Owners Getting Paid to Buy a Home in California

According to CoreLogic’s recent HomeEquity Report, California homeowners experienced a gain in wealth of approximately $40,000, highlighting the higher home prices.

This is all good news for current homeowners, it also indicates good things to come for the nation’s economy. Gains in wealth tends to stimulate extra consumer purchases.

In the U.S., equity grew the most in Californian where they saw the biggest rise in home equity, with the average homeowner gaining $44,000 over the year. Washington homeowners experienced gains of $40,000, on average, while those in Utah, Nevada, Massachusetts and Idaho saw jumps of $20,000 or more. Equity increased the smallest in Louisiana, where homeowners gained just $311 for the year.

The midpoint price of all sales for a Southern California home was $507,000 last month, which is only $2,500 below the all-time high it hit in December 2017, the Irvine-based real estate data firm reported in late February.

That's a rise of 11.4 percent from the January 2017 median price, the highest appreciation rate dating back to May 2014. By comparison, the average price increase over the past two years was 6.7 percent.

The biggest gains occurred in the Inland Empire, which has Southern California's most affordable home prices. Median prices rose 12.1 percent to $370,000 in Riverside County and 10.8 percent to $312,500 in San Bernardino County. Ventura County’s median increased 9.8 percent to $560,000, while Orange County saw prices leap 8.8 percent to $690,000 vs. average price gains of 6 percent. Los Angeles County’s year-over-year gain of 7.6 percent was closer to its two-year average of 7.2 percent. The January median there was $565,000.

Inland Empire home sales represented nearly a third of all Southern California transactions last month, which is also the most. It's also the Inland Empire’s largest share of sales in six years.

 Inland Empire economist John Husing says "People are being priced out of the coastal counties, and the (price) differential is the largest in history between the coastal counties and the inland counties. So, more people are looking to migrate inland."

But similar to other parts in Southern California, there's not enough housing to meet demand in Riverside and San Bernardino counties, Husing said.  The large price gains are due to not enough housing which means these homes would sell for and appreciate less with a normal supply and demand inventory.

There has been a rise in blue collar jobs in the Inland Empire, yet white collar people in such fields as tech and finance now make up the largest share of commuters driving to and from Orange and L.A. counties for work.

How Much of My Monthly Income Should Go Towards Housing?

This is a typical question many homebuyers ask.  How much of my income should be applied to my house payment?  The answer you'll hear from one lender to the next or depending on the loan program can be a wide range. For example, many conservative lenders will say it is between 28% and 36%. While more aggressive lenders may allow up to 50% of your monthly gross income on conforming and non-conforming loans.

Are you budgeting already?

Figuring out how much you can afford for your monthly housing payment shouldn't automatically be determined by an arbitrary percentage. Some people are comfortable paying a certain percentage each month and then there's others who have the means to allocate more money for housing such as half of their income. 

A large majority of conforming mortgages are underwritten by an automated system that uses a maximum back-end DTI percentage of 43 or 45. Other programs like an FHA (Federal Housing Administration) loan are more generous and may offer the borrower a debt-to-income ratio up to 55%.

Important factors that dictate an automated approval are things such as the individual's credit profile, credit score, down payment, liquid assets, and type of loan.  What got one person approved doesn't always mean it will work for another borrower with many of the same data.  Getting advice from an experienced loan officer is a great place to start.

To clarify, the back-end debt to income (DTI) ratio consists of the housing payment and the borrower's other monthly debt obligations.  A front-end DTI is only the housing payment and many lenders use 28-33% but that is not set in stone so it pays to use a company that can shop around for multiple programs to satisfy your financial goals.

Real Examples

Let’s look at two borrowers whose gross monthly income is $8,000.

Borrower A has monthly debt of $1500 and Borrower B has monthly debt of $800.

FHA Mortgages

FHA will permit as much as 55% debt ratio.  Monthly Income * 55% = max housing and debt

If the gross monthly income is $8000 then $8000 * 55% = $4400

Borrower A has monthly debt of $1500.  If max housing and debt is $4400 then the difference may represent the maximum housing payment.  $4400 – $1500 = $2900 housing payment limit.

Borrower B has monthly debt of $800. If maximum housing and debt is $4400 then the difference may represent the maximum housing payment.  $4400 – $800 = $3600 max housing payment.

Conventional Loan

A conventional loan may offer up to a 50% debt-to-income ratio.  Income * 50% = max housing and debt

If the gross monthly income is $8000 then $8000 * 50% = $4000

Borrower A has monthly debt of $1500.  If max housing and debt is $4000 then the difference may represent the maximum housing payment.  $4000 – $1500 = $2500 max housing payment.

Borrower B has monthly debt of $800. If max housing and debt is $3000 then the difference may represent the maximum housing payment.  $4000 – $800 = $3200 max housing payment.

So, you know your maximum allowed payment. What is the maximum sales price?

Once you know your highest payment you're eligible, simply do the math in reverse to determine the maximum loan and sales price.   

While you can try to do this to get an approximation, other critical factors that must be included are the county property taxes, homeowners insurance, and if applicable mortgage insurance, flood insurance and HOA fee.  That's a lot of math to do without the necessary and accurate information.  These variables easily accessible by a licensed mortgage professional.