LaLa Land may be a place of hopes and dreams, but homeownership isn’t one of them: Just 2.8 percent of non-homeowner households in Los Angeles can currently afford a typical mortgage, according to new data from Zillow.
High mortgage rates aren’t the only factor behind soaring home prices — extreme supply shortages are also a factor.
“Housing shortages are a major factor in driving up prices, especially in regional markets like Los Angeles,” said Jeb Smith, a licensed real estate agent in California and a member of CNET Money’s expert review panel. The limited number of affordable homes available, in particular, creates increased competition and bidding wars, further inflating home prices, Smith said.
What’s behind California’s skyrocketing home prices?
Los Angeles is just one of 270 “million-dollar cities” in California, where the typical home costs more than $1 million. The median home price in Los Angeles has risen more than 10% since last year and is now $1.05 million, more than double the national average.
Wage growth has not kept pace with housing costs and inflation: A recent report from CNET sister site Bankrate found that the average household income needed to buy a median-priced home in California is $197,057, more than double the median household income in the city.
Half of the 10 U.S. metropolitan areas with the worst housing shortages are in California: Sacramento, San Diego, San Francisco, San Jose and Los Angeles. The housing shortage is exacerbated by the state’s strict zoning laws, high construction costs and limited land supply.
Real estate experts say there’s no single factor behind the housing affordability crisis: Rising home prices, high mortgage rates and a limited housing supply have all combined to make homeownership difficult today.
A chronic housing shortage has led to skyrocketing home prices, making it nearly impossible for working- and middle-class families to even afford a down payment, let alone continue to make mortgage payments at interest rates of around 7 percent.
Can you afford the down payment and mortgage?
Potential buyers with lots of liquid assets may be able to make a larger down payment up front, which makes their monthly payments more affordable. But households without savings or a windfall are more likely to opt for a smaller down payment and a larger mortgage, which means exorbitant monthly mortgage payments and overly burdensome interest payments.
Let’s look at how a down payment on a $1 million home would affect your monthly mortgage payment: In this example, we’ll assume a 7% interest rate on a 30-year fixed-rate mortgage.
Down Payment Initial CostsMonthly Mortgage Payment5%$50,000$7,05320% $200,000$6,05580% $800,000$2,064Calculations based on CNET’s mortgage calculator
What does this mean for prospective homebuyers?
Unfortunately, it will be some time before we see any significant improvement in the housing market.
“Strong productivity gains will boost wage growth and encourage new home construction, improving home affordability,” said Orphée Divongie, senior economist at Zillow Home Loans. The key to long-term home affordability, according to Divongie, is implementing land-use and zoning reforms that allow for more and denser housing construction.
But government processes are often very slow, and many people don’t support lax zoning regulations.
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An Alternative Approach to Homeownership
Homeownership is becoming increasingly out of reach, raising serious concerns about how people will be able to create, build and pass on wealth across generations in the future.
That has made renting the new American dream, even for some financial experts, as others share homes with partners or friends or turn to first-time homebuyer programs for help with down payments and closing costs.
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