California's Affordability Crisis

Practitioners get creative to help first-time buyers in a state where median-priced homes are unaffordable for most households.

June 1, 2005

California homebuyers trying to cope with the highest real estate prices in the nation are increasingly being priced out of the market or are forced to move further away from where they really want to live.

The state has undergone such a spectacular surge in housing values that it has plunged into the worst affordability doldrums since 1989, when Ronald Reagan was in the last year of his presidency, according to CALIFORNIA ASSOCIATION OF REALTORS®’ annual housing affordability index.

The crisis has forced practitioners to get creative in finding solutions to help their clients overcome ever-spiraling home prices.

In the last five years, home prices in the Golden State have more than doubled to a median $450,990 in 2004 from $217,510 in 1999, according to CAR. Seven of the 10 most expensive housing markets in the nation last year were located in California, according to Coldwell Banker’s annual Home Price Comparison Index.

All of the California markets in the Coldwell Banker survey were along the coast, with the fashionable enclave of La Jolla in the spotlight as the most expensive city in the country for the second consecutive year. La Jolla buyers paid an average $1.7 million for their swank address, Coldwell Banker says. (The La Jolla price tag for a 2,200-square-foot home is in sharp contrast to the country’s most affordable city—Minot, N.D.—where $130,300 purchased a similar-size home.)

For California as a whole, only 18 percent of its residents in March could afford to purchase the median-priced $495,400 home, down 3 percent from a year earlier, and buyers had to earn $115,910 annually to qualify for an 80 percent mortgage loan. A regional breakdown showed the pain was harshest for buyers in Santa Barbara County and the Northern California wine country, where only 9 percent could afford homes costing the local median $595,830 and $596,970, respectively. The easiest region in which to purchase was in the High Desert area, where 36 percent of residents could afford a median $264,320 home.

Pain Across the Board

There are no signs of relief to price run-ups this year. CAR predicts home prices will balloon another 15 percent in 2005, thanks to low mortgage-interest rates, an awakening economy, and a severe shortage of housing in the state.

The flip side of the hot real estate market is that many buyers are scuffling just to get in. The problem is pervasive and cuts across class and economic landscapes—from farmers in small agricultural towns and working-class families in rural mountain hamlets to highly-paid professionals in urban cities. For example, take a look at these markets:

  • Grass Valley. In this small Gold Rush town in the Sierra foothills of Nevada County, the average home in the county cost $397,000 last year, according to Tom Dykstra, a broker with Coldwell Banker Grass Roots Realty in Nevada City. But wages haven’t kept up with home prices in Nevada County’s tourism, service, and agricultural-based economy. “A firefighter makes $32,000. A school teacher makes $47,000, and a registered nurse makes $53,000” says Dykstra. “You need to make $76,800 to qualify for a loan” to purchase that home. Local residents have few choices; they can “buy small homes that may or may not need work, mobile homes, or move to the outskirts of the county,” Dykstra says
  • San Francisco. The median price for a single-family home hit $870,000 earlier this year, and homes in traditional starter neighborhoods cost $500,000, says John Wong, CRB, a broker with Prudential California Realty in San Francisco. “This is a scary thing to think about. People start giving up when you reach that plateau,” says Wong, who’s also president of the San Francisco Association of REALTORS®.
  • San Diego. Just 10 percent of the area’s residents could afford March’s median $588,800 house—and needed a $137,760annual paycheck to be able to purchase it. Many buyers fled to La Mesa, El Cajon, Santee, and other less expensive cities in the eastern part of San Diego County. But the ripple appreciation has made it “very difficult for most first-time buyers to qualify (for houses) in the East County—and that’s the most affordable portion of San Diego,” says Ron Faul, a sales associate with Coldwell Banker Southern California in La Mesa.
  • Sacramento. A recent study shows just how precarious the situation has become in the Sacramento area, where only one in four residents can afford the median $357,360 home. Approximately one-third of the area’s residents are prepared to pack and move—most of them out of the state—because of high housing costs, according to researchers at California State University in Sacramento.

