Today’s homebuyers earn more money than current homeowners — and in some areas of California, the difference is profound.
That’s because, as home prices increased rapidly throughout 2012-2017, homebuyers have needed to earn higher incomes in order to qualify to buy the same type of home. As the years have gone by, this results in buyers needing to pay more to get into the same neighborhood compared to their predecessors.
Nationally, the average new homebuyer earned $79,900 in 2017, 6.5% higher than those who already owned their home, who had an average income of $75,000. In California, new homebuyers in 2017 earned:
- in San Jose, 33% more than current owners;
- in San Francisco, 20% more than current owners;
- in San Diego, 15% more than current owners;
- in Los Angeles, 13% more than current owners;
- in Sacramento 9% more than current owners; and
- in Riverside, 4% more than current owners, according to Zillow.
In each of California’s major metro areas — excluding Riverside — the gap between homebuyers and current owners is well above the national average. What’s more, new homebuyers need to contend not just with higher mortgage payments, but higher tax payments as well.
Prop 13: the welcome stranger law
Unlike other states, California homeowners pay property taxes based on the assessed value of their home in the year of purchase, plus a nominal inflation factor of no more than 2%. This was enacted by Proposition (Prop) 13.
The effect is that new homebuyers pay significantly higher tax bills than their homeowning neighbors. Since property taxes are a necessary part of sustaining healthy and desirable communities, these new owners are effectively subsidizing the tax bills of those who are paying much less (hence why it’s sometimes called the “welcome stranger law”).
Of course, proponents of Prop 13 will argue, the longer today’s new homebuyers own their homes, the more benefits they will reap in the future. But by rewarding sedentary homeownership, Prop 13 discourages people from selling and buying replacement property — the very lifeblood of the real estate industry.
Worse, local governments are forced to compensate for the huge shortfalls in property taxes paid by long-term homeowners, detrimental to all residents. A study by the Tax Foundation found that to make up for Prop 13, the state and local governments have needed to increase:
- income tax rates;
- sales taxes; and
- business taxes.
Prop 13 proponents say that it has helped senior citizens on fixed incomes stay in their homes due to the predictable property taxes, and this may be true. But any number of laws can be put in place to protect this type of homeowner with lower tax rates. For example, the law could cover only those of a certain age, or in certain income brackets, still protecting vulnerable populations while ensuring a more equitable property tax distribution — and more funds available for public services.
But Prop 13 won’t change anytime soon. Potential changes to Prop 13 have made it onto the ballot several times over the years, but they continue to fail.
Once people get used to having a tax break, they won’t vote to eliminate it, and even altering it will be a tough sell. Until the unexpected happens and Prop 13 is reformed, the burden will continue to fall on new homebuyers and communities, holding back sales and damaging California’s housing industry.