Last week, we wrote about the demographics shift that could precipitate a period of healthy demand for real estate. The 20-24 and 25-29 age cohorts are now the largest in the United States. As these “millenials” graduate, advance in work, and start families, they will need housing, and the existing supply may not be able to cover demand. Will we see a construction boom? Could this boom be a significant U.S. economic driver?
This week, we bring this theme a little closer to home. Like the rest of the country, the San Luis Obispo County real estate market rose during the bubble years (+96% prices: 2001-2006), dipped mightily (-37% prices: 2007-2011), and then recovered energetically (+30% prices: 2011-2014).
Rising prices indicate a gratifyingly robust housing sector, but the diminished affordability hurts the very same young workers that we hope will drive the economy.
The median price for a single-family residential home in San Luis Obispo County was $480,000 through October, a rise of about 30% over 36 months. In 2011, 39% of sold properties were “distressed” (foreclosure or short sale), but today that portion is just 6%. Through October of 2014, foreclosure properties were priced 35% lower than “normal” properties on average. Such deals are now much more difficult to find, and when something affordable does enter the market, multiple buyers queue to snap it up.
Zillow put together a fascinating graphic to visualize real estate market affordability for young first-time buyers. Zillow took the median income for ages 23- to 34, and assumed a 30-year fixed mortgage and a down payment of 5% (younger buyers often have less savings and so require a lower down payment.). How much of their income would this median, young first-timer need to pay to obtain an “affordable” home (defined as the lower 33% of for-sale homes)?
No surprise: it is less affordable for first-time buyers to purchase a home. On the national level, Zillow estimates that first-timers should expect to pay 17.4% of their income per monthly mortgage payment. The typical buyer could expect to pay 15.3% (“typical” is defined as a buyer with median income who purchases a median priced home with a standard 20% down payment).
Zillow’s nifty tool lets us take a look at the San Luis Obispo-Paso Robles area affordability as well. The picture is about as grim as you might expect. The first-time buyer with a (local) median income for ages 23-34 would need to commit 54.9% of income to get a mortgage, compared to 39.5% for repeat buyers. These numbers disqualify many people right off the bat.
So how do we make room for this young workforce in our growing economy?
More housing supply should help. We have profiled local efforts to expand access to affordable workforce housing. A recent decision by the San Luis Obispo City Council appears to have cleared the way for a housing development out by the SLO airport. The good news is that everybody from local businesses, to developers, to government officials have identified a problem and are working to find solutions.
Lending plays a significant part of the “affordability” conversation as well. Broadly speaking, mortgage lenders are relaxing their qualification standards, which will give more people the ability to afford a home loan.
One notable example: Fannie Mae recently reduced their down payment requirement for a conventional 30-year loan from 5% to 3%.
“The number one hurdle to homeownership is down payment: it takes folks a long time to save $100,000,” commented Central Coast Lending owner Jason Grote. “This program lowers that bar, making home ownership more attainable for more working class folks.”
Education will also play an important roll. Potential buyers need to know their options. A recent report by NeighborWorks, a nonprofit community development corporation, estimated that 70% of U.S. adults aren’t aware that down payment assistance is available. Programs like the Mortgage Credit Certificate (MCC), the CCL Workforce Housing loan (CCLWorks), and the California Homebuyers’ Down Payment Assistance Program (CHDAP) all offer price cuts and/or down payment assistance for first-time, middle-income home buyers.
For a more in-depth look about how first-time Central Coast buyers can better afford homeownership, read our guide here.
At Central Coast Lending, we have had great success qualifying all types of people. Our unique banker / broker hybrid model gives us flexibility to find the right loans for all types of financial situations. Give us a call at 805.543.LOAN for a completely free, honest, and confidential assessment of your finances, and find out what you can afford!