How to Help First-Time Buyers

Real estate practitioners in California are using a number of approaches to help their clients—especially first-time buyers—afford a home. These tips also can work for practitioners in other high-priced markets who want to help their clients achieve homeownership:

  • Keep current, and educate buyers about the myriad mortgage loan programs that conventional lenders offer. “The only thing that has saved our ability to work with first-time homebuyers in this market has been the advent of no-doc, low-doc, low start-rate option ARMs, interest-only loans, and other flexible loan programs,” says Jeffrey S. Gill, broker-owner of Realty World of Contra Costa in the suburban San Francisco bedroom community of Antioch.
  • Become knowledgeable about state and local government housing programs, which can offer everything from downpayment assistance to silent second loans (forgivable state or local loan) to first-time buyers. Two state programs in particular are commanding attention:
  • The California Housing Finance Agency in April rolled out a 35-year, fixed-rate loan with interest-only payments for the first five years. The program allows some buyers to obtain a 100 percent loan, plus another 3 percent in closing costs.
  • The nonprofit Pacific Housing and Finance Agency last year launched a lease-to-purchase program that lets renters obtain 100 percent financing on eligible homes costing up to $475,000. “Renters get a lease for six years and at the end of the lease can purchase the house at the six-years-ago price,” says Pete Yackley of Roberson Real Estate in Bakersfield. “It’s like a godsend.”
  • Stay on top of the local MLS on a daily basis because below-market homes built under government auspices may come on the market unannounced.
  • Become familiar with downpayment or other housing-assistance programs that a growing number of private employers offer their workers.
  • Lobby governmental agencies and elected officials for more affordable housing and higher densities. Wong, for example, argued for higher densities in San Francisco during his installation address as 2005 president of the San Francisco Association of REALTORS®. Rochelle Hair, president of Time+Place Consulting and Real Estate in the ski resort town of Mammoth Lake, says “our firm has taken an active part in the planning commission and the revision of the town’s general plans. We attend every single workshop and town council meeting.”
  • Don’t be wary of seeking terms that can help buyers, even though it’s a seller’s market. “I’m having buyers ask for closing costs and they’re getting them,” says Christopher Gately of Keller Williams Realty in Palmdale.
  • Be positive and patient with novice buyers. “Just encourage them to buy something in whatever price (range) they can. … Don’t consider it your dream house. Just purchase something so you can get a leg up on appreciation, keep up with market value, and move up from there,” says Judy Zeigler, CRB, CRS, with Prudential California Realty in Palm Desert.

“I remind new buyers this is a stepping stone to greater things,” says Patricia Bini with RE/MAX Monterey Peninsula, Del Rey Oaks. “In two years, you can move. For now, fix your homes, save some money, improve your FICO scores.”

Some Affordable Options

Although the housing squeeze is real, it’s not all doom and gloom. There still are some “affordable” neighborhoods for California homebuyers. Real estate professionals point to these options:

  • Homes in Soledad, Gonzales, and Greenfield in southern Monterey County cost $100,000 less than in Monterey, says Bini of RE/MAX. Those towns are about 30 miles from Monterey, where homes cost a median $694,000.
  • The Coachella Valley has homes that working-class families can afford, despite the area’s reputation as a vacation and second-home resort for wealthy residents of Rancho Mirage and Palm Desert. “We really have both ends of the spectrum,” says Zeigler. Because there is so much buildable land to accommodate the influx of people, the median price for a home is $275,000 in Indio, $312,000 in Cathedral City, and $307,700 in Palm Springs, Zeigler says.
  • Finding a home for $500,000 “may be difficult” in San Francisco, San Mateo, or Marin counties, but buyers can still find homes for about that price in a few close-in, urban neighborhoods in San Leandro, Union City, Newark, and Hayward. Or, buyers could head further out to Santa Rosa, Brentwood, Fairfield, Cloverdale, and other bedroom communities where Goldman says “you won’t be in as many multiple offer” situations.
  • In Oakland, young couples and singles escaping astronomical prices in nearby San Francisco have discovered Maxwell Park, a middle-class neighborhood of two- and three-bedroom Bungalow homes that sell in the $450,000 to $550,000 range. “You get more house for your money,” says Kate Phillips, CRS, GRI, a sales associate with Wells & Bennett, REALTORS®, in Oakland. “People think of it as one of the last neighborhoods that’s really nice and more, ‘affordable.’”

The current state of housing prices in California means that homebuyers have to work a little harder to buy a home. Practitioners also may have to work a little harder to help their clients achieve homeownership, but persistence pays off.

Buyers can trade off their dreams for a detached home for a less expensive condominium, accept a neighborhood that is not their first choice, or move further out of town, says Avram Goldman, CRB, president of Coldwell Banker Northern California in San Ramon. “A lot depends on where you want to live and what you’re willing to sacrifice,” he says.

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