Across the nation, the average amount of a homebuyer’s income they can expect to spend on a mortgage payment is well below the historical average. This translates to higher buyer purchasing power. This increased purchasing power takes into account local:
- home prices; and
- mortgage interest rates.
While interest rates are pretty similar across the U.S., incomes and home prices vary greatly from city to city, and even within cities. Since home prices are consistently higher than average in California, it likely comes as no surprise that California bucks this national trend.
In a recent analysis of buyer purchasing power by metropolitan area, Zillow found buyer purchasing power to be well above the historical average in each major U.S. metro except for in:
- San Jose, where a homebuyer with an average income can expect to spend 43% of their income on a mortgage payment;
- San Francisco, where a homebuyer with an average income can expect to spend 41% of their income on a mortgage payment;
- Los Angeles, where a homebuyer with an average income can expect to spend 40% of their income on a mortgage payment; and
- Miami, Florida, which — while higher than its historical average — has an expected income contribution of only 21% to an average mortgage payment.
San Diego is roughly level with the historical average, where a homebuyer with an average income can expect to spend 33% of their income on a mortgage payment.
Even worse, the average share of income California renters can expect to allocate to shelter is much higher, with renters in:
- Los Angeles spending 48% of their income on rent;
- San Francisco spending 46% of their income on rent;
- San Jose spending 41% of their income on rent; and
- San Diego spending 40% of their income on rent.
When renters spend such a large share of the paycheck on rent, less is left over for saving (such as for a down payment). This makes young would-be homebuyers delay homeownership for years, evidenced by Generation Y’s (Gen Y’s) belated entry into homeownership.
What does this mean for the future of California’s housing market?
Currently, California is one of the best places for high social mobility. That is, children born into low-income families have the best chance of making it into the middle- or upper-class in the Golden State, according to Zillow. However, since housing costs have increased disproportionate to incomes, the opportunities for low-income renters to move up are eroding.
Zillow’s report recommends low-income families seeking social mobility are to move to Midwest states, where social mobility is also high but housing costs are low (compared to California).
But for those of us still enraptured by the great state of California and not willing pull up roots, the solution is to bring both California rents and home prices in line with incomes. Building more homes in California’s heavily populated coastal areas will be a start. Construction has lagged behind historical averages since 1990 — and it won’t catch up to needed levels until zoning restrictions are altered to suit the demands of our rising population.
In the meantime, renters and homeowners will continue to feel the squeeze of stagnant incomes and rising housing costs. If the trend continues, expect California’s homeownership rate and home sales volume to linger below average for many more years to come.