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Who Can Afford These Homes?

As real estate prices have escalated over the past several years, people often ask me “Who can afford these homes?!” Let’s face it, home affordability is a big issue. Some (many!) of the prices we see for a modest family-home here along the coast of South Orange County are outrageous and beyond the reach of the masses. Even though the question is typically posed as rhetorical, I thought I’d try to give it a serious answer.

To do so, I ran a current search (as of August 10, 2017) for closed sales over the past six months in five nearby cities. I used the same criteria for each city, that being about 2,000 square feet of living space with at least three bedrooms and nothing over $2 million. Here are the results:

CitySq.Ft.Bed/BathAvg. Price
City:
San Juan Capistrano
Sq.Ft.:
1,960
Bed/Bath:
3/2
Avg. Price:
$750,000
City:
Laguna Niguel
Sq.Ft.:
1,957
Bed/Bath:
3/3
Avg. Price:
$842,000
City:
San Clemente
Sq.Ft.:
1,990
Bed/Bath:
3/3
Avg. Price:
$940,000
City:
Dana Point
Sq.Ft.:
1,982
Bed/Bath:
3/3
Avg. Price:
$1,053,000
City:
Laguna Beach
Sq.Ft.:
1,973
Bed/Bath:
3/3
Avg. Price:
$1,587,000

As you can see, in coastal South Orange County (my focus area), we’re basically looking at between $750,000 and $1.6 million for a modest single family home, depending on the location, or an average of $968,912 with a median of $865,000.

Next, I checked with Rob Briggs of New American Funding to find out what a safe debt-to-equity ratio is, as viewed by a lender. He said they like to see 43% debt to equity, but there are programs that go higher. Just to be clear, “debt” includes both installment and revolving loans for things like car loans, credit card debt, student loans and home mortgage (including property taxes, HOA and homeowner’s insurance). To be safe, I used 43% in my analysis. Armed with this information, I assumed the buyers would have a 20% down payment, a big assumption, I know, but presumably coming from equity from another sale, gift from parents, etc. I also assumed a fixed interest rate of 4.0% for a 30 year loan, added in property taxes, insurance and additional debt of $1,000 per month to cover car payments, student loans and some credit card debt. The following chart shows a breakdown by city using the average price for that city, factoring in a 20% down payment and calculating what your household income would need to be at 43% debt to equity.

CityAvg PriceDown PmtIncome
City:
San Juan Capistrano
Avg Price:
$750,000
Down Pmt:
$150,000
Income:
$136,018
City:
Laguna Niguel
Avg Price:
$842,000
Down Pmt:
$168,400
Income:
$148,481
City:
San Clemente
Avg Price:
$940,000
Down Pmt:
$188,000
Income:
$161,757
City:
Dana Point
Avg Price:
$1,053,000
Down Pmt:
$210,600
Income:
$177,065
City:
Laguna Beach
Avg Price:
$1,587,000
Down Pmt:
$317,400
Income:
$249,404

Finally, to answer the question of “Who can afford these homes?” I searched for average salaries by job type in Orange County. Here’s what I found:
• An engineer fresh out of college with a four-year degree starts at an average of $78,000 per year
• A school teacher in the Laguna Beach School District earns an average of $93,000 per year (and gets summers off)
• A mid-level manager averages $97,244 per year
• A firefighter has an average base salary of $91,000, but earns an average of $65,000 more in overtime, totaling $156,000 per year (with over $60,000 more in benefits)
My conclusion is that household income needs to be at least $150,000 or more to comfortably purchase a modest single-family home in coastal South Orange County. Therefore, if you are not a reality TV star, one person needs to have better-than-average income or there needs to be more than one wage earner in the household.

Geez, it’s not cheap to live in Paradise.

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