The high cost of
homes is pricing many residents out of the California market. Some are
staying in rentals, and others are leaving the state.
By Allison B. Cohen
Special to The Times
March 7, 2004
It used to be one could graduate from college, get a job, save a little
and buy a home. But in today's real estate market, where the median
California home price in January was $405,720, the middle-class dream
of homeownership is moving out of reach for many.
Only 22% of households in Los Angeles County — where the median
price of a single-family residence is $390,830, according to the
California Assn. of Realtors — could afford a home in January. And only
20% could in Orange County, where the median price of an existing home
is $523,380. A year ago those percentages were 30% in L.A. County and
25% in Orange County.
The gap between median income and median home prices is wide and
appears to be widening. Since 1989, the median household income in Los
Angeles County has increased 53%. But during the same period, the
median price of a single-family residence has increased 91%. In Orange
County, median income has increased 68% while the median price of a
single-family home has risen 134%.
So how can Southern California households with annual incomes between $50,000 and $100,000 buy in today's real estate market?
"With great difficulty, sacrifice and caution," said Christopher
Cagan, director of research and analytics at First American Real Estate
Solutions in Anaheim. "Even with a husband and wife both working, it
can be very difficult."
"It wasn't long ago that lower- and moderate-income people were
being priced out," said Doug Perry, senior vice president of
Countrywide Home Loans. "But now it's the middle class, as the average
home price has outpaced income levels."
Some shoppers are choosing to call it quits, even those who earn
twice the median income, which Economy.com projects will be $47,643 for
Los Angeles County and $66,547 for Orange County in 2004.
Kristin and Jayce Murphy, after looking for a year and bidding on
four homes, have decided to stay in their Fairfax area rental and wait
it out.
The couple's household income of about $100,000 annually is too
high for them to receive FHA help but not high enough for them to buy a
satisfactory home at today's prices. Their decision to give up came
after realizing they were putting offers on homes they felt were subpar.
"We were really settling," said Kristin Murphy, 38, nonprofit
project manager at KCRW-FM. "We would say to ourselves, 'Gee that house
is only $350,000 for 700 square feet and one bedroom and one bath.' "
Even searching in a wide geographic area didn't help. The couple
looked in Hollywood, Glendale, Eagle Rock, Pasadena and Altadena. "We
were all over the map," she said.
Competing with multiple offers — real estate agents routinely
report bidding wars with 10, 20, even 30 offers coming in for a listing
— also factored into calling off the search. Buyers who could be the
most flexible, with cash and no contingencies, seemed to always win out.
The Murphys quickly discovered that they would have to bite their
tongues about the most fundamental of issues, such as asking a seller
to repair a cracked foundation or replace old electrical wiring. In
fact, with so much competition for so few houses, Murphy said she and
Jayce felt they had little time to carefully consider the most
important purchase of their lives.
"I can understand multiple offers," she said, "but when you are
competing at this level, it becomes so psychological. I don't even
think you could make a good decision. We will buy a home eventually,
but we are not going to have our arms twisted by the conditions of the
market."
Part of the pressure to buy is because of interest rates still
under 6% for a 30-year fixed mortgage. Sweetening the deal in some
cases are parents willing to assist with down payments. And lenders are
bending over backward to help shoppers maximize their buying power,
stretching ratios of income compared to housing expenses more than ever
and offering more loan options and creative financing. Among them are
loans with 0% down, adjustable rates, interest-only loans and hybrid
loans, which are fixed for a time and then become adjustable.
While these alternatives may look good, they also can create situations in which buyers get in over their heads.
"People are qualifying for loans today, dangerously so," said
Stuart Gabriel, director of the Lusk Center for Real Estate at USC. He
cautioned that with a moderate increase in interest rates and if
housing prices were to ease back a little, "some homeowners might find
themselves with more mortgage debt than the value of their home."
With a baby due later this month, Linda and Shaun McCray factored
the cost of day-care into their decision to give up their home search.
"In Los Angeles, we would look at starter houses in the $700,000
or $800,000 range," Linda McCray said. "We saw homes that were perfect
starter houses, but they weren't priced as perfect starter houses." The
monthly mortgage, on top of child care, would have been beyond their
budget, even though their combined annual income exceeds $100,000.
So they've decided to keep their $1,250-a-month rental and wait
out the market. "We hope we will get something in foreclosure some
day," she said.
Other young couples are deciding to go where their dollars stretch
further. David Papini, 29, along with his fiancée, Joy Scissom, 25,
after looking for more than a year and making offers on about 20 homes,
have decided to move to Las Vegas instead.
"The Los Angeles housing market is horrible," said Papini, who
works as an engineer for Lockheed Martin in Palmdale. He and Scissom
are living on his $80,000-a-year income while she works toward her
doctorate in psychology.
When spending the recent New Year's holiday in the Las Vegas area
with Scissom's parents, the two decided to look at what the growing
desert community had to offer. They liked what they saw.
Soon after, they put an offer of $250,000 on a four-bedroom,
2,600-square-foot house with a three-car garage, built in 1994. "In Los
Angeles, you couldn't touch that house for $700,000," Papini said.
The move to Las Vegas will require Papini to find work there. And
the two won't even be able to move into the house completely until
Scissom finishes her degree in December, meaning they will have to
maintain their rent here and manage the new $1,086 mortgage. Papini is
philosophical about the arrangement. "It's absolutely cheaper to have
two households this way than living in Los Angeles."
Although the market for buyers may change in time, for now the
best that most experts predict is a gradual slowing in the rate of home
appreciation. But many are concerned about what the region will look
like in 10 years if more potential buyers are priced out.
So what is a middle-class buyer to do? Look for pockets of
affordable homes, keep credit clean and don't be afraid to call
mortgage and real estate brokers with questions, recommends Jim
Hamilton, president-elect of the state Realtor group. "If people really
want to be homeowners, they will find a way to make it work."
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