Overview of California Housing Market
California has had a slow recovery from the recession compounded by a lack of affordable housing. The state has some of the highest median home values in the country, as well as a high cost of living.
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Factors in Your California Mortgage Payment
Your monthly mortgage payment will consist of your mortgage principal and interest. On top of that bill, you’ll have to consider property taxes and homeowners insurance as two more recurring expenses.
Property taxes in California are a relative bargain compared to the rest of the nation. With limits in place enforced by Proposition 13, generally property taxes cannot exceed 1% of a property’s market value. Assessed value cannot exceed increases of more than 2% a year. With those rules, California’s effective property tax rate is just 0.81%. On the local and county level, additional taxes can be levied if you live in a special district that’s financing an improvement or other local concern.
Unlike many other states which employ local assessors to determine market value, California bases your initial property tax rate on the purchase price of the property. Each year the value will increase by the rate of inflation, capped at 2%. If the property is your principal place of residence, you’re entitled to the homeowner’s exemption of $7,000 decreased assessed value, which cannot surpass $70 in savings.
As for homeowners insurance, California has reasonable rates. The state ranks 26th-most expensive in the U.S. for annual premiums. Despite the relatively frequent occurrence of natural disasters, including wildfires and earthquakes, the state has lower insurance costs than half of the nation. The average annual policy is about $1,110 a year.
You may want to consider additional insurance to cover earthquakes, as most homeowners insurance policies don’t cover earthquake damage. The California Earthquake Authority is a not-for-profit, privately funded and publicly managed provider of residential earthquake insurance. If you’re considering a property on the coast, you’ll want to take a look at the National Flood Insurance Program (NFIP) to help protect yourself from flood losses.
California also has what’s called the FAIR plan which offers coverage to all property owners as a last resort. This is your option if you can’t find insurance coverage anywhere else on the voluntary market. The coverage is not comprehensive (meaning it doesn’t cover all situations), but provides the absolute basic level of home insurance.
Costs to Expect When Buying a Home in California
One of the costs you’ll want to consider during the home-buying process is a home inspection. Before you close the deal on a house, there’s usually a period where you can arrange a home inspection to determine the state of the house and any potential problems with the property. If problems are found, you generally have some negotiating power over the seller for repairs or price. Typical costs range from $300 to $500, with larger houses falling on the higher end of the price range. Some types of mortgages (such as a VA-backed loan) will require additional tests such as termite inspections. Any additional services will cost extra, but may help you discover serious issues prior to moving in, such as a mold infestation. One last consideration for testing is radon. California doesn’t have as high of risk for radon as some regions in the U.S. However, there are some areas, such as Tulare, that are depicted as having high concentrations of radon, according to the California Department of Conservation’s indoor radon potential map. You’ll want to check to see if your property is in one of those high-risk areas.
If the inspection goes well and you set a closing date for the home, you’ll have to budget for the additional fees that are called closing costs. These costs vary based on the location and value of the home, your mortgage lender and a number of other factors.
Average Closing Costs by County
|County||Avg. Closing Costs||Median Home Value||Closing Costs as % of Home Value|
|San Luis Obispo||$5,033||$445,700||1.13%|
Our Closing Costs Study assumed a 30-year fixed-rate mortgage with a 20% down payment on each county’s median home value. We considered all applicable closing costs, including the mortgage tax, transfer tax and both fixed and variable fees. Once we calculated the typical closing costs in each county we divided that figure by the county’s median home value to find the closing costs as a percentage of home value figure. Sources: US Census Bureau 2015 5-Year American Community Survey, Bankrate and government websites.
A large portion of your closing costs are paid to the lender and are known as origination fees. This includes underwriting, processing, mortgage broker fee, origination points, document preparation and commitment fees. The exact amounts per item will differ per lender. Additional funding fees or other charges will potentially be added to the total, if you’re getting a VA loan or other specialized type lending option.
Other costs you’re responsible for include credit reports, flood certification, survey or appraisal if you or the lender requires it, and an attorney fee if you choose to have one during the buying process. You also have to factor in the cost of title insurance. This type of insurance protects you and the mortgage lender if someone challenges the title to the property. There are two title insurance policy options in California: standard and extended. Extended policy insures against defects, liens, easements, encroachments and conflicts in boundary lines that aren’t reflected in public records. You’ll need a property survey usually for this type of policy. The buyer pays for the mortgage lender’s requirement for title insurance, but if you also buy owner’s coverage, it can be different. In Southern California, it’s customary that the seller pays for owner’s title insurance, but in Northern California, it’s usually split between buyer and seller.
