In the third quarter of 2023, the housing affordability index in Sacramento County, California, was 23%, the lowest since late 2006. The affordability index measures the percentage of residents who can afford to purchase a typical single-family home in the region, and an index of 23% indicates that less than a quarter of local families have the financial means necessary to buy an average house.

From 2008 onward, the affordability index has experienced several significant fluctuations. During the 2008 financial crisis, triggered by the bursting of the housing bubble, home prices collapsed due to speculation and the mass issuance of subprime mortgages to high-risk borrowers. Although this led to a decrease in property prices, high unemployment, and strict credit criteria limited the ability of many people to purchase homes during the post-crisis period (2008-2012).

Even though home prices fell during that time, access to homeownership remained challenging, as many households had lost their purchasing power due to foreclosures and adverse economic conditions. Financial institutions tightened lending requirements, further complicating consumers’ ability to qualify for new mortgages.

More recently, from 2020 to 2023, housing affordability has been challenged once again. Home prices have rapidly increased, driven by high demand and limited supply. Additionally, mortgage interest rates have risen due to monetary policies controlling inflation. At the same time, wage growth has not kept pace with the rising cost of homes, which has exacerbated affordability challenges.

This landscape reflects an economically challenging environment that has made property access more expensive in the region. The current situation underscores the need for policies that address economic disparities and foster a more balanced real estate market, particularly by reflecting on lessons learned since the 2008 crisis.

Factors Contributing to the Decrease in Affordability

  • Increase in Housing Prices: California’s home prices have long been, and continue to be, much more expensive than those of the rest of the US. Mid-tier homes are more than twice as expensive as the typical mid-tier US home. Perhaps even more importantly for a first-time home buyer, a bottom-tier home in California is now about 32 percent more costly than a mid-tier home in the rest of the U.S., a gap that has widened over the last decade. 
  • Increase in Mortgage Rates: The combination of rising home prices and mortgage rates has dramatically increased home buying costs. Since January 2020, the monthly payments for a newly purchased mid-tier home have surged by about $2,400. Initially, in 2020, there was a minor reduction in monthly payments due to a dip in mortgage rates. However, in 2021, the increase in home prices became the main factor pushing up monthly payments, as buyers needed larger loans to afford these costlier homes. Beginning in 2022, with the Federal Reserve raising interest rates to combat inflation, mortgage rates became the leading force behind the escalating costs. Specifically, the rate for a 30-year fixed mortgage rose sharply from 2.7% in January 2021 to 7.6% by October 2023, before decreasing to 6.2% in September 2024. The simultaneous rise in mortgage rates and home prices creates a compounding effect on monthly payments since borrowers face higher interest costs on these increased loan amounts.
  • Housing Costs Have Grown More Quickly Than Wages: Affordability depends on housing costs, household incomes, and wages. In September 2024, the annual household income needed to qualify for a mortgage on a mid-tier California home was about $221,000, over two times the median California household income in 2023 ($96,500). A bottom-tier home needs about $136,000 in annual revenue to qualify for a mortgage, about 40 percent higher than the median household income in 2023.
  • Dramatic Rise in Monthly Payments for New Home Purchases Since 2020:  Although monthly payments for a newly purchased mid-tier home, which include mortgage, taxes, and homeowners’ insurance, have decreased in 2024, they remain significantly higher than before 2020. By September 2024, the monthly cost for a mid-tier home reached over 5,500, a 75 percent increase since January 2020.

Additionally, the difference between the monthly costs of buying a bottom-tier home versus renting is approaching levels reminiscent of the housing bubble in the mid-2000s. This sharp rise in monthly expenses for homebuyers is primarily due to escalating home prices and rising mortgage rates, which we delve into in more detail below.

Community Impact

  • Decrease in Homeownership: The combination of high prices and high interest rates has led to a decrease in the homeownership rate, as many families cannot meet the financial requirements to purchase a home.
  • Rising Demand for Rentals: The inability to purchase homes has increased the demand for rental properties, which has raised rental prices, affecting low- and middle-income renters.
  • Growing Economic Inequality: The gap between household incomes and housing costs has exacerbated economic inequality, limiting many families’ opportunities for social mobility and financial stability.

