As competition drives home prices ever higher in the Bay Area, there is a whiff of good news for first-time homebuyers.
The number of starter homes coming to market across the region rose in the second quarter: by 10.9 percent in Oakland, 24.1 percent in San Jose and 26.1 percent in San Francisco, compared to the same quarter last year.
You’re feeling excited? Don’t. A new report by Trulia contends that traditional buyers of starter homes – households in the lower third of the income bracket – have basically been frozen out of the market.
Assuming those earners could put together a 20 percent down payment, they still would face spending an outlandish portion of annual income on their mortgages.
Here’s how much: 60.5 percent of income would go to paying the mortgage on a starter home in the Oakland metro area, which includes Alameda and Contra Costa counties. In the San Jose metro area, which covers Santa Clara and San Benito counties, the percentage is 78.4 percent. And it’s a crushing 99.6 percent of income in the San Francisco metro area, which includes San Mateo County and the city of San Francisco.
“So the news is bittersweet,” said Ralph McLaughlin, chief economist for Trulia and author of the report.
Besides, he pointed out, the uptick in the starter-home supply is minuscule in terms of real numbers. Only 389 starter homes – single-family homes, condominiums, co-ops and townhomes – came to market in the San Francisco metro area in the second quarter, compared with 722 in San Jose and 768 in Oakland.
Trulia defines a starter home as one with a value in the lower third of the market.
Nationally, the housing supply has shrunk for nine consecutive quarters, and the shrinkage recently includes the starter-home segment of the market, which fell 15.6 percent in the second quarter.
So why is there any expansion of the starter-home market in the Bay Area, which is notorious for its slim pickings?
Because overall inventory — all homes in all price ranges — is chronically low across the region while the job force keeps growing, competition among buyers has been fierce, driving prices to record highs.
Seeing those high prices, McLaughlin theorized, some owners of starter homes feel that now is a good time to sell. They “think they’re going to make a bundle because they bought at the best time, when the market was at its bottom,” he said. “Or else they bought their homes at the worst time – at the pre-recession peak – and now they’re above water, so they can unload them.”
Either way, he said, “those homes are nowhere near affordable for traditional starter-home buyers, so it’s not great news for those trying to get into a first home.”
According to Trulia, the median price of a starter home is $286,300 in the Oakland metro area, $445,667 in the San Jose metro area and $535,823 in the San Francisco metro area.
Who can pay those prices? McLaughlin said some of the homes are likely being snapped up by investors.
Others are being bought by middle- and upper-income homeowners who feel overwhelmed by their mortgages and other costs associated with living in larger homes. Squeezed by the pricey market’s “compression effect,” he said, they are downsizing.
They “feel stymied,” he said. “So they will start to look down the ladder at homes that are not necessarily suitable to their needs – with the exception that they’re less expensive.”