be $1.30 to $2 per square foot of land, including surveying, drainage plans, utility and septic mapping, permits, soil testing, land clearing, excavation, and demolishing any existing structures.

Pro: New homes typically come with less maintenance

An obvious advantage of building a home is that everything is brand-new. That means maintenance and repairs will be minimal or even nonexistent for a while, saving you plenty of headaches and thousands of dollars a year. According to HomeAdvisor, in 2020, homeowners spent an average of about $3,200 on home maintenance.

Nonetheless, a new house isn’t entirely maintenance-free. You’ll probably still need to do yardwork to keep up your newly installed landscaping. And you may want to pay for some preventive upkeep, such as a maintenance contract on your HVAC system, costing $150 to $500 a year. But that could save you money in the long run.


Watch: How Much a Home Inspection Costs—and Why You Need One


Con: Building usually costs more than buying an existing home

Building a house is an expensive enterprise, and typically costs more than buying a preexisting home. As such, you’ll need to have some in-depth discussions with your builder on what you want, and whether it’s affordable for you.

“A builder can help guide the design process starting with schematic design to give the prospective client an idea of the budget,” says Tim Benkowski, senior project manager at Balsitis Contracting in Lake Geneva, WI. “That way, design revisions can be made early without the owner falling in love with a home design only to find out they need to cut out their favorite parts or reduce the project scope.”

Several factors determine how much your newly constructed home will cost: location, size, complexity, and design elements.

The NAHB estimates that the median price of constructing a single-family home is $289,415, or $103 per square foot. Labor typically constitutes about 40% of the cost, followed by permits, design fees, and materials. Here’s more on how much it costs to build a house.

Con: Getting a construction loan can be complicated

To finance building a home, you’ll need a construction loan, which is a little more involved than getting a traditional mortgage to buy a preexisting house, says Steve Kaminski, head of residential lending at TD Bank.

For starters, you’ll likely need a 20% down payment since construction loans are considered higher-risk. Along with the usual financial documents needed for your loan application, you need to provide project plans, costs, and land value. You also need a signed contract or purchase contract with the project’s plans, specs, and budget details, and a timeline for the construction.

“The lender is not only evaluating the borrower, but also the project plans and oftentimes the builder to ensure they will be financially solvent throughout construction,” Kaminski explains.

Construction loans are usually shorter-term, covering just the duration of the build, and may have higher interest rates, usually about 1% higher than conventional mortgages, according to the Consumer Financial Protection Bureau.

Once the home is completed, you can pay off the balance or convert the loan to a conventional mortgage. The interest rate and the type and terms of the mortgage will depend on your credit history and lender.

When shopping around for a mortgage for a new home build, Kaminski urges borrowers to go with a lender experienced in working with construction loans.

Con: Building a home takes a while

Generally, it takes a bare minimum of three months to build a simple house, and it can take much longer. But it’s a “sliding scale,” says Benkowski. “A 2,500-square-foot and under [home] can typically be completed in seven to nine months with proper planning. A 7,500-square-foot home and up would likely take 12 to 30 months.”

Planning as much as you can will keep the project on track. Still, delays do happen. Weather is the biggest one, with temperature shifts and rain or snow postponing work. Your own choices could also be to blame. If you’re taking too long to choose your favorite flooring or windows, it could make it all take a little longer.

Here’s more on how long it takes to build a house.

In the next installments, we’ll cover how to buy land, design tips, the ins and outs of mortgages for home construction, and lots more.