Who qualifies to sell a home in 2024?
Lenders typically extend mortgages to households when the mortgage payments do not exceed 31% of their monthly income. When additional debt payments are considered — including auto loans, student loan debt and credit card debt — mortgage lenders keep the household’s total debt-to-income (DTI) ratio to a maximum of 43%.
But here in California, seller pricing today is literally frozen at their mid-2022 level as set by cheap mortgage rates of 2021. It’s impossible for a median-income household to meet these price levels with lender DTI requirements.
The share of income a median-income household will spend on a home in 2024 is:
- 72% in Los Angeles;
- 68% in San Jose;
- 67% in San Diego;
- 61% in San Francisco;
- 50% in Riverside;
- 45% in Sacramento;
- 40% in Fresno; and
- 37% in Bakersfield, according to Zillow.
The burden on borrowing has climbed rapidly since 2021, conflicted by a 44% increase in California home prices since 2019. Meanwhile, California household income has also increased since 2019 — but only by 22%, according to the U.S. Census.
The result? Even in the metros where housing costs are in the low- to mid-tier price ranges, median-income households simply cannot meet seller pricing.
Editor’s note — For its analysis, Zillow assumes a household:
- purchases a median-priced home for each metro area in January 2024;
- uses a 10% down payment;
- pays a 6.61% mortgage interest rate; and
- earns the median income for each metro area.
Related article:
Despite Q4 2023 FRM rate slippage, Buyer Purchasing Power remains negative
Buyer purchasing power sets their price
Fundamentally, a homebuyer’s borrowing capacity sets what they can pay for a home with a zero-to-15% down payment.
When the calculus is lopsided, it’s the seller’s price that must give to get inventory moving again. All other factors in the equation — the buyer’s income and savings, and mortgage interest rates — are slower to change than seller pricing.
But in 2022-2023, a lack of willing sellers produced a low level of new listing inventory. Thus, sellers found they did not need to drop prices to meet reduced buyer purchasing power. And buyers as well as homeowners still have jobs producing a status quo standoff.
While inventory continues to taper into mid-2024, this does not reflect more buyers drawing down MLS listings. Rather, today’s low level of inventory is a sign of sellers’ reluctance to list — they have jobs and are not being asked to relocate. As evidence, the number of new listings to hit the market in 2023 ranges from 32%-36% below a year earlier across the state.
Related article:
California’s for sale inventory: a symptom of seller reluctance in 2023
Looking ahead, prices will need to drop to meet the level facilitated by buyer purchasing power — it’s a matter of when. A national stock market crash, an actual decline in the employed labor force in California, or present unknowns will trigger price movement.
Home prices will return to 2019 levels only once the Fed gets serious about actually ending excess consumer inflation. The inflation fight is yet to match inflation pressures. When it does — at the Fed — inflation reduction will bring on the inevitable reduction in jobs — income and spending — which fuels inflation, not expected before late 2024 at this point.
