97% of Households in Los Angeles Can’t Afford a Mortgage. Here’s Why

La La Land might be the place of hopes and dreams, but homeownership isn’t one of them. According to new Zillow data, only 2.8% of non-homeowner households in Los Angeles could afford a typical mortgage today. 

High mortgage rates aren’t the only culprits behind the housing affordability crisis. An extreme lack of supply plays a role, too. 

“The housing shortage is the primary factor driving up prices, particularly in local markets like LA,” said Jeb Smith, a California-based licensed real estate agent and member of CNET Money’s expert review board. In particular, the limited amount of lower-priced homes is leading to increased competition and bidding wars, which drive home prices even higher, according to Smith. 

What’s behind the housing affordability crisis in California?

California has 270 “million-dollar cities,” where the typical home is worth $1 million or more, and LA is just one of those metros. The median home price in LA, which increased more than 10% since last year, is now $1,050,000, more than double the national median. 

Wage growth hasn’t kept pace with housing costs or inflation. The household income needed to afford a median-priced house in California is $197,057, according to a recent report from CNET’s sister site, Bankrate. That’s more than twice the average household income in the city.

Half of the ten worst housing shortages in large US metros are located in California: Sacramento, San Diego, San Francisco, San Jose and Los Angeles. The housing shortage is even more dire due to the state’s strict zoning laws, high construction costs and limited land availability.

Real estate experts point out that there’s not one single factor behind the housing affordability crisis. Rising home prices, high mortgage interest rates and limited housing supply combined have made homeownership inaccessible today.

As the chronic housing shortage continues to push up home prices, it’s become nearly impossible for working-class and middle-class households to afford a down payment, let alone ongoing mortgage payments with interest rates around 7%.

Can you afford a down payment and a mortgage?

Prospective buyers with massive liquid assets might be able to make a huge down payment up front, which translates to a more affordable monthly payment. But households without savings or a windfall are more likely to go with a small down payment and a hefty home loan — that means exorbitant monthly mortgage bills and excessively burdensome interest charges. 

Look at how a down payment would affect the monthly mortgage payments on a $1 million home. For this example, we assumed a 7% interest rate on a 30-year fixed-rate mortgage.

Down payment Up-front costs Monthly mortgage payment5%$50,000$7,05320% $200,000$6,05580% $800,000$2,064
Calculations based on CNET’s Mortgage Calculator

What does this mean for future homebuyers?

Unfortunately, it will take a while before we see significant improvements in the housing market. 

“Large increases in productivity that push wage growth higher and boost new residential construction would help to improve housing affordability,” said Orphe Divounguy, senior economist at Zillow Home Loans. One key to long-term affordability would be to implement land use and zoning reforms that allow more and denser residential construction, according to Divounguy. 

However, government processes are often painstakingly slow, and many are not in favor of looser zoning regulations.

Alternatives approaches to homeownership

Homeownership is becoming increasingly out of reach, which raises serious concerns about how people will be able to establish, build and pass on generational wealth in the future. 

That’s why, even to some financial experts, renting has become the new American dream. Others are sharing homes with partners or friends, or turning to first-time homebuyer programs for assistance with down payments and closing costs.

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