Thursday, June 29, 2017

Riding the Unicorn: The Quest for Homeownership in Los Angeles County

For far too many people in Los Angeles County, being able to afford a home of your own is about as likely as taking a ride on a unicorn.  But for those of you interested in riding the unicorn, consider these facts.

According to CoreLogic's, Southern California Home Resale Activity Report for May 2017, the median price of a detached home in LA County is $585,000, while the median priced condo will set you back $492,000.  What does that actually mean in practical financial terms?  To answer that question I'll use Google's mortgage calculator.

Detached House Example
Let's say you're trying to buy the median-priced detached house.  To be prudent, and avoid paying mortgage insurance, and protect yourself from being underwater if your home value dips, you should save up the traditional 20% down payment, which in this case is a mere $117,000.  Good luck saving that in one of the most expensive rental housing markets in the country.

But okay, let's say you managed to save it up.  You still need to borrow $468,000.  We'll assume you're signing up for a 30-year fixed-rate mortgage at 3.75% interest.  I can say from personal experience that interest rate is about right.  Your base mortgage payment is $2,167 per month.  You also have to pay property taxes, which in LA County will run you about 1% of the purchase price per year, which works out to $488 per month.  We should also budget $100 per month for homeowner's insurance and $200 per month for repairs.  If you don't like my assumption about repairs, wait until your roof starts leaking and then tell me why you don't think that repairs are a perfectly predictable expense that you need to save up for.

Add up all of that up and you're at $2,955 per month in housing costs.  The federal government's affordability standard is spending no more than 30% of your income on housing costs, so . . .

Monthly Income * 0.3 = $2,955
Monthly Income = $9,850

You need to make $9,850 per month or $118,200 per year to afford the median priced detached house.  How much does the typical household in LA County make (median household income)?  $59,134, according to the 2015 American Community Survey.  If the average household in LA County roughly doubled its income, it could afford the median-priced detached house in LA County.  Well that's depressing.  What was the deal with that condo again?

Condo Example
20% down payment: $98,400
Mortgage Amount: $393,600
Mortgage Cost: $1,823 per month (30-year fixed-rate loan at 3.75% interest)
Property Taxes: $410 per month (1% of purchase price per year)
Insurance: $100 per month
HOA Dues: $300 per month
Home Repairs: $100 per month (lower than above because HOA handles exterior stuff)
Total Monthly Cost: $2,733
Monthly Income Needed for Affordability: $9,110
Annual Income Needed for Affordability: $109,320

The condo is a bit more affordable, but you still need to be well above the county median income to avoid overstretching yourself financially.

The moral of the story is if you want to ride the unicorn, be prepared to pay, a lot.  If we want more people to be able to ride the unicorn and enjoy stable housing costs (and we should) we need to build a lot more housing in LA County to address the severe shortage that we have.

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