Mortgage costs lock out California home buyers (2024)

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Back in 2021, when mortgage interest rates were plumbing all time-lows, Caitlyn O’Connell and her fiance nearly closed on a home in San Luis Obispo.

They backed out of the deal after discovering major issues with mold, she said. Over the course of the next year, the cost of a typical mortgage payment in California increased by as much as 56% in some markets, according to housing data firm Zillow.

O’Connell feared she and her now-husband were locked out of homeownership forever. This year they abandoned their search.

“If we stay in California, we will have to be renters,” said O’Connell, who lives in Los Angeles’ Venice Beach neighborhood. “I don’t know, it really just feels like we’re stuck.”

Tens of thousands of California first-time home buyers saw their homeownership ambitions fail last year as mortgage interest rates doubled after the Federal Reserve began its inflation-fighting campaign last summer.

While the frenzied bidding wars that have defined parts of the state’s housing markets for more than a decade may have subsided, the monthly costs of a mortgage have left the state’s market more unaffordable than at any point in the last decade, particularly for lower- and middle-class families.

In December, the state’s median home price dropped to $774,580, according to the California Association of Realtors, a 2.8% annual decline likely not significant enough to make a meaningful contribution to housing affordability.

The prospect of higher monthly mortgage payments means many sellers can’t afford to trade-up, agents and economists said, resulting in too few economically priced homes. The situation is a considerable change from the last housing downturn, which began in 2007, when home foreclosures and other distressed sellers triggered big price declines and opened a rare affordability window that has long since slammed shut.

These days California’s housing market is characterized by both high prices and much higher mortgage interest rates than buyers and sellers are accustomed to.

“There’s this crisis of confidence,” said Selma Hepp, chief economist at housing data firm CoreLogic. “Sellers don’t want to give up the price that they thought they were going to get, or had in mind, and they also have locked in mortgage rates that are incredibly cheap.”

Nine months into 2022, only 18% of households could afford the state’s median priced home, the California Association of Realtors reported. And the estimated minimum annual household income needed to buy a median priced home increased from $148,400 to $192,800 over that time period.

“In 2023, it’s gonna be tough for first-time buyers, because of higher interest rates, because of tighter supply, and also because of the fact that there might be some uncertainty in the economy,” said Oscar Wei, deputy chief economist at the Realtors group.

Wei estimated the increase in annual mortgage interest rates from 2021 to 2022 meant that more than 30,000 likely homebuyers in the state were cut out of the market, or needed to find a bigger down payment in order to afford a home. Orphe Divounguy, a senior economist with Zillow, estimated as many as 400,000 Californian renters who may have made enough income to qualify for a mortgage in 2021 were potentially locked out because of the increase in mortgage interest rates.

Mortgage payments increased year-over-year by 43% in San Francisco and 56.5% in Bakersfield, Divounguy said. Dianna Silva, a Concord-based real estate agent, has witnessed the change first hand with many of the first-time buyers she works with.

“Every time that there’s been that jump, there have been some people that have been taken out,” Silva said. “It has been devastating for some of them.”

California’s increasingly impenetrable housing market is a top concern among voters and residents. A January poll from the Public Policy Institute of California found that nearly 90% of adults and likely voters in the state were concerned the state’s costly housing would prevent younger generations from buying a home in the state.

The economic woes of the pandemic have added another layer of uncertainty. Fewer than 56% of Californians live in homes they or their families own, the second lowest rate of any state and just slightly higher than New York. On Tuesday, state officials said they were expanding who was eligible for the pandemic-era California Mortgage Relief Program, a $1 billion program designed to help people who already own a home. The program was created in 2021 using federal dollars from the American Rescue Act.

Helping California’s first-time home buyers was a top priority for state lawmakers last year, when Senate President Pro Tem Toni Atkins, a San Diego Democrat, backed creation of a $1-billion-a-year down payment program for people looking to buy their first house. The California Dream For All program received $500 million in initial funding last year, spread out over two years. But faced with a projected budget shortfall, Gov. Gavin Newsom proposed scaling back the yet-to-be-launched program by $200 million in his January budget proposal.

The program is expected to launch by the end of March, Ellen Martin, an official with the California Housing Finance Agency said last month. Martin told the agency board that the $300 million could help an estimated 2,300 initial qualifying first-time buyers, by providing them either all of the money they need for a down payment, or very close to it, in exchange for an agreement to share in some of the homes’ price appreciation.

As for O’Connell, the 37-year-old Los Angeles native said she has grappled with the state’s high housing costs her entire adult life. She said she and her husband looked into various first-time homebuyer programs when she began her house hunt, but was discouraged by their limitations and also did not think she qualified for those she did find. O’Connell studied poetry at Sarah Lawrence College and worked a variety of jobs, including as a teacher and in farmers markets, before landing a gig in the tech industry.

She began seriously home shopping with her husband in early 2021, when they were still engaged to be married. They looked for a home in San Luis Obispo, her husband’s hometown, a city in the heart of California’s storied Central Coast. It offered beauty, access to nature, temperate weather and, by California standards at the time, relative affordability. She and her husband eyed many homes priced under $950,000, she said.

A seller accepted their offer on a three-bedroom, two-bathroom home in San Luis Obispo, but they walked away from the potential purchase after an initial inspection revealed water damage and mold.

Instead they moved to an affordable apartment in Venice that was below market due to unusual circ*mstances — a nearby home had burned down in an arson fire, scaring away other renters. The couple married last summer. She and her husband are trying to stay in the state they were born in because both hope to care for their parents as they age, she added.

Their below-market Venice rent works for now, O’Connell said, but added that she and her husband feel they can never leave.

“I don’t know how we can stay in our neighborhood even as renters,” she said, noting that they hope to start soon on a family of their own. “We will need another bedroom, so we will need to move, but I don’t know how we’re going to.”