High Cost of Housing in California

When Kim and Jim Larsen planned to move to Northern California from Omaha in early 2004, they expected that they would have to pay more for a house in California than in Omaha, but they were not prepared for the magnitude of the difference. In Omaha, the Larsens own a typical three-bedroom home. It has a finished basement, where Jim brews award-winning beer and their high-school daughter has her computer, a family room, and separate dining room. The home has a two-car attached garage and a large fenced yard that borders a greenbelt area. The living space totals approximately 1700 square feet. Built in the 1970s, the house has been well maintained, and is on a quiet cul-de-sac with plenty of visitor parking. After meeting with some real estate agents in the area, the Larsens were pleased to learn that they can expect to sell their home for approximately $155,000, which will result in a profit of approximately $65,000; they purchased their home 12 years ago (Larsen, personal interview, Apr 1, 2004).

Unfortunately, the Larsens discovered that $65,000 is barely sufficient to make a down payment on a similar home in California. Relocating because of Kim's new job--she recently joined the staff of Kaiser Permanente as a psychiatrist--they set out to look at homes in the Sacramento/Stockton area. Homes that are similar in square footage, and with smaller yards, are currently selling for $350,000. In addition, there is no basement. If the Larsens want to avoid property m

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ncome" 1). Bankers once required that borrowers use approximately one-quarter of their income for housing debt, and have no more than 36 percent of their income in total debt ("How Much" 1). This conservative approach means that homebuyers with the median income could typically support a loan of $191,000 depending on the interest rate and exact terms of the loan. However, bankers have relaxed their rules in recent years so that today's guidelines could well result in borrowers taking on as much as $255,000 in debt based on the median income (Alvarez, personal interview, 1 Apr 2004). The higher level of debt is necessary given the higher prices of homes in California, but puts the lenders as well as the borrowers at risk if housing prices fall and the homeowners end up owing more than their home is worth. In February 2004, the median price of a single-family detached home in California was $394,300, an increase of 20.7 percent over February 2003, but a decline of 2.9 percent from January 2004 ("Median Price" 1). To avoid PMI, homebuyers would have to have nearly $80,000 in a down payment, a significant hurdle for many first-time buyers. ANALYSIS This research revealed that housing prices in California are high, and are co

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