Changes in the Residential Lending Industry

The current situation in Sacramento County highlights the need for public policies that address housing affordability. This could include incentives for building affordable housing, homebuyer assistance programs, and measures to control the increase in home prices and mortgage rates.

Recent housing incentives have started to reshape the landscape, making homeownership more attainable for those entering the market for the first time. These incentives, ranging from federal to local, aim to alleviate financial constraints and provide more pathways to secure housing. 

Federal Housing Incentives

The Federal Housing Administration (FHA) loan remains a cornerstone of federal efforts to increase homeownership among first-time buyers. FHA loans are notable for their low down payment requirement of 3.5%, making them accessible to individuals who might not have substantial savings or strong credit histories. FHA loans are crucial in maintaining market accessibility as economic pressures and housing prices rise significantly. According to recent data, over 1.75 million FHA loans were issued in 2023 alone, signaling their significant role in helping first-time buyers enter the housing market.

Complementing FHA efforts are the U.S. Department of Agriculture (USDA) loans, which cater specifically to rural homebuyers. These loans eliminate down payment requirements and offer competitive interest rates, making them attractive for buyers in less densely populated areas. USDA loans will continue to be pivotal for regions where traditional banking services may not be as robust, providing necessary financial pathways to homeownership.

While the First-Time Homebuyer Credit program is no longer active, there’s an increasing legislative interest in reviving similar initiatives. Lawmakers are exploring avenues to introduce new forms of tax relief aimed at reducing the financial burden of buying a home. Such discussions highlight a policy direction that focuses on renewing financial support and incentives for first-time homebuyers, potentially expanding their access to the market in a landscape that continues to present economic challenges. These potential future programs are poised to provide crucial support amid increasing property costs and fluctuating mortgage rates, making homeownership more attainable for many.

State-Level Incentives

State-level housing programs offer another critical support layer, often tailored to specific regional market conditions. The California Housing Finance Agency (CalHFA) exemplifies state efforts to foster homeownership through various programs in California. The MyHome Assistance Program offers buyers up to 3.5% of the home price in aid for down payments or closing costs. This initiative is especially beneficial in higher-cost areas like California, where property prices significantly affect affordability.

By the end of 2023, CalHFA initiatives had helped over 250,000 families transition from renting to owning, underscoring the impact of targeted state-level interventions in bridging the affordability gap. These programs are designed to respond dynamically to economic changes, providing resilience in the housing market.

Local Government Efforts

Local municipalities craft bespoke programs that focus on specific community housing challenges. In Sacramento, for example, the Sacramento Housing and Redevelopment Agency provides down payment assistance of up to $20,000, allowing low- to moderate-income buyers to mitigate the financial barrier of up-front costs. This initiative is particularly essential in urban settings where housing markets are competitive, and costs can be prohibitive.

Localized incentives also respond quickly to shifts in housing demand, ensuring that support remains relevant and effective in promoting homeownership. In many metropolitan areas where housing prices have significantly outpaced wage growth, these municipal efforts are crucial in keeping the door open for first-time buyers.

Lending  Solutions Your Advocate in Homeownership:

Lending Solutions is a trusted guide in navigating the complex landscape of housing incentives. With over six decades of combined expertise, we offer clients strategic insights into leveraging federal, state, and local programs. Our approach ensures clients are well-informed and positioned to benefit fully from available incentives, aligning seamlessly with our philosophy that places people before profits.

As the owner of Real Estate & Lending Solutions, I am particularly passionate about working with first-time buyers, renters priced out of the recent housing market due to inflation, and seniors looking to simplify their lifestyles while putting more money into retirement. Our dedication ensures these groups find tailored solutions that meet their unique needs and aspirations.

If you are considering homeownership and want to explore current incentive opportunities, contact Solutions@RELSgrp.com or (916) 296-7662. Let us guide you as you turn the aspiration of homeownership into reality.

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