California’s high housing costs are no secret. But just how high homes cost in relation to incomes may surprise even the most experienced real estate professionals.

Six of the nation’s ten least affordable housing markets are in California. In 2017, the average share of income spent on a new mortgage was:

  • 46% in San Jose;
  • 42% in Los Angeles;
  • 41% in San Francisco;
  • 35% in San Diego;
  • 26% in Sacramento; and
  • 25% in Riverside, according to Zillow.

The remaining least affordable places to buy a home were in other expensive coastal cities like Boston and New York on the east coast and Seattle and Portland on the west coast.

In contrast, the nation’s most affordable areas to live are all found in land-locked states like Ohio, Tennessee and Oklahoma. The average homebuyer in Oklahoma City, where it’s most affordable to buy, spent less than 11% of their income on a mortgage payment in 2017.

The top four cities in this list all see new homebuyers spending more than 31% of their income on mortgages, the recommended limit set by financial professionals. Of course, these are simply median figures and don’t apply to any individual situation. In reality, the majority of new homebuyers in these areas likely qualify at the recommended level. After all, it’s difficult to find a lender willing to qualify a homebuyer above the standard 31% front-end/housing debt-to-income ratio (DTI) without jumping through some extra hoops.

So, what these figures really show us is the average would-be homebuyer simply cannot qualify to buy at current home prices and interest rates.

Prices have to give

California is a desirable place to live, with its pleasant climate, cultural amenities and strong job industries. There is no shortage of individuals who want to live in California, and buy homes here.

But the number one thing holding back residents from buying is home prices.

Home prices in California are 11% higher than a year earlier in the low tier as of February 2018. This tier of homes, priced below $590,000 as of February, is where most first-time homebuyers find their entry into the housing market.

But this tier of homes is also where inventory is lowest, meaning the demand for low-tier homes has grown much faster than homes have become available for purchase. The result: rapid price growth.

In order for the housing market to realize its full potential, more housing will need to be added to California’s for-sale inventory. This process is already underway, as several new pieces of legislation aimed at more construction of low- and mid-tier housing passed at the end of 2017.

Look to the end of 2018 and into 2019 for the effects of the new legislation to make their mark on the construction landscape.

In the meantime, mortgage interest rates are inching higher in 2018, reducing buyer purchasing power and making it even more difficult for homebuyers to qualify for today’s elevated home prices. Discouraged, more homebuyers will begin to drop out of the market, slowing sales and eventually pulling back home prices.

More construction and higher interest rates will combine to slow home price increases around 2019. This will be a year for homebuyers to make their way back into the market, leading up to the next boom in home sales, expected around 2021.