Is The Sunshine Worth The Price Premium? Today's Homebuyers In LA, SF and SD Spend Almost 78% Of Their Income On Mortgage Payments

When you apply for a mortgage, the rule of thumb is that your payment should not exceed more than 30% of your income. This ratio is important because borrowers whose mortgage exceeds 30% of their income are at increased risk of foreclosure. Unfortunately for many California buyers, high property prices are throwing that equation out of whack. A recent study by Redfin RDFN shows California homeowners spend up to 78% of their income on mortgage payments.

To be certain, California is not the only place where the old 30% threshold is being exceeded. Redfin's report indicated that median-income earners in The U.S. are paying 41.8% of their salaries to cover mortgages. The calculations were made based on a borrower earning the $83,782 median income–based on US Census Bureau data–with a hypothetical interest rate of 6.72% and a 15% down payment on a median-priced home costing $429,734.

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The report showed America's median monthly mortgage payment in 2024 was $2,920, meaning prospective borrowers would need to earn $116,782 to achieve the ideal 30% ratio. However, the numbers in many of California's major population centers are skewed by the state's notoriously high property prices. California has five major real estate markets where borrowers are paying between 67% to 77% of their income in mortgage payments. 

Those markets are: 

• San Diego – 67.3%
• San Jose – 73.9%
• Anaheim – 75.9%
• San Francisco – 76.2%
• Los Angeles – 77.6%

These numbers are based on the median income and median home sale prices for the areas, which are: 

• San Diego – Median Home Price: $905,463. Median Income: $108,115
• San Jose – Median Home Price: $1,566,114. Median Income: $169,663
• Anaheim – Median Home Price: $1,165,966. Median Income: $121,925
• San Francisco – Median Home Price: $1,513,699. Median Income: $159,936
•  Los Angeles – Median Home Price: $896,060. Median Income–$92,994

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California's major population centers have historically attracted highly skilled workers due to its combination of idyllic weather and elevated salaries. This has also placed a price premium on California real estate, which buyers were happy to pay for much of the 20th and 21st centuries. However, a lack of available inventory and high interest rates are changing that equation for the worse.

Almost all of California's biggest cities have restrictive zoning that prioritizes building single-family homes on large lots. Most of those zoning regulations were conceived when land was plentiful in both the major cities and the surrounding metropolitan areas. That is no longer the case and real estate developers now find themselves increasingly shackled by these decades-old zoning restrictions which make building affordable multi-family developments difficult bordering on impossible.

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This lack of development occurred while California's population was exploding, which drove the prices of existing inventory even higher. It also made large swaths of land necessary for real estate development even more expensive. These market forces disincentivize developers from building affordable housing because it doesn't make a profit after land, labor, and material costs are accounted for.

The net effect of all these factors is putting quite a financial squeeze on California homeowners who were not fortunate enough to lock in a pre-COVID-19 interest rate. Although the appeal of California real estate remains strong, borrowers spending 67% to 77% of their income on mortgage payments is unsustainable. If this trend is not reversed, the California dream of affordable housing and great weather could be in the past.

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