California Homebuyers Pushing The Financial Envelope To “Afford The Unaffordable”

SAN FRANCISCO, California, August 18, 2005 – There’s something new in the latest run-up of California’s already staggering housing prices. It is the financial lengths to which buyers are willing to go to buy a home – and the willingness of banks and lenders to accommodate them, according to a study released today by the Public Policy Institute of California (PPIC).

Since 2000, 18 of the 20 metropolitan areas in the United States with the greatest housing appreciation have been in California. Yet, as prices reach record highs, so do sales. In fact, homeownership rates appear to be at their highest level in decades: In 2003, 59 percent of Californians owned the home they lived in – the last time there was a comparable peak was in 1960, when 58 percent owned their homes.

How are so many residents managing to pay today’s prices?

One way is by devoting an exorbitant share of their income to housing. Over half (52%) of state residents who purchased a home within the last two years spend more than 30 percent of their total income on housing – a percentage that exceeds the top threshold recommended by the U.S. Department of Housing and Urban Development. Even more startling, 20 percent of these recent homebuyers spend more than half their income on housing. Their cost burden is significantly higher than for residents who have owned longer or for residents in the rest of the nation (see Tables 6 and 7).

Higher debt-to-income ratios are possible because more and more lenders are forgoing the fiscal practice of limiting housing costs to no more than 30 percent of income. Instead, they are qualifying buyers for loans that consume 40, and even 50, percent of their income. Additionally, increasing numbers of homebuyers are opting for variable and interest-only loans – loans that allow buyers to minimize their initial monthly payments but make them vulnerable to increases in payments if and when interest rates rise, according to the analysis.

But today’s home buying tactics are not just about income and financing. “We find that Californians are quite resourceful when it comes to home ownership, and that they are employing multiple strategies to gain entrance into the housing market,” says PPIC research fellow Hans Johnson, who co-authored the study with PPIC research associate Amanda Bailey.

One of these strategies is moving. Across the state, there is a large migration from costly coastal areas to less-expensive inland regions: Between 2000 and 2003, the annual flow of migrants from the rest of California to the Sacramento region was almost double, and to the northern San Joaquin Valley almost triple, what it was in the 1990s. People are also making do with less space: Nearly one-third (32%) of the state’s recent homebuyers bought houses with two or fewer bedrooms, compared to only one-fourth of long-term owners. Finally, a substantial number of recent buyers were previous owners who sold their homes and used the equity from the sale to buy a new home.

More Key Findings

• Although homeownership rates in California may be at their peak, the state still ranks near the bottom nationally (48th out of 50 states).
• Among the state’s recent homeowners with low or moderate incomes, three-fourths spend more than 30 percent, and one-third spend more than 50 percent, on housing.
• The counties with the greatest share of homeowners spending over 30 percent of their income on housing are Santa Cruz, Monterey, San Francisco, San Luis Obispo, and Santa Barbara.
• The median income of Californians who have owned their home for two years or less is significantly higher than the incomes of those who have owned for ten or more years ($68,000 to $60,000).
• Recent homebuyers in California are no more likely to rely on two incomes than their counterparts in the rest of the nation (44% for both), but more likely to rely on two incomes than renters in the state (31%).
• A remarkably large share of California’s young adults – an age group not associated with high incomes – are finding ways to buy homes: The percentage of 30-34 year olds who owned their homes rose from 38 to 41 percent between 2000 and 2003.
• Nearly three-fourths (72%) of recent California homebuyers are white or Asian. However, Latinos make up a significant share (22%), while African Americans (4%) lag far behind.
• Californians who are married and have children account for 37 percent of recent homebuyers, while single parents account for only 9 percent.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.