How do people afford houses in California?

California has one of the most expensive real estate markets in the US. It’s routine to find homes costing around one million or more here. So with the high price of homes here, it’s safe to ask, how do people afford houses in California?

California is a very hard place to own a house. Many of the homeowners in California rely on family support to buy their first home, even when using FHA loans. This is due to the very high cost of living that makes saving difficult. But there are those who earn high enough to afford the mortgage.

However, many homeowners in the state are long-term owners, multimillionaires, foreigners, and investors. Here, we discuss how difficult it is to buy a home in California and how people afford houses in the state.

How Hard Is to Buy a Home in California

California is one of the toughest states to buy a home in the US. This is mainly due to the high cost of homes in the state and the high cost of living. This makes it one of the toughest states to buy a home in the country. A major challenge for most people in California is that it’s almost near impossible to save. The wages aren’t exactly the best. Most families spend a large proportion of their household income on rents and paying back debts such as student loans. These make it difficult for many families to save the down payment needed for a home purchase.

The expensive accommodation cost makes California the state where households spend the highest percentage of their income on housing. This, coupled with the high taxes, further makes it difficult to save in the state. Since many can’t save for the down payment, it’s almost impossible for many to qualify for the loans needed to own a house. So, it’s not surprising that the state has the second-lowest homeownership rate in the country.

How Do People Afford to Buy Houses in California?

Apart from the ultra-rich in California, many people struggle to become a homeowner in California. Most who do it usually relies on any of the following means:

1.      Family Money

Many of those who buy homes in California do so by relying on family money to partially help them out. Available data shows that if you’re planning to buy a home in California, it helps if you have relatives who can contribute. A KPCC analysis of over 600,000 FHA loans discovered that most FHA borrowers, first-time homebuyers, use money from relatives for down payments. In 2011, one of every 4 FHA loans in California included down payment money from relatives. In 2018, the number rose to 1 out of 3, showing that many first-time homeowners rely on family support. In addition, the rate of family down payment support for homeownership in certain parts is almost 50%, far above the national rate.

Parental help comes in many forms, such as gifting the person a certain amount of money they need for down payment or even co-ownership where the parents and the children buy the home together. It could also come in the form of inheritance and trust funds which usually won’t reflect in the FHA loans. Parents also assist children in buying homes, even with other mortgages. It’s also possible for parents to sell houses to children in California for less than the appraised value as a way of helping them and keeping the homes in the family.

2.      High Wages

While the average wages in the state are a bit low for the cost of living, there are still several people that earn well over $100,000 in the state. This is mostly in major cities such as Los Angeles and San Francisco, where people can work in tech and entertainment. The average salary in San Francisco is $103,000, while that of Los Angeles is $80,000. In these cities and some other parts of California, it’s possible to earn well depending on the job. In that case, affordability for high-wage earners is easier. Of course, in the major cities where the wages are high, the cost of living is also very high, and homes are pricier than other areas where wages are lower. For example, the average price of a home in San Francisco is $1,579,001, while that of Los Angeles is $944,651. Both are above the average cost of homes in California.

3.      Federal Housing Programs

Several federal loans could help people become homeowners. The Federal Housing Association loans appear to be the best choice for most first-time homebuyers in California. It has low down payment options and flexible credit requirements. But the loan limits the kind of homes it can get a person. The lending limit is $970,800 for a single-family home for high-cost counties in California. This is higher than the average cost of a home in the city which is $758,360. But whoever wants to get this loan still needs to pay the down payment, which is where many first-time homebuyers have no choice but to rely on family help.

Categories of Homeowners in California

Beyond the people who have to rely on loans and family support to afford homes in California, the state has other categories of homeowners. They include:

1.      Long Term Owners

Several homes in California have a long history that may go back to a decade or even more when the last owner bought the house. Then, the house was most likely expensive. But it’s still much more affordable than its current price. Many long-term owners in California decide against selling their property and leave it to their children or family members.

2.      Multimillionaires

California is a state that attracts the wealthiest, and this isn’t surprising when one considers the establishments here. Hollywood and Silicon Valley are both here, and both account for some of the richest people in California. Actors, tech executives, sports stars, media moguls, and more are a common sight in the state, and this superrich holds the most expensive real estate in the state.

3.      Foreigners

Several wealthy foreigners also buy homes in California. This ranges from middle eastern oil tycoons to politicians from several other countries. These people have the money to afford the homes in California.

4.      Investors

There are also real estate investors who took advantage of the housing crashes between 2007 and 2008 to buy a home in the expensive parts of California for far below the original price. These people also account for a certain number of homeowners in the city.

In Conclusion

Apart from the ultrarich and real estate investors, most people who buy homes in California receive help from family members, used loans, or both. Even those with high wages still rely on loans, and they only have the advantage of being able to afford the down payment.