In California, plenty of homeowners live in houses they couldn't afford to buy today. That's good news if they plan to sell and leave the state but where will the next buyers come from?
By Scott Burns
Just beyond the parking lot for a Safeway in Santa Rosa, Calif., my early morning walk takes me into an older housing development. The homes are on small lots, about 60 feet wide. They are well-tended, with lovely plantings. Enormous irises are already in full bloom.
The size and design of the houses say they were built in the early '50s -- they are ranch homes, 1,100 to 1,400 square feet. Most have single-car garages. In the background, a tall grassy hill looms.
A house painter dressed in coveralls walks toward me. We start to talk. I learn the house behind me is his, that he bought it nearly 30 years ago for $17,500, and that he has improved it by adding a family room. Like its landscaping and small lawn, the house is in perfect condition. In much of America it would sell for about $150,000.
"How much do you think your house is worth?" I ask.
"Prices are crazy here," he says. "About $900,000."
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Location, location, location
Somehow, I am not shocked. This is California, the Tulip State. A compulsive reader of area home guides, I know that $300 a square foot is basic, $400 is routine and figures way over that are common. People are selling in Marin County, to the south, to take advantage of the "bargains" here. Indeed, a day later I describe the house and neighborhood to a Realtor. She immediately informs me $900,000 is a bit high.
"It's more likely worth about $800,000," she says.
An advertisement from a Russian River Realtor offers, "RURAL SEBASTOPOL. Beautiful sunny view lot with older mobile home. Approximately 1/2-acre lot. Mobile is in good condition (for its age) and has large spacious rooms and covered patio. $350,000."
It may not sell for that, of course. But I can't help thinking about a house in suburban Austin, Texas, that has been for sale since last summer. The development offers bike paths, community pools and tennis courts, and an occasional view of Lake Travis. Like Lake Woebegone, all of the children there are above average, probably because at least one of their parents works for Dell Computer. This particular house has one of those distant Lake Travis views from the master bedroom, 3,500 square feet of living space, a large lot, 2 1/2 baths, etc. -- but it has no takers at $300,000.
The paycheck gap
The real issue, however, isn't the stunning differences in price from one location to another. It's the paycheck gap. California is full of working-stiff houses with fat-cat price tags.
Visit a Web site like Bankrate.com and you can play with one of the many "How much house can you afford?" calculators. Its calculator tells me that if you have a 20% down payment (that's an impressive $160,000 on an $800,000 home) and can get a 30-year mortgage at 5%, you'll need an income of about $13,000 a month to qualify for the necessary mortgage. (This assumes that real-estate taxes are only 1/2 of 1% of value, that insurance is relatively cheap and that you've managed to avoid any consumer debt that might reduce the amount you can borrow.)
So you'd need an income of $156,000 a year to buy that house for $800,000.
How much would you bet the owner doesn't earn that much? While some painting contractors do very well, I've never met a painter who earns $156,000 a year. Indeed, fewer than 5% of all income-tax returns report that much. Most get there by having two earners.
Basically, California is a state where few of the homeowners would qualify to buy the houses they already own. This is good for them -- if they have plans to sell their homes and move out of the state.
But it makes you wonder who (and where) the next buyer is.
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