Guest Column: First-Time Home Buyers at a Disadvantage in California

By Gerd-Ulf Krueger

Intense competition from investors, foreign buyers, and low affordability apparently pushed aside first-time home buyers in California during the market frenzy in 2013. According to the 2013 Annual Housing Market Survey of the California Association of Realtors (CAR), “the share of first-time buyers fell again in 2013 to 28%.” This was down from 36% in 2012 and was the fourth decline in four years since the 47% market share of first-timers in 2009, when federal and state tax credits stimulated demand for entry-level homes. The 2013 first-time home buyer market share was also 10 percentage points below the 38% long-term average.

The weakness of the first-time home buyer market is worrisome for three reasons. First, it arrived in tandem with deteriorating California housing affordability. According to CAR, just 32% of California households could afford to purchase the median-priced home during the fourth quarter of 2013, down 16 percentage points from 48% in the second quarter of 2012. While statewide numbers were still in line with 2002/2003 levels, affordability in fast-growing and high-salary coastal areas, so critical for California’s economic fortunes, was close to a breaking point at the end of last year: 16% in San Francisco County, 23% in Santa Clara County, 20% in Orange County, 28% in San Diego County, and 30% in Los Angeles County.

Secondly, the softness in first-time home buyer activity could trip up the normal housing market ladder. With relatively low first-time buyer activity today, tomorrow’s moveup buying is likely to be constrained in the near future. This could result in weaker housing markets than one would normally expect during recovery periods.

Finally, there is a demographic component here. According to the CAR survey, the median age of first-time home buyers was 30 years old in 2013. That is right in the middle of the advance cohort of the Millennials, the huge number of the children of the baby boomers born between the early 1980s and the early 2000s. Apparently, it is the Millennials who are having trouble entering California’s housing ownership market. Even young tech workers with good salaries can’t buy homes in coastal counties.

Consider the following numbers to assess the intensity of competitive pressures first-time home buyers face these days, again according to the CAR survey:

Investors captured almost one fifth (19%) of the market share of total sales in 2013, up from 16% in 2012. Since the beginning of the last decade, the investor market share has almost tripled from 7% in 2000.
Meanwhile, the market share of foreign home buyers increased from 5.8% in 2012 to 8% in 2013. Of foreign buyers, 34% were Chinese, 15% were Mexican nationals, and 10% were Canadian citizens.
Almost half (49.5%) of all homes sold by agents in 2013 were sold above the asking price, nearly twice the share in 2012 (25.9%).
Multiple offers reached the highest level in 15 years with 72% of all sales receiving multiple offers in 2013, up from the already elevated 57% in 2012. Each home in the multiple-offer subset received 5.7 offers in 2013.
While the share of cash buyers decreased for the first time after seven years, more than a quarter of all home buyers still paid with cash in 2013.

It is hard to see how entry-level, young, middle-class families or singles can compete in this environment. California is in danger of losing a large group of Millennials in the housing market to investors, foreign buyers, and due to sheer affordability pressures. This is something to think about. This could have long-term social and economic consequences. Young workers, especially in California’s coastal communities, may not be content with being apartment dwellers forever and may eventually look for an exit strategy, such as moving to job and tech centers with more affordable ownership housing.

Gerd-Ulf Krueger, a regional economist in the real estate and land development business, is also a member of the Controller's Council of Economic Advisors. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Controller or his office.