Jul162015

No college education means no house in Coastal California

Lower wage earners, including most who don’t graduate college, may never earn enough to save for a down payment to own a house in California.

no-house-for-youWhen I first wrote about the housing bubble back in 2007, I argued forcefully that it was not possible for everyone to get priced out of the real estate market. At the time, with prices already high and rising rapidly, many people fueled the bubble from panic, buying from fear and driving prices even higher.

One person relayed their story of saving $10,000 each year from 2002-2005 only to watch house prices rise so fast they were falling farther behind. Out of fear and desperation they bought a property in 2006 only to be burned during the crash. The fear of being priced out is a dangerous fear to fall prey to.

When prices rise faster than their wages, people can obtain less real estate with their income, so there is a natural tendency for people to react with urgency because they don’t want to be forced to accept lower quality accommodations later on. When people react to the fear of being priced out, they often act irrationally and buy whatever is available, and in their buying, they contribute to the problem of rapidly rising prices that prompts even more irrational buying. A frenzy results.permanently_high_plateau

The problem with the “priced-out” argument is that there is a grain of truth to it. Particularly now that lenders believe they can sustain any price peak by can-kicking delinquent mortgages, house prices can become elevated and remain elevated for a very long time. While it isn’t possible to price out all buyers forever, it certainly is possible to price out large segments of the population for extended periods of time.

The big unresolved question today is whether or not the new loss mitigation practices lenders learned from the bubble really can price people out forever. The virtue of forced foreclosure is that it forces a repricing of assets when their valuation becomes inflated due to excessive debt. Since lenders now circumvent this natural market cleansing process, once prices become elevated, they can remain elevated permanently — or at least until wages and fundamentals truly catch up.

Americas_housing_market_2012

Due to the chronic shortage of real estate in California, a segment of California society is permanently priced out of the housing market — an income demographic that easily buys homes in other areas. Whereas in most of the country, the 25th to 40th percentile of the income distribution can afford housing, in California this group cannot because there is only enough housing available to accommodate higher wage earners. In the Bay Area the problem is even more acute, and perhaps only the top 30% of wage earners can ever hope to buy a house.

Is this a permanent feature of the California housing market? If so, then those who don’t graduate college and earn in the top percentiles will never have opportunity to participate in the American Dream.

American_Dream_Just_add_money

It will take 29 years for college grads to save 20% down on SF home, study shows

By Anna Marie Erwert on July 9, 2015 4:00 AM

Bay Area kids: stay in school, at least if you ever hope to own a home here.

According to a new Trulia study, it will take the average Bay Area college grad approximately 29 years to save 20% down for a typically priced home. For those prospective buyers with no degree, forget it. By this study’s calculations, that 20% down savings is impossible for millennials who didn’t earn a college degree.

… the report assumes a 20% down payment requirement and 10% savings rate for each group. It also assumes (perhaps optimistically) that the average college grad has signed up for a 10-year repayment plan on their student loans. Trulia calculates that the average monthly student loan payment is $280 and subtracts that from the grads potential savings for the first 120 months.

With these data, the study identifies the specific point in the future at which each group — those with and without college degrees — has saved up enough for a 20% down payment on a median priced home in its respective housing market.

priced-out

As we see in the depressing gallery above, the longest duration to save 20% is in the San Francisco metro. Of the top 5 metros, all are in CA, and two are in the Bay Area. All require  more than 15 years, with SF requiring 29.4 years. Meanwhile, in the five easiest  metros to save for, such as Detroit, MI, and Dayton, OH, take from 4.1 years to 6.1 years, with or without a college degree.

If the current prices, competition, and overbidding continue, Bay Area college grads (to say nothing of those with no degree) won’t be able to afford homes here at all — unless waiting over 29 years to be able to do so makes sense. Maybe it will in the future. At the moment, it seems an unappealing proposition.

I came to a similar conclusion in How to save money for a down payment to buy a house:biggest_saver

At $700 per month, it will take 158 months to save the $142,052 for a down payment. Thirteen years is a very long time. That’s why so many people opt for FHA financing with 3.5% down. At $700 per month, it only takes 20 months, or just over a year and a half, to save the $13,825 required to cover the FHA down payment on a $395,000 property.

If house prices rise faster than incomes, which often happens in California, it can take much longer than 13 years to save up 20% down. As I noted back then, this is why most people use FHA financing in California to buy their first house. Unfortunately, FHA fees are very high even after the recent cut, so FHA financing is no panacea.

Until something is done politically to curb the power of NIMBYs, housing will remain scarce, prices will remain high, and the bottom half of the income scale will find housing opportunities limited, and many will leave the state.

It just costs too much to live in California, and that isn’t likely to change any time soon.

(Click to see full size graphic with more information)

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