Mortgage cost locks out homebuyers in California

Back in 2021, when mortgage interest rates hit rock bottom, Caitlin O’Connell and her fiancé nearly bought a house in San Luis Obispo.

They pulled out of the deal after they discovered serious mold problems, she said. Over the next year, the cost of a typical mortgage payment in California increased by 56% in some markets, according to housing company Zillow.

O’Connell feared that she and her current husband would be forever homeless. This year they abandoned their search.

“If we stay in California, we’ll have to be tenants,” said O’Connell, who lives in the Venice Beach area of ​​Los Angeles. “I don’t know, it just seems like we’re stuck.”

Tens of thousands of California homebuyers saw their homeownership ambitions fizzle out for the first time last year as mortgage interest rates doubled after the Federal Reserve launched its inflation-fighting campaign last summer.

While the frenetic bidding wars that have defined parts of the state’s housing markets for more than a decade may have subsided, monthly mortgage costs have made the state’s market more unaffordable than at any time in the last decade, especially for low-income and middle-income families.

According to the California Association of Realtors, the state’s median home price fell to $774,580 in December, a 2.8% annual decline, likely not significant enough to make a meaningful contribution to housing affordability.

The prospect of higher monthly mortgage payments means many sellers can’t afford to bid, agents and economists say, leaving too few economically priced homes. The situation is quite different from the last housing market downturn, which began in 2007, when home foreclosures and other troubled sellers caused significant price cuts and opened a rare window of affordability that had long since closed.

These days, the California housing market is characterized by both high prices and much higher mortgage rates than buyers and sellers are used to.

“This is a crisis of confidence,” said Selma Hepp, chief economist at housing data firm CoreLogic. “Sellers are reluctant to give up on the price they thought they were going to get or had in mind, and they’ve also set incredibly low mortgage rates.”

Nine months into 2022, only 18% of households could afford a home at the average price in the state, according to the California Association of Realtors. And the estimated minimum annual household income required to buy a house at the median price increased from $148,400 to $192,800 over that time period.

“2023 will be tough for new buyers due to higher interest rates, limited supply, and also because there could be some uncertainty in the economy,” said Oscar Wei, deputy chief economist at the Realtors Group.

Wei calculated that the increase in annual mortgage interest rates from 2021 to 2022 meant that more than 30,000 potential homebuyers in the state were excluded from the market or needed to find a larger down payment to afford a home. Orff Divungi, a senior economist at Zillow, estimated that up to 400,000 California renters who could earn enough income to qualify for a mortgage in 2021 were potentially locked out due to rising mortgage interest rates.

Mortgage payments are up 43% year-over-year in San Francisco and 56.5% in Bakersfield, Divunga said. Dianna Silva, a real estate agent based in Concord, has witnessed change firsthand with many of the new buyers she works with.

“Every time this jump happened, someone got thrown out,” Silva said. “For some of them, it was devastating.”

An increasingly impenetrable housing market in California is a major concern among voters and residents. A January poll by the California Public Policy Institute found that nearly 90% of adults and likely voters in the state were concerned that the state’s expensive housing would prevent the younger generation from buying a home in the state.

The economic problems associated with the pandemic have added another layer of uncertainty. Less than 56% of Californians live in homes owned by them or their families, the second-lowest of any state and only slightly higher than New York. On Tuesday, state officials said they were expanding eligibility for the California Pandemic Mortgage Assistance Program, a $1 billion program designed to help people who already own a home. The program was created in 2021 using American Salvation Act federal dollars.

Helping first time buyers in California was a top priority for state legislators last year when Pro Tem Senate President Tony Atkins, a San Diego Democrat, supported the creation of a $1 billion a year down payment program for people who want to buy your home. first house. Last year, California Dream For All received $500 million in initial funding for two years. But faced with a projected budget shortfall, Gov. Gavin Newsom proposed in his January budget proposal to cut the pending program by $200 million.

The program is expected to be launched by the end of March, California Housing Finance Agency spokeswoman Ellen Martin said last month. Martin told the agency’s board that $300 million could help the roughly 2,300 original qualified buyers by giving them either all the money they need for a down payment, or very close to it, in exchange for an equity agreement. part of the increase in house prices.

As for O’Connell, the 37-year-old Los Angeles native said she’s struggled her entire adult life with high house prices in the state. She said that she and her husband looked into various homebuyer programs for the first time when she started looking for a home, but were discouraged by their limitations and also didn’t think she was right for the ones she actually found. O’Connell studied poetry at Sarah Lawrence College and worked a variety of jobs, including a teacher and farmers’ markets, before taking a job in the tech industry.

She started doing household chores in earnest with her husband in early 2021 while they were still engaged. They were looking for a home in San Luis Obispo, her husband’s hometown, a city in the heart of California’s fabled Central Coast. It offered beauty, access to nature, a temperate climate, and, by Californian standards of the time, relative affordability. She and her husband have been eyeing many homes under $950,000, she said.

The seller accepted their offer for a three-bedroom, two-bath home in San Luis Obispo, but pulled out of the potential purchase after an initial inspection revealed water damage and mold.

Instead, they moved into an inexpensive apartment in Venice that was below market due to unusual circumstances – the house next door burned down in an arson attack, scaring away other tenants. The couple got married last summer. She and her husband try to stay in the state they were born in because they both hope to take care of their parents as they age, she added.

Their rent is below market in Venice so far, O’Connell said, but added that she and her husband feel they can never leave.

“I don’t know how we can stay in our area even as tenants,” she said, noting that they hope to start a family of their own soon. “We’re going to need another bedroom, so we’ll need to move, but I don’t know how we’re going.”