HOW DO THEY AFFORD IT?
Kelly Zito, Chronicle Staff Writer
The housing market is red-hot in the Bay Area. So, who’s buying those pricey homes — and how are they able to do it? The answers: Young professionals. Riskier loans. Longer commutes. Smaller houses. And, in some cases, a lot of peanut butter and jelly..
With Hayes Valley condos selling for $750,000 and Livermore tract homes fetching $1.3 million, the question is on everyone’s lips: Who’s paying these stratospheric prices?
The answer, increasingly, is young professionals who are devoting exorbitant portions of their incomes to housing, according to a new study.
"It’s painful, more painful than I thought it was going to be," said Kris Crichton, who bought a $640,000 condo in San Francisco‘s SoMa neighborhood using $50,000 in equity from a home she owned with her former husband and an interest-only loan for part of the mortgage. "I’m eating ramen and PB&J every day, but at least I have a house."
Recent California homebuyers are finding novel ways to stretch into the nation’s most expensive real estate market, including taking out riskier adjustable loans, leveraging existing equity, and choosing smaller homes and longer commutes, says a study released today by the Public Policy Institute of California in San Francisco.
"Californians are being resourceful about homeownership just like they are about many other parts of life," said Hans Johnson, co-author of "California’s Newest Homeowners, Affording the Unaffordable."
But one of the study’s most surprising conclusions finds that nearly 1 out of every 5 recent California homebuyers is spending 50 percent or more of his or her income on housing costs — twice the national average (the study defines recent home buyers as those who purchased homes in 2002 and 2003). Though 2004 and 2005 data were not available to include in the study, Johnson said the percentage is likely even higher today.
Experts fret that consumers are placing an expensive bet on an overheated market that is expected to cool off. "I worry there are going to be a lot of unhappy young couples five to 10 years from now because of the heavy risks they’re taking on," said Ed Leamer, economist at the UCLA Anderson Forecast.
The study — which primarily analyzed 2000-2003 data from the U.S. Census Bureau, the California Association of Realtors, DataQuick, the National Association of Home Builders and the regulator of Freddie Mac and Fannie Mae – – examined how homeownership rates across the state are rising at a time when prices are fast outpacing income growth.
Some of the explanations sound familiar.
Californians, on average, make more money than people in other states. In 2003, for example, nearly 1 in 5 recent home buyers had a household income of more than $125,000, compared to 1 out of 10 in the rest of the country.
And amid rapidly rising home prices — about 47 percent in the Bay Area in the last three years, according to DataQuick — many are trading up using equity from the sale of another property. Three out of 4 homes sold in 2004 went to people who had previously owned a home, the study found.
Jason Morrison and Andrea Sumits bought their first house in North Berkeley three years ago after living with Morrison’s father in Lafayette for a year to save money for the down payment. Armed with perhaps a couple hundred thousand in equity from a sale, the couple hopes to move into a bigger house on a quieter street, either in Berkeley or Marin County.
Increasing numbers of both trade-up and first-time buyers in the state are allotting a fat chunk of their incomes to their house payments. Although the U.S. Department of Housing and Urban Development recommends that households pay no more than 30 percent of their incomes on housing costs, 40 percent of all households in California with mortgages and 52 percent of the newest home buyers exceed that threshold. In the Bay Area, 44 percent of recent home buyers dedicated 30 percent or more of their household incomes to homeowner costs, which include mortgage, real estate taxes, insurance, utilities and condo fees, the study said.
Caltrans landscape architect Marty Hogan is among a growing share of homeowners whose housing costs eat up a whopping 50 percent or more of their income.
Last September, Hogan, 49, bought his first home — a two-bedroom condo in Hercules for $301,000. He jokes that his mortgage payments are twice his old rent, but he figures that after deducting the mortgage interest from his taxes, he will come out ahead.
"You just adjust," Hogan said. "You’re still a little broke, but it’s not too bad."
Competitive lenders and a flood of investment in bonds and real estate are helping drive the trend toward smaller down payments, easier credit standards and larger percentage of income spent on housing, experts say. But no one seems to know whether the lending standards have grown too loose.
Almost 50 percent of home purchases in Californians last year were financed using interest-only loans, up from about 2 percent in 2001. As such, financially stretched buyers could quickly find themselves at the breaking point if home values were to stagnate or interest rates to jump.
"Everything works out well provided home values are rising and the economy and jobs remain strong," said Keith Gumbinger, vice president of HSH Associates, a mortgage information firm in New Jersey. "But in an adverse environment, those borrowers can get into trouble."
Likewise for lenders.
"If the risks are distributed, there’s not that much of a problem," said Gumbinger. "But if there’s an accumulation of risks out there, a lender who has accumulated a lot of these loans, and they fall over at the same time … that could pose some systemic risks."
Among the study’s other unexpected findings was that homeownership has risen among those in their early 30s. What’s more, many buyers in the last several years have moderate or even modest incomes — between $40,000 and $80,000.
An account manager at a fair-trade nonprofit in Oakland, Kristina Pappas describes her income as being at the low end of that spectrum. Still, by using a risky type of adjustable-rate mortgage and renting out a couple of rooms in the Mission district condo she bought late last year, Pappas, 35, has been able to get by.
"I don’t worry that it’s a gamble because … it’s my home — it’s not an investment for me," she said.
Others buyers have had to compromise on space or location to get a toehold in the market. One-third of recent California home buyers purchased dwellings with two or fewer rooms. And in Northern California, for example, prices are soaring in places like Yuba City, Merced, Redding and Stockton as refugees from the Bay Area flee to the lower home prices in the Central Valley.
Dan Kalb and his fiancee didn’t have to go that far.
Kalb, who had lived in San Francisco for 21 years, originally started his home search in San Francisco. But af
ter finding they could afford little more than a closet in the city, they quickly redirected their search to Oakland and Berkeley. After about a dozen failed offers, the couple landed a $700,000, 1,165-square-foot Craftsman-style home with two bedrooms in the Rockridge section of Oakland.
"It’s definitely smaller than what we wanted, but it’s a good neighborhood," said Kalb, a policy manager for an environmental nonprofit organization.
Melita and David Doostan were able to get a bigger place than they originally imagined — a triplex in North Berkeley. Their secret? Parents. David’s father kicked in about half of the down payment on the property.
"We’re lucky, we can pay that back — whenever," David said. "A lot of people scrape together whatever they can to make it work."
Gleb Budman, who looked at a $729,000 condo in Noe Valley last weekend, also expects to use all the tricks he can — financial help from family, an interest-only loan and renting out rooms.
"All of the above," he said.
I thought it would be fun to post this trip down memory lane. Originally published on August 18, 2005.
A few things have changed since then. A few.