If you're a millennial living in California, buying your first home doesn't come any harder.
California ranked as the toughest state in the nation for first-time home buyers, who typically would be in the millennial age bracket of 18 to 34, according to a recent report by Claes Bell, an analyst with Bankrate.com.
There are several reasons the Golden State placed last in the report, including the relatively high cost of housing, the tight market for available entry-level homes and the struggle that millennials face in saving for a down payment.
In Southern California, the median home price for new and resale homes hit $460,000 in February, up 7% from a year earlier and the latest gain in nearly five years of steady price increases, real estate firm CoreLogic reported recently.
The easiest states for first-time home buyers were Iowa and Utah, Bell found.
We asked Bell to walk us through the reasons that California is the nation's hardest state for buying that first house and how — despite the hurdles — it's still possible for millennials to get into the market. Here's an edited excerpt:
What's one of the key reasons California is so tough?
California consumes one of the highest percentages of people's income for housing. Folks in that typical first-time home buyer age range, anywhere from the mid-20s to early 40s, are going to have a difficult time in many cases finding room in their budget for a California-sized mortgage payment.
Not only do homes cost so much but they cost so much relative to people's incomes. In California, people are going to be earning more than the average state, but because the houses are just that much more expensive, affordability becomes a real problem.
Can you be more specific about where California ranked?
The typical rule of thumb is that you want your housing costs, inclusive of everything, to be 28% or less of your gross income, and that's going to be a hard thing to find in a lot of places in California right now. In all 50 states the average was 19.4%, in California it was 35.2%.
What else did your research find?
Home builders are not keeping up with demand for homes in California. There just aren't enough homes being built relative to the growing number of households in California.
I looked at the growth of the housing stock and the growth in the number of households from 2010 to 2015. You would want that growth spread to be getting wider, because that would show an increase in housing relative to the number of people there. Unfortunately, it's going the wrong way in California. The spread basically is negative there.
Why do you think not enough houses are being built?
I've seen a lot of research in recent years that the starter home that was kind of mainstay of the home-building market has sort of fallen out of favor and they're just building more homes at the top of the market for folks rolling over their equity from another home. They're kind of leaving that bottom of the market unsupplied.
It's a huge issue, and it's going to be more of an issue as more millennials grow into this prime first-time home buyer range and it's going to have all kinds of problems down the line.
Such as what?
A lot of folks are going to depend on their home equity to fund at least part of their retirement. If they don't get into a home until their mid-40s because of this challenging housing market, they're not going to have as much equity when they retire.
But it's not easy saving for a home. That's why so many millennials live in rental units, correct?
Yes, and it's kind of a vicious cycle because the cost of renting has gone up so much in California. That prevents people from saving for a down payment. It keeps them trapped in that rental market for an even longer period of time.
How did employment factor in California's ranking?
I did a five-year average of unemployment in each state and, among folks 25 to 34 in California, the average unemployment rate was 7.7%. The average for all the states was 6.2%.
That's a problem. When lenders look at whether to lend to you, one thing they look at is your work history, so having a steady work history is really important.
So is there any hope for first-time home buyers?
Yes. A lot of people are under the impression you need a 10% down payment in order to qualify for a loan and that is not the case. A lot of first-time buyers can qualify for an FHA [Federal Housing Administration] loan that allows you to buy a home with as little as 3.5% down, depending on your credit score and other factors. I would definitely suggest people look into that.
Also, a lot of local municipalities have first-time home buyer-assistance programs, and people should look at those programs in their area. You also may be able to qualify for additional assistance as a first-time home buyer based on your occupation, for folks like teachers, firefighters and law enforcement.
What type of assistance?
Sometimes it's down-payment assistance, where it's almost like a grant or a loan you'll pay back when you sell your home, but you don't have to make payments on it in the meantime.
Regardless, isn't being able to save money the main obstacle to buying that first home?
Absolutely. That is key, having the financial discipline to put that money away and being in a position to do it. But for some folks, there's just no room in their budget to save.