Can California solve its worsening affordability crisis?
High prices are nothing new in the Golden State, but an increasingly small fraction of residents can afford a home. Is a turnaround in sight?
- The state continues to grapple with low inventory and ultra-high home prices, despite prices falling 15% from their May 2022 peak.
- A California household would need an annual income of more than $200,000 to afford a median-priced house — something that applies to only 17% of households.
- Affordability challenges have been a decades-long problem in the Golden State; most other states have yet to see similar price-to-income ratios.
For many Californians, the dream of homeownership may never become a reality.
Buyers have been increasingly priced out of the market, particularly in coastal cities, and the latest affordability figures show that the situation has only worsened in the past year. Is California's affordability crisis a bellwether for the rest of the country?
At the end of 2022, only 17% of California households could afford a median-priced home of $790,020, according to a recent report from the California Association of Realtors (CAR). That's down from 25% at the end of 2021.
Broken down by ethnicity, the affordability index is even lower for Black (12%) and Hispanic/Latino (12%) households, according to CAR.
That's because the income needed to buy a home in California is staggering compared to many other parts of the U.S. For a median-priced home purchase to be considered affordable, the minimum annual household income required would be $201,200. If buyers are able to come up with 20% down, CAR estimates a monthly mortgage payment, including property taxes, of $5,030.
Other than Hawaii, where the median home price is over $1 million, no other state approaches California's high housing costs, though several are unaffordable, including Massachusetts, Colorado, Washington state and the District of Columbia with median prices all above $600,000. A handful of states, primarily in the South, have median prices under $200,000. The U.S. median home price at the end of 2022 was $467,700.
Decades of high prices
Home prices in California are very high, but that isn't new — prices in the state started breaking away from the national average in the 1980s and 1990s.
Between 2004-2007, a big jump in demand combined with low supply dropped the state's affordability index down to the 12-13% range, said Oscar Wei, deputy chief economist for CAR.
The past few years have seen affordability plummet again, a situation exacerbated by elevated interest rates. Aside from the housing boom years that preceded the Great Recession, Wei hasn't seen the affordability index this low for California.
The Golden State is a unique place to live, and it's always had an affordability issue, said Ryan Lundquist, an appraiser in Sacramento who analyzes the housing market. In his research going back to the 1970s and 1980s, he found that concerns about affordability were similar to those being expressed today.
"So at one level we have to concede that the market is different here," Lundquist said. "But there's also up-and-down market cycles. So the idea that from here on out prices will only go up, that seems disconnected from history."
Is California an outlier?
California is the most populous state with big hubs of wealth, from Silicon Valley to Hollywood. Do those factors explain the state's extreme lack of affordability?
The root causes are many, but the most recent issue is one of simple economics: High demand and lack of supply have driven up home prices. The state is still recovering from the surge of demand when interest rates were historically low, wiping out what little inventory was available.
One hopeful sign for would-be buyers is that prices have come down significantly since the market slowdown began last summer. Even with a median home price approaching $800,000, Wei said that's about 15% lower than the peak last May. He predicts prices may hit bottom in the next couple of months before starting to climb again.
Although California has seen elevated out-migration rates in recent years, the state still has around 39 million residents and the largest share of millennials who are hitting their prime homebuying years.
Prices may be falling, but that doesn't mean all those potential buyers will find homes, as inventory remains very low. Lundquist said high land prices, permit fees and labor and supply shortages have made it difficult to add much inventory. Plus, builders shifted gears in 2021, focusing more on multifamily construction because the rental market was particularly strong.
Wei said many communities have made plans to add more housing units, but there have been setbacks, including pandemic-related disruptions and pushback from neighborhoods resistant to new housing.
"It requires a concerted effort," Wei said, adding that he expects more single family homes to be built in 2024, but not at a rate that meets demand.
State-funded efforts to promote homeownership successful, but limited
California recently tried to ease the affordability crunch through its Dream For All down payment program for first-time homebuyers. The program helps cover the down payment, but the loan would be repaid once the house was sold, plus a share of the appreciation.
The program, which launched in late March, was wildly popular — the allotted funding ran out in just 11 days, and the program was paused on April 6. According to a report by KQED, about $288 million in initial funding was provided to 2,564 homebuyers.
While the program didn't solve the bigger issue of affordability, Lundquist said it did help get some people onto the path of homeownership.
Wei agreed, adding that it served an immediate need while the state waits for more homes to be built.
"We can wait for supply to continue to improve, but to be honest it's going to take some time," Wei said. "Some people who want to buy a home may not be able to wait five years, 10 years before they get into homeownership."