California Housing Affordability Tracker (2nd Quarter 2024) [EconTax Blog] (2024)

Housing costs in California have long been higher than the national average. In recent years, these costs have grown substantially—in some cases, growing at historically rapid rates. In this post, we provide a brief update on housing costs and affordability in California.

California Home Prices Far Exceed the Rest of the Country. As shown above, California home prices have long been—and continue to be—much more expensive than the rest of the US. Prices for mid-tier homes are more than twice as expensive as the typical mid-tier US home. (Mid-tier homes reflect home values in the 35^th to 65^th percentile range.) Perhaps even more importantly for a first-time home buyer, a bottom-tier home in California is now about 32percent more expensive than a mid-tier home in the rest of the U.S.—a gap that has widened over the last decade. (Bottom-tier homes are those with values in the 5^th to 35^th percentile range.)

Dramatic Increase in Monthly Payments for a Newly Purchased Home Since 2020. Monthly payments for a newly purchased mid-tier home—including mortgage, taxes, and homeowners’ insurance—have increased dramatically over the last couple of years. Payments for a mid-tier home were nearly $6,000 a month in June 2024—an 84 percent increase since January 2020. Payments for a bottom-tier home were over $3,600 per month—an 89 percent increase sinceJanuary 2020. Also, the gap between the monthly costs of purchasing a bottom-tier home versus renting are near levels that have not been seen since the housing bubble in the mid-2000s. This rapid increase in monthly costs for homebuyers was driven by higher home prices and increasing mortgage rates, both of which we discuss in more detail below.

Growth in Home Prices and Mortgage Rates Have Made Purchasing a Home Much More Expensive. As shown above, monthly payments for a newly purchased mid-tier home have increased by about $2,700 since January 2020. In 2020, there was actually a slight drop in monthly payments as prevailing mortgage rates dipped. However, in 2021, rising home prices became the major driver of rising monthly payments, as homebuyers had to take out larger loans to pay for the more expensive homes. Subsequently, beginning in 2022, as the Federal Reserve began to increase interest rates to slow inflation, mortgage rates became the primary driver of the growing costs. The prevailing mortgage rate on a 30-year fixed rate mortgage increased from 2.7 percent in January 2021 to 7.6 percent in October 2023.(Mortgage rates declined to 6.9 percent in June 2024.) Furthermore, when both mortgage rates and prices increase, there is a compounding effect on monthly home payments, as borrowers have to pay higher interest costs on higher loan amounts.

Purchasing A 2-Bedroom Home Now Much More Expensive Than Renting. Monthly rents have also grown significantly in recent years, but not as quickly as monthly payments needed to purchase a home. As shown above, monthly payments for a 2-bedroom home are about $2,000 (71percent) more thanrenting an apartment or home.

Costs of Buying A Home Have Grown by More Than Median Income. Affordability depends on both the costs of the housing, as well as the income and/or wages of households. Annual household income needed to qualify for a mortgage on a mid-tier California home in June 2024 was about $239,000—over 2times the median California household income in 2022 ($95,500). For a bottom-tier home, about $145,000in annual income is needed to qualify for a mortgage—more than 50percent higher than median household income in 2022.

Housing Costs Have Grown More Quickly Than Wages. Since January 2020, California housing costs—especially the costs of purchasing a home—have grown more than California wages, as shown above. From January 2020 to June 2024, the growth in monthly payments for a mid-tier home (84percent) and bottom-tier home (89percent) have far exceeded growth in average hourly wages (21percent). Rents have also grown more quickly than wages. Over the same time period, rents grew 26 percent.

Costs Vary Dramatically by Location, Especially for Homebuyers.. As shown in the figure above, the housing costs in certain parts of the state—mostly in the coastal areas—are significantly higher than other areas. Although there is significant variation in rents as well, the differences between locations are much smaller. Put another way, the difference in costs between buying and renting is generally much higher in the high-cost areas of the state.

Northern California Has Generally Had Slower Growth Than the Rest of the State. Housing costs have grown substantially in almost all areas of the state over the last few years. However, as shown in the figure above, the monthly costs associated with purchasing a bottom-tier home have grown more slowly in Northern California—most notably the Bay Area—than many other parts of the state. There has been a similar pattern of rent growth across the state. As shown in the figure below, rents in the Bay Area have grown very little since 2020, while rents have grown by 40 percent or more in many other parts of the state.