You won’t have to worry about mortgage tax, as California does not charge buyers for purchasing a home, like New York does. However, there are a few transfer tax fees. Generally, the seller in California will pay the city transfer tax or split it with the buyer. The county transfer tax is almost exclusively paid for by the seller, at a rate of $1.10 per $1,000.
Details of California Housing Market
California, the third-largest state by square miles, boasts the largest population of any state in the U.S. It has over 39.3 million residents grouped in three general regions. The southwestern portion of the state near Los Angeles and San Diego constitutes one region. The second is the northwestern Bay Area which contains San Francisco and its suburbs. Third is the San Joaquin valley which runs through the middle of the state. The cities of Stockton, Fresno and Bakersfield are the largest urban areas in the valley and are surrounded mostly by farmland. Most of the eastern and far northern regions of the state are much less populated and have less than 10 people per square mile.
As a whole, California’s housing market has several issues including lack of affordable housing and a slow recovery from the recession. In our Healthiest Housing Markets study, California ranked 35th in the country based on stability, affordability, fluidity and risk of loss factors. According to the Public Policy Institute of California (PPIC), home values continue to rise since the bust from 2008 to 2012, but at a slower rate than in 2014 to 2015.
As of 2016, about 348,000 or roughly 5.2% of California homeowners were still underwater. This means homeowners had mortgages that exceed the market value of their home. The good news is that underwater rate is lower than the nationwide rate of 7.1%. In addition, there’s also hope for California’s foreclosure activity: from August 2012 to August 2016, it declined 75% and is now below pre-financial crisis levels.
However, the housing market is especially tough in the coastal areas where about two-thirds of the population live. The San Francisco area remains the nation’s least affordable major housing market. In June 2017, the median sold price of a single-family home was $1.5 million, according to the California Association of Realtors. In Santa Clara it was $1.2 million and in Marin it was $1.3 million.
It doesn’t stop there, Los Angeles County, Orange County and San Jose County aren’t far behind with some of the nation’s five least-affordable housing markets. Los Angeles County had a median sold single-family home price of $548,000 and Orange County topped it at $795,000. Supply shortages are also an issue, with lack of housing stock leaving many low-income and middle-class homebuyers out of options.
If those prices give you sticker shock, you may find that home prices are more attractive in the Central Valley region. The median sold price was just $260,000 in Fresno and $250,000 in Merced. Sacramento prices are a bit higher at $347,000, but still nowhere near the Bay Area price range.
As for how fast housing inventory moves in California, according to Zillow data the average was only about 70 days in 2016. If you’re looking at areas with an even faster turnaround, such as San Francisco, that number will be much lower. Short times on the market means heavy competition between homebuyers, another factor in California’s difficult market.
Some of the major considerations of owning property in California other than price is earthquake risk, drought and wildfire. While each area has a different level of risk for each natural hazard, it’s something you’ll need to consider when budgeting for insurance as well as determining the best place to live for your housing requirements.
Local Economic Factors in California
While the West Coast is attractive to many with its long stretches of coastline, warm weather and plethora of exciting cities, it comes at a price: specifically, high taxes. California has some of the highest taxes in the U.S. with a base sales tax rate of 7.5% and a top marginal income tax rate of 13.3%.
Although the Golden State has high taxes, it does play host to a number of bustling industries. The state has the second-most Fortune 500 company headquarters at 53, which is only one behind the top state, New York, which has 54 companies. In 2016, California had the top gross domestic product (GDP) in the U.S. at $2.6 billion. Some of the most notable employers in the state include Apple, Chevron, Alphabet, Intel, Disney and Oracle. Of course, California is well-known for Silicon Valley, home to many startups and tech companies. Los Angeles, home of Hollywood, is key in the entertainment industry which is another large source of revenue. There’s also a number of military bases in the state in the San Diego area as well as northern California. And for tourism, the wine region of Napa Valley is a huge draw for many out-of-state visitors, as well as native Californians.
In June 2017, the overall unemployment rate for California was 4.7% compared to the national rate of 4.4%. However, personal income per capita in 2016 was $55,987 which was 113% of the national average.
Before you decide to move west to the Golden State, you might want to compare the cost of living to your current home. If you’re switching coasts and moving from New York, NY to Los Angeles, CA, your cost of living will be 3% lower on average, thanks to lower taxes and housing costs. If you’re trading Austin, a Texas tech hub, for the bigger tech hub of San Francisco, prepare for higher costs. You’ll pay 25% more on average to live in the Bay Area due to much higher food, housing and tax costs. However, if you’re moving from Portland, Oregon to sunnier San Diego, you’ll only see a 5% increase in your cost of living on average.
