Here’s a sobering fact: Fewer than 30% of potential California homebuyers will be able to afford a median-priced house in 2017, according to the California Association of Realtors. For the sake of comparison, that figure was above 50% during the 2011-12 market!
The association predicts that the California housing market will post only modest gains this year. Existing home sales, comprising nearly 70% of the market, are projected to increase 1.4 percent to approximately 413,000 transactions. That contrasts with the 0.4 percent drop in 2016. The average house price should rise 4.3 percent to $525,600, the smallest increase in six years. But tight supplies will also cause the lowest housing affordability in six years.
Coupled with rising prices, median three-person household incomes across all income tiers have either stagnated or dropped. California residents are now forced to be wealthier to even qualify for a mortgage.
It All Begins with Starter Homes
How serious is this affordability issue? A recent report in First Tuesday Journal indicates that nine out of the ten worst metropolitan areas for first-time homebuyers are in California. Some areas are requiring as much as 110% of a homebuyer’s income to support a 30-year fixed-rate mortgage.
Why is this important? Starter homes play a critical role in the transition into homeownership. First-time buyers purchase these homes hoping to build up equity and trade up in the future to a larger family-type home. Without that initial foothold, they are unable to leverage themselves into their ideal property. The vehicle they would use for future housing is missing.
So, where do California’s house hunters look to find properties that fit into their budgets?
You’ll Probably Find the Fewest Gems in San Francisco and the Bay Area
Californians know it’s difficult to buy a home in the San Francisco Bay Area. As the state’s hottest housing market, it is saddled with low inventory and high prices. Santa Rosa has one of the tightest housing markets in the area. According to a report from Realtor.com, only 0.4 percent of the city’s housing stock is for sale. That puts it up there with Seattle as having the biggest housing shortage in the entire country.
Even though San Francisco has seen an increase in inventory lately, the bay area remains plagued by falling inventory and rising prices. Bay Area median prices are forecast to increase by more than 6 percent, rising to $833,600 in 2017.
Southern California is a Better Bet
Good news is at a premium in the California housing market. But that doesn’t mean there isn’t any. For example, Southern California’s median home price fell 3.2% in January and is expected to rise only 3.2 percent to $501,500 by the end of 2017.
Sales in the region increased by 5.4 % to reach the highest level for a January in four years. Experts attribute the jump, which mirrored the national housing market, to the recent mortgage rate increases. They believe buyers were quickly closing deals to avoid future rate hikes. Recently, the interest rate on a 30-year fixed mortgage averaged 3.86%, according to mortgage bankrate.com. That was down from 4.16% in January.
Despite the recent strong sales in Southern California, questions remain over how long prices can continue to rise. Many believe there are signs that they have begun to peak.
Don’t Leave Just Yet
So, there it is. You’re living in a state with high housing prices and limited availability. Many California residents have come to realize that if they want to live where houses are available, and the cost of living is within their financial means, they need to leave the state. However, California has some irresistible qualities that you can’t find anywhere else. If you’re in love with California, like many people are, and determined to make California your home, here are some suggestions for finding the house of your dreams in a nightmare housing market:
- Avoid areas that have name recognition and reputation. Those things add up to high prices and low availability. San Francisco is a case in point. A beautiful city with iconic landmarks, independently owned businesses, and cutting-edge residents, San Francisco has long been a magnet for those who follow the beat of their own drums. As a result, apartments and houses are all but impossible to find. And even if you do, you will pay some of the highest prices and rents in California.
- Identify what you like about a particular area, and look for something comparable. Just about every area will have a sister area that offers similar amenities, along with affordable housing, good schools, and the type of lifestyle you’re seeking. Look for a neighborhood that has the same feel as your first choice but has a lower median price.
- Be sure you look next door. You don’t have to choose between a suburb close to the city and one on its outer rings, or a neighborhood with train access to work downtown and one that has no public transportation options. There can be a huge price difference between two cities located right next to each other.
Check out these sister cities, which offer similar homes for very different prices, and get an idea of how much you can save by sacrificing that specific zip code.
A Tale of Two Cities
Consider the case of two cities in the Bay Area. If you choose a home in the popular city of Palo Alto, where the median list price is over $1.5 million, you’ll pay over $4 million for a 3,400-square-foot house with five bedrooms and five baths.
Move just a little north to San Mateo, which is close to San Francisco, and the difference is astounding. Although it doesn’t have the same prestige, San Mateo does have excellent schools and easy access to trains into the city. And for the same house, you’ll pay $1.4 million and get a view of the canyons.
If at First You Don’t Succeed, Talk to a Realtor
You might become overwhelmed trying to find that gem in the rising California housing market. If you do, hire a professional. Realtors have all the tools to help you find what you’re looking for.