Who Can Afford to Buy a Home in California?

California’s five metropolitan areas have become one of the 10 most expensive places for homebuyers. As of the first quarter of 2017, the median home prices for single-family homes are[1]: San Jose-Sunnyvale-Santa Clara, $1.1 million; San Francisco-Oakland-Hayward, $0.85 million; Los Angeles-Long-Beach-Anaheim, $0.49 million; Anaheim-Sta. Ana-Irvine[2], $0.75 million; and San Diego-Carlsbad, $0.564 million. At these level of prices, who can afford to purchase a home in these metro areas?

Home prices are just one aspect of affordability; the other aspect is to compare the home prices to income. I calculated the income that is required for a 2-earner family so that the mortgage payment on a fixed rate 30-year mortgage is no more than 25 percent of the family income, assuming a mortgage rate of four percent and a five percent down payment on a mortgage for a home valued at the median price for single-family homes as of the first quarter of 2017.[3] Table 1 shows the calculations for some CA metro areas where 2017 Q1 price data are available.


Table 1 shows that home prices are now unaffordable in San Jose-Sunnyvale-Sta. Clara, San Francisco-Oakland-Hayward, Anaheim-Sta. Ana-Irvine, and San Diego-Carlsbad. In these four areas, the share of mortgage payments to income is above 25 percent. Putting this in another way, the level of income that a 2-earner family currently receives is below the level of income that so that mortgage payments are no more than 25 percent of this income.[4] For example, in San Jose-Sunnyvale-Sta. Clara, even a 2-earner family earning $165,546 will not be able to afford a home without being cost-burdened because the mortgage payment takes up 35 percent of income. Another way to look at this is a family needs $232,940 in income (compared to actual income of 165,546) so that the mortgage payment represents no more than 25 percent of income.

Home prices are still affordable in the metropolitan areas of Los-Angeles-Long Beach-Anaheim However, with mortgage payments at 23 percent of income, although home prices are bordering on becoming unaffordable. Already, mortgage payments in the metropolitan division of Anaheim-Sta. Ana-Irvine now account for 35 percent of income. Home prices are still affordable in the metropolitan areas of Riverside-San Bernardino-Ontario and Sacramento-Roseville-Arden Arcade.

Saving for a down payment is another constraint to a home purchase. Even at a five percent down payment, one needs about forty to fifty thousand in San Jose-Sunnyvale-Sta. Clara and in San Francisco-Oakland-Hayward. To note, workers in these areas, particularly those in the technology companies, may have stock options[5] that provide a source of income or cash for down payment. The down payments for a property in Riverside-San Bernardino-Ontario and Sacramento-Roseville-Arden Arcade are more manageable, about twenty thousand.

Table 2 shows that home prices in San Jose-Sunnyvale-Sta. Clara have become so pricey that only workers in three types of occupations have incomes that are commensurate to the high cost of property so that they are not cost-burdened: high-end medical profession, computer/software engineers and managers, and business/finance managers. For people in other professions, including real estate agents, a home purchase in this area is not affordable, and if they do purchase a property, the mortgage payment will be a severe cost burden.


Why have prices become so unaffordable in California? The reason is extreme lack of supply amid strong job growth. On the supply side, the number of listings has considerably fallen in all metro areas compared to one year ago, except for Yuba City, Hanford-Corcoran, and Oxnard- Thousand Oaks-Ventura, based on July 2017 data from  In San Jose-Sunnyvale-Sta. Clara, listings are down by 40 percent. On the demand side, job growth has been strong in many areas, with the number of new homes constructed below the number of jobs created, according to an NAR analysis by Evangelou.[6]  Clearly, more home construction is the only way to bring down prices and make homes more affordable.

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[1] National Association of REALTORS® 2017 Q1 median single-family home prices

[2] Anaheim-Sta. Ana-Irvine is a metropolitan division of the Los-Angeles-Long Beach-Anaheim metropolitan statistical area.

[3] The rule-of-thumb for a cost-burdened household is when housing expenditures are 30 percent or more. Because the homeowner will spend on other costs related to owning a home (property taxes, utilities, home maintenance), we allow for these expenditures and assume that mortgage payments are 25 percent of income.

[4] The latest available data on mean annual income by occupation from the Bureau of Labor Statistics’ Occupational Employment Statistics is for May 2016. I inflated the 2016 metro-level income data by the 4.78 percent change in California’s personal income from 2016 Q1 to 2017 Q1. The state personal income data is released on a quarterly basis by the Bureau of Economic Analysis. The statewide growth rate is an approximation to the growth rate of income in the various metropolitan areas.

[5]stock option is a privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a certain period of time.

[6] Evangelou, Nadia, “Where Does Job Growth Outpace New Housing Construction?”, Economists Outlook, NAR