Mortgage Legal Issues in California
One benefit of buying a property in California is its buyer’s protections. The state was at the forefront of abandoning the “caveat emptor” rule, also known as buyer beware, in real estate transactions. This means that sellers are required to disclose any issues or defects with the property on an extensive transfer disclosure statement that both the seller and real estate broker are required to sign. California, unlike many other states, has these rules backed by law. It’s not an optional disclosure, it’s mandatory.
The state also runs the Department of Consumer Affairs Bureau of Real Estate. This entity was created to protect public interest and increase consumer awareness in real estate transactions. You can visit its website to read information on the homebuying process, loan modification or foreclosure prevention, verify a real estate license, find answers to frequently asked questions and find who to call for complaints.
Curious how California handles foreclosures? The Golden State has a non-judicial (no courthouse involvement) process for deeds of trust that include a power-of-sale clause and a judicial process for mortgages. However, the most common foreclosure in the state is non-judicial, which generally means a speedier process. When a lender includes a power-of-sale clause, the lender trades a full loan payout for timeliness. This means a lender can’t collect a deficiency judgement against the homeowner. A deficiency is when the home doesn’t sell for the full amount of the mortgage on the property. While the lender may lose out on the full loan amount, the lender saves time and court fees using this speedy process.
When a judicial foreclosure occurs (which is rare in California), the process is much slower as the court is involved. The benefit to this process is that the homeowner has the right of redemption. This right allows the homeowner to buy the property back up to one year after the auction. However, with a judicial foreclosure, a lender can get a deficiency judgement which allows the lender to pursue the full mortgage amount from the borrower.
With a non-judicial foreclosure in California, you will get a series of notices that will alert you of the impending steps. The lender has to contact you to assess your financial situation in what’s called a foreclosure avoidance assessment. The foreclosure process cannot start until at least 30 days after you were contacted for the assessment. After that, a Notice of Default can be recorded in your county. This is the start of the formal and public foreclosure process. You have 90 days to “cure,” which means pay, what’s owed. If you don’t pay, a Notice of Sale is recorded (no earlier than 90 days after the Notice of Default). The sale will state that your home will be sold at auction in 21 days. You can pay the default and “reinstate” your loan up to five days prior to the auction. If you want to learn more, the California Courts has a webpage on your rights as a homeowner and the state’s foreclosure process.
California Mortgage Resources
|Resource||Problem or Issue||Who Qualifies||Website|
|California Housing Finance Agency||Offers home loans with below-market interest rates, down payment assistance and a mortgage credit certificate tax credit program.||Low- and middle-income homebuyers; Down payment programs require homebuyers to be first-time buyers.||http://www.calhfa.ca.gov/|
|Keep Your Home California||Offers unemployment mortgage assistance, mortgage reinstatement assistance, principal reduction and transition assistance.||Homeowners who have experienced a financial hardship.||http://keepyourhomecalifornia.org/|
|Home Affordable Modification Program||Lowers monthly mortgage payments so that they're more affordable.||Homeowners who have experienced a financial hardship who took out a mortgage on or before January 1, 2009.||https://www.makinghomeaffordable.gov/pages/default.aspx|
|CalHFA Mortgage Insurance Services HARP Eligible Program||Refinancing.||Homeowners must have mortgage loans insured by CalHFA Mortgage Insurance on or before May 31, 2009.||http://www.calhfa.ca.gov/harp/guidelines.pdf|
Hopeful homeowners have a number of agencies to turn to in California. The California Housing Finance Agency (CalHFA) has loan programs such the first mortgage conventional or CalPLUS fixed-rate loan, down payment assistance programs and mortgage credit certificates. In addition to lending programs, you can find an online homebuyer education course as well as links to NeighborWorks or HUD in-person education.
First-time homebuyers in Los Angeles County or Orange County can turn to the Southern California Home Financing Authority (SCHFA) for help. The organization offers help with securing a home loan as well as up to 4% down payment assistance in the form of a non-repayable grant.
If you’re a Californian homeowner suffering financial hardship and having trouble with mortgage payments, you can turn to Keep Your Home California. Programs offered include unemployment mortgage assistance, mortgage reinstatement assistance, principal reduction, transition assistant and reverse mortgage assistance. To qualify, you have to remain below county income limits, which you can find on the website. You can also find foreclosure resources, including counselors on the U.S. Department of Housing and Urban Development website.
For those looking for property in the rural areas of the state, you can see if the property qualifies for USDA eligible loans. You’ll need to meet requirements such as income limits and credit score to qualify for this government-backed loan program.
Making a move to the Golden State? You’ll want to check out the cost of living in California to see what your budget might have to include. If you’re on the fence and want to know where the best places to live in California are, we also got you covered. Lastly, if you’re curious how you’ll be taxed in this state, check out our California state income tax calculator.