A recent housing study by Harvard University revealed the increasing difficulty Californian residents, especially those in metropolitan areas, faced in purchasing homes in 2023.
The report highlighted the significant wage-to-housing price gap in Northern California, particularly in Silicon Valley, where the disparity between housing prices and incomes is substantial.
Published on June 20th, the report indicated that the median housing prices in three cities in Silicon Valley – San Jose, Sunnyvale, and Santa Clara – were 11 times higher than the average annual income of local residents, which is nearly $113,000.
The median housing price represents the midpoint of all housing sale prices, with half of the homes priced higher and the other half priced lower than this median.
A similar situation was observed in coastal areas of Santa Cruz County, where housing prices in 2023 were 11 times higher than the local average annual income of almost $68,000.
In Los Angeles County and Anaheim in Orange County, the median housing prices were around 10 times higher than the local average annual income of $98,200.
Further south in San Diego and Carlsbad, the median housing prices last year were nearly 9 times higher than the local average annual income of $76,000.
The authors of the report, in the summary of “The State of the Nation’s Housing 2024,” highlighted that both homeowners and renters were facing steep housing costs. With rising housing prices and interest rates, millions of potential homebuyers across the US were forced out of the market. Additionally, increasing insurance and property taxes were adding to the cost of homeownership.
Furthermore, the construction of single-family homes might be hindered by persistent development obstacles and high construction costs.
However, in recent years, California has implemented several measures aiming to lower the barriers to homeownership. The state government has eased permit and environmental assessment requirements for construction projects to make building more convenient, quicker, and less costly.
In 2023, California also restructured land owned by religious institutions and colleges to facilitate the development of affordable housing, adding 171,000 acres of developable land.
Additionally, a new subsidy program was introduced in California, providing $40,000 in upfront construction costs for low-income individuals and offering first-time homebuyers up to a 20% subsidy, capped at $150,000, to cover down payments and transfer fees.
Despite these efforts, Dan McCue, the lead author of the report and senior researcher, noted that since the pandemic, rents and housing prices in the US had sharply risen. Home prices nationwide had increased by an average of 46% since 2022, while rents had risen by 26%.
McCue emphasized that the high housing prices were continuing to escalate, exacerbating the situation. Additionally, the housing supply in the US had decreased by approximately 30% compared to pre-pandemic levels.
One of the reasons for the supply shortage was that many homeowners chose to stay put due to interest rates hovering around a high level of about 7%. The double blow of high housing prices and interest rates had driven the housing inventory in the US to its lowest level in 20 years.
The growth in the rental market had also slowed down due to persistent high rents post-pandemic. McCue pointed out that this posed a problem for a record number of renters – over 12 million people in the US were spending more than half of their income on housing expenses, a common issue among low- to moderate-income groups.
The report further highlighted the 35% increase in housing insurance costs, which posed a significant burden for low-income homeowners.
“We are concerned that the barriers to homeownership are increasingly high for everyone except the highest-income households,” stated McCue. “In most cities, the threshold for purchasing a home has, in fact, risen.”
Nevertheless, the report indicated a continuous growth in demand for both rental and single-family homes as the number of households in the US increased by 1.7 million in 2023.
McCue estimated that the Z Generation, aged 12 to 27, had formed an additional 8 million households over the past four years.
Moreover, the pressure on housing supply caused by the growth in immigrant populations should not be overlooked. McCue noted, “This is significant growth that is effectively supporting market demand.”