01 Mar Is owning a home in California cheaper than renting?
Renters in 2017 spent more of their income on rent, while homeowners actually spent less of their income on mortgage payments and associated housing costs. In California, both are paying way too much.
Financial experts recommend a tenant or owner limit their cost for shelter to no more than 31% of their income. This is fine and well in most parts of the country, but is exceeded for tenants and owners in almost all parts of California, according to data from Zillow.
Compared to the historical average — between 1980 and 2000 — California tenants at the end of 2017 spent:
- 48% of their income in Los Angeles, up from the historical average of 36%;
- 42% of their income in San Francisco, up from the historical average of 30%;
- 42% of their income in San Diego, up from the historical average of 34%;
- 38% of their income in San Jose, up from the historical average of 26%;
- 37% of their income in Riverside, up from the historical average of 32%; and
- 32% of their income in Sacramento, up from the historical average of 31%.
Tenants in Los Angeles have it the worst in the state, with the average renter spending 48% of their income on rent at the end of 2017. This percentage has steadily increased over the last few decades as demand from newcomers has consistently outpaced new rental construction. In fact, the last time rent was at the traditionally recommended 31% of tenant income was in 1979.
In California, homeowners are spending on average:
- 43% of their income in San Jose, up from the historical average of 40%;
- 41% of their income in Los Angeles, up from the historical average of 40%;
- 41% of the income in San Francisco, down from the historical average of 43%;
- 34% of their income in San Diego, down from the historical average of 39%;
- 25% of their income in Riverside, down from the historical average of 31%; and
- 25% of their income in Sacramento, down from the historical average of 33%.
While homeowner spending has improved historically in some parts of the state, the share of income spent on mortgage payments is still objectively high in California’s coastal cities.
Coastal housing costs are too high, period
While the state-wide trends are different for tenants and homeowners, one thing is the same: most Californians are spending way too much of their income on housing.
In California, the annual difference between the share of income tenants paid in 1980-2000 versus what they paid in 2017 is an additional:
- $13,500 in San Jose;
- $11,200 in San Francisco;
- $8,200 in Los Angeles;
- $5,300 in San Diego;
- $2,400 in Riverside; and
- no tangible difference in Sacramento, according to a recent Zillow analysis.
Aside from Sacramento, tenants across the state are spending significantly more of their income on rent today than in prior years, foregoing increased saving for a down payment, retirement, education or other expenses.
For perspective, consider Los Angeles, which has reached a crisis level for desperate tenants. In eight years, the additional $8,200 spent each year on rent could add up to a 10% down payment on the average priced home in the area. Or, the difference could be spent in other ways that would benefit the local economy. Either way, the abnormally high rent in Los Angeles has undoubtedly contributed to one of the lowest homeownership rates in the state — less than 47% as of Q3 2017.
The solution is ultimately more housing. This will be accomplished by:
- loosening zoning restrictions and allowing higher density in urban areas;
- smoothing the permitting process for low- and mid-tier housing; and
- incentivizing builders of low- and mid-tier rental housing.
Some of these actions have already begun, primarily with the package of affordable housing bills passed by California’s legislature in 2017. Rents will level out once new construction picks up, likely by the end of 2018.