The latest study on the cost of residential real estate indicates that the majority of potential buyers in Los Angeles lack an industry standard for affordability.
For decades, many real estate experts used a rule of thumb that a house was affordable if the price was equal to or less than 2.6 times a potential buyer’s annual income.
The online brokerage firm Clever Real Estate compared median incomes and median house prices in markets across the country and determined that Los Angeles is the country’s least affordable metro area.
California took the top four spots and six of the top 10.
The survey is a back cover of another released last week by RentCafe, which touted both Los Angeles and California in general for claiming excessive proportions of the most expensive zip codes for house prices nationwide.
The Clever Real Estate survey’s considerations on income put the recent red-hot sales market and price increases in a different light.
“I think we already knew that California is quite expensive, but this really paints a picture that earnings do not match the cost of living,” said Francesca Ortegren, a computer scientist at the company. “So it’s seemingly impossible to buy a house in some of these places.”
The study analyzed data on local demographics from the U.S. Census Bureau along with housing values from Zillow for the 50 most populous urban areas. The company considered metro regions according to the Census Bureau’s statistical main area designations. The Los Angeles MSA includes LA County and Orange County; The San Francisco MSA includes San Francisco, Oakland and Berkeley.
The study also measured how both housing values and incomes have changed nationally since 1965, highlighting a dramatic, if well-known, contrast. Over the past five and a half decades, U.S. housing values have more than doubled from $ 172,000 in current inflation-adjusted dollars to $ 375,000.
Americans’ incomes, on the other hand, have largely remained flat. The national median household income has gone from about $ 60,000 in 1965 to $ 69,000. And the small gain over time is smaller than it might seem, Ortegren said, because more households today have more incomes compared to the 1960s.
For the LA region, the report found an average home value of $ 783,000 and a median household income of $ 80,000, representing a price-to-income ratio of 9.8 to 1 – almost four times the recommended ratio.
The second least affordable metro area was San Jose, where the figures for both income ($ 151,000) and home value ($ 1.38 million) were much higher, giving the center of the notoriously expensive Silicon Valley region a price / income ratio of 9.1 to 1. San Francisco finished third, followed by San Diego and New York.
The federally designated Riverside MSA – reflecting the counties of Riverside and San Bernardino, which together form what is referred to as the Inland Empire east of Los Angeles – came in as the least affordable. The Riverside MSA, generally seen as the market for buyers priced out of the Los Angeles MSA, had an average home value of $ 463,000 and an income of $ 78,000, in a ratio of about 5.9 to 1,
Sacramento finished eighth. Miami-Fort Lauderdale, Seattle and Salt Lake City rounded out the top 10.
California’s soaring housing costs have been well documented, but recent analyzes have helped add timely context to the trend.
In addition to the recent report on the most expensive zip codes, another published in late September analyzed affordability across major U.S. cities by comparing median household income and median area prices. In that analysis, California had 10 of the 20 best cities with least affordable prices; In LA, which ranked just after New York and Miami for least affordable prices, the average household would have to spend 81% of its monthly income on payments for a median-priced home.
In Clever’s report, Pittsburgh, Cleveland and Oklahoma City are ranked as the country’s most affordable metro areas. In Pittsburgh, the median household income was $ 85,000, and the average home value was $ 190,000, giving the area a very affordable price / income ratio of 2.2.
It would look like a statistical deviation for most Californians. Home prices in the state are expected to rise again next year, although they were less dramatic than they were from 2020 to 2021. The trend means more and more potential home buyers – especially first-time buyers – will be priced out of the market .
“We saw this with Millennials,” said Ortegren, who in recent years has been forced by high prices to delay home purchases later than previous generations or completely abandon the idea. “The pandemic may have made it worse.”