Buyer Challenges to Entering the Housing Market
Buying a home is typically the biggest purchase of a lifetime. Hovering right below $600,000, the California median home price is near its all-time high, and housing affordability is moving towards its all-time low. In fact, only 27 percent of California households could afford to purchase a median-priced home in the third quarter of 2018. Assuming buyers put 20 percent down payment, they would need $117,706 for a median-price home of $588,530 in Q3 2018. At the prevailing interest rate (30- year fixed-rate mortgage at 4.77 percent), a typical buyer would need a minimum qualifying income of $125,540 to make the monthly payments of $3,140, which is significantly above the 2018 statewide median income of $70,640.
Many would have purchased sooner if it weren’t for the cost. Most home buyers need a mortgage in order to own a property in California, but according to the State of the Consumer (the R.E.A.C.T.) report published by the California Association of REALTORS®(C.A.R.), many found that to be the most difficult part of the overall buying process. First time buyers had an especially tough time with 31 percent rating obtaining financing as either “extremely” or “somewhat” difficult, compared to 18 percent of repeat buyers who felt the same.
Coming up with a down payment is also a challenge for many home buyers in California. In fact, 33 percent of all buyers cited the need to save for a down payment as the top reason why they did not buy a home sooner. Buyers typically needed five years to save enough down payment to purchase their property, with first-time buyers taking slightly longer (five years) to save than repeat buyers (four years).
Most buyers, especially those buying for the first time, used personal savings as the source of their down payment. Buyers also used funds from parents or family, funds received as a gift, or their inheritance to fund their down payment and nearly one-third of repeat buyers used the proceeds from the sale of their previous home.
Buyers were also forced to make compromises, selecting a home that may not necessarily be a perfect fit, but instead a good enough fit. Some of the compromises included price (44% purchased a more expensive home than desired), location (36% purchased a home further away from schools/work than desired and 29% purchased a home not in their preferred neighborhood), size (33% purchased a home smaller than desired), and quality of education (30% purchased in neighborhoods where schools are lesser quality than desired).
Despite the affordability challenges, consumers remain committed to homeownership and REALTORS® can help them fulfill their American Dream. While the Internet provides useful information to make decisions throughout the home-buying process, buyers continue to rely on real estate professionals to navigate through their sales transactions, evidenced by 94 percent using an agent.
Buyers needed help in many different areas including negotiating price (26%), finding the right home (25%), negotiating the terms of sale (22%), mortgage financing (14%), and help with legal issues (12%). Home buyers valued their agents’ expertise and indicated that their agent’s knowledge about the market and the neighborhood was the most important service they provided. In fact, nearly half enlisted their agent at the very beginning of their home search to fully take advantage of that knowledge. As interest rates continue to rise and prices continue on an upward trend, buyers will need even more help from REALTORS® as they deal with challenges due to affordability.
8This article was originally published by the California Association of REALTORS® in November 2018 and is the most current at the time of this posting.