Only in California
California was once dubbed the land of "hot tubs and alfalfa spouts." That may or may not be true, but there are a lot of other ways we differ from the rest of the country - heck, the rest of the world! In real estate, we own most of the records for high appreciation rates and lack of affordability. Our state income is high, but the cost of the housing is even higher. How high? Consider these stories.
A garage burned down in the Newport Coast area. The fire department said that the dollar value of the destruction of the garage and the three cars in it was $500,000. Even if the three cars were brand-new Mercedes Benz's at $75,000 each, that's still $275,000 for the garage. Must have been some garage!
In Santa Barbara, long known as one of the most expensive markets and most certainly the most conservative towns in the state, local agencies were trying to create an affordable housing project. At a recent meeting, they argued about the income limit and finally said that if you had income of more than $160,000 per year, you wouldn’t qualify to buy in this project. I'm not sure what you have to make to get an average home there.
The California Association of Realtors has kept statistics on housing affordability in the state for years. Over the years, their data became increasingly meaningless because of faulty assumptions. They assumed that the average first-time homebuyer made a 20% down payment and devoted 30% of his income to housing expenses. They also assumed that buyers would buy a home that had a value of 85% of the value of the average home. That’s probably a better assumption.
But these numbers are really antiquated and have not been relevant for 20 years. It’s about time they made a change. Today, almost no one waits until he has 20% to buy a home. Most put down 5% or 10%, but about 40% of homebuyers don't put anything down at all.
As important, another out-dated assumption CAR used was that people wouldn’t get approved for a loan if their ratio of income-to-housing expense was over 30%. That means if someone had income of $5,000 per month, the maximum they would spend for housing was $1,500 per month. For the last 5 years, the mortgage industry has routinely been approving loans where the ratios were 50%. CAR has gotten around to modernizing their assumptions, assuming a 10% down payment and more liberal underwriting.
Whatever criteria someone uses to calculate housing affordability, this is a pretty grim picture.
Of course, one problem is that the homebuilders are generally building homes that sell for more than the average of the area, not less. These are not the kind of houses average buyers and below can afford. There are several reasons for this. First, if they can sell $500,000 homes, they’d rather do that than sell $250,000 homes. (I suppose if they were smart, they’d try to do both!)
The other reason, especially here in California, is that local governments may assess “developer fees” of up to $50,000 per home to pay for infrastructure, such as schools and roads. How do you build affordable homes if the government starts out making it difficult? Basically, the building industry has just gone along with that, feeling that they have no choice. And when the buyers line up and accept those prices, who are they to argue?
But you could argue that the solution to housing affordability is to build new homes that average buyers CAN afford. That isn’t such a strange concept, is it? But to do that, you have to have a different approach than is currently the case, starting with local government and its approach to taxation. It would be better for these homebuyers if someone was building with them in mind.
To balance the goofiness of California, not only is there a more rational market in many areas of the country, but I have heard several stories of small towns in mid-America where they have created new jobs but have not yet been able to create housing for the people those jobs attract. To see how it looks nationally, check out this map . I hope you feel better.
A high credit score often equals savings on loans and credit cards.
/life of loan
/life of loan