Why homeownership in California isn’t nearly the financial slam dunk it once was

It’s the benchmark of success, a milestone of responsible adulthood, a time-tested way to amass wealth for you and your progeny. Homeownership, we’re told again and again, is a status that every right-thinking person should aspire to — the white-picket-fence-fronted embodiment of the American Dream.

For generations it has been taken as a near article of faith across the country that ownership is both the financially and socially superior way to inhabit a home and that public policy makers should always promote it.

California legislators and housing advocates spent this past year enacting sweeping policies aimed at making it easier to build housing of all kinds. This coming year, many of them indicate that they plan to focus specifically on providing more plentiful paths to homeownership.

The state’s homeownership rate of roughly 55% is second lowest in the nation, above New York, and a full 10 percentage points beneath the national average. Most of that gap, both common sense and researchers at UC Berkeley tell us, isn’t the result of an atypical fondness for the freedoms of renting but comes down to the price tag. The median price of a detached single-family home across in the United States is $426,800. In California, it’s $852,680. In San Francisco it’s well over $1 million.

With borrowing rates still hovering above 6%, those prices translate to estimated monthly mortgage costs between $4,000 to $6,000 or more. Even in all but the toniest neighborhoods of coastal California, that’s far above the cost of renting a typical apartment.

In Orange County, the estimated all-in monthly costs on a home (including taxes, insurance, maintenance and any association fees) is four times the average rent, according to a recent analysis by the commercial real estate firm CBRE. In Los Angeles and San Francisco, the “buying premium” is three times greater than renting. Nationally, it’s twice as much.

Economists and housing finance experts are careful to note that it depends — on a person’s financial circumstances, the particulars of their preferences and the market in which they want to live, how long they plan to occupy a home and, most challenging of all, what the future holds.

But across the country, the gap between renting and owning is “way out of line” with the historic norm, said Laurie Goodman, an economist at the Urban Institute, a liberal-leaning thinktank in Washington D.C.

In 2018, Goodman co-authored a paper on homeownership in the United States, which came to the fairly unambiguous conclusion that most people most of the time would be better off buying a home (assuming they can afford the monthly payments) compared to renting.

“Homeownership is not the universal panacea, but the financial returns on homeownership have been more beneficial than renting for most homeowners and will likely remain so if current patterns continue,” Goodman wrote in a corresponding blog post at the time.

Current patterns did not continue: Today we see dizzying prices and interest rates and flat rents in most places. Homeownership isn’t nearly the financial slam dunk it once was, she said.

Take a market like San Francisco. The average price of an admittedly rare single-family home in the city is $1.38 million, according to Zillow. Depending on the size of a buyer’s downpayment, that would work out to a monthly loan payment of roughly $6,500. The average rent for one is $4,350.

In order for all those extra monthly payments to eventually pay off, the value of the house will need to soar vertiginously into the indefinite future. Or rents, which determine how much a person can save by not buying, will need to shoot up as well. Or the stock market or other possible places a well-heeled renter could park all the extra money they aren’t spending on a mortgage, will need to flatline.

A person buying into that market is assuming a very specific and by no means certain version of the financial future, said Goodman.

Either that, or they’re just “desperate to own in San Francisco because they’re just desperate to own in San Francisco,” she said. “For whatever reason.”

For many Californians, this isn’t actually a decision. The number of renters who can buy locally and get away with spending anything less than 40% of their income on monthly homeownership costs are in the single digit percentages in Los Angeles, San Diego, Riverside, Sacramento, San Jose and Ventura, according to the CBRE report. Being a tenant in California is hard enough. More than half of California renters are spending more than 30% of their income on rent as it is.

But for those lucky enough to rent by choice, it’s not necessarily a bad choice to make.

Remember that yawning “buying premium” between the monthly cost of owning and renting? A wealthy tenant is in a position to save and invest the difference. Though homeownership is often touted as the best way to build wealth, it’s not the only way. It might not even be the best way: On average and over long stretches of time, the stock market regularly outperforms median home prices — albeit, without quite so many tax benefits and other boosts that federal and state governments shower upon homeowners.

Rather than pouring every last dollar in disposable income (and then some) into a single asset that threatens to leak when it rains, parking that money elsewhere also allows a renter the option to diversify.

“I think more people are starting to be interested in renting and saving at the same time, because they’ve been priced out of owning a home, but they still want to achieve their financial goals and they’re looking into those alternatives and getting more savvy about it,” said Redfin economist Daryl Fairweather.

Running the numbers on whether renting and saving is, in fact, the better financial call gets very “murky,” she said. Much of it depends on the future of home prices, local rents, stock prices, interest rates and how long a person plans to stay put. It’s a hugely complex and individual choice and it’s not risk-free. Fairweather touted an online rent-vs-buy calculator produced by the New York Times.

But with California’s specific conditions — high prices relative to rents, high maintenance and insurance costs, the relatively large number of tenants protected by rent control policies of one kind or another — the financial argument for renting may be about as good as it’s ever been.

Even if renting is a better deal on paper, there are plenty of reasons someone might want to buy that have nothing to do with money.

Space is one: For a host of regulatory and financial reasons, the vast majority of rental units are apartments while detached single-family houses are predominantly reserved for owners. Especially for growing families, the option is often either to cram your spouse and kids into an urban apartment or drive out of the city (and possibly out of the state) until you can afford to buy.

Education is another. Rentals are also more likely than owner-occupied units to be in neighborhoods with poorly performing public schools and elevated crime rates.

For some, homeownership also comes with an entirely non-monetary warm and fuzzy factor, whether it’s independence — deciding when and what color to paint your walls, for instance — or a sense of security.

Finally, just because someone can save and invest the extra hundreds or thousands of dollars a month that would have gone to a mortgage payment, that doesn’t mean they will. No one likes making a mortgage payment, but by converting part of your paycheck each month into home equity, it acts as a kind of forced savings plan. It’s perpetually tempting not to save.

“It takes more discipline to go against the social trend,” said Fairweather.

My aunt and uncle lived in Palo Alto. Brokers from the tech companies would cruise the neighborhood leaving pamphlets with offers to buy everything. When houses did sell they were gone in minutes and these brokers would stuff a dozen Indians hot racking between work shifts. Shuttle busses would pick them up and drop them off.

Not many people can compete with Patel, with dozens of guaranteed renters per unit, when it comes to cash for houses.

This article is about 20 years late. It was a slam dunk for anyone who bought property in California in the 1990s. They made a fortune if they could weather the early 2000s real estate recession. They are the ones cashing out and moving to states like Tennessee to retire in more financially favorable locations. Anyone who bought after the 2008 real estate recession probably is not going to make money. The state is such a mess when it comes to home ownership - taxes, regulations, zoning. Its sad.

CaCaLand will do nothing to make getting a home cheaper, except virtue signal about meaningless changes to crap laws they implemented to block home ownership; and blame Trump.

Politicos have adopted the Aussie program: make home owning expensive, buy up land and build rentals, force everyone into renting.

Oh, and continue to encourage home-burning wildfires. Remember the fiasco (planned) PacificPalisades fire made possible by building a reservoir in the area specifically to fight fires (not drinking water)? Then, it was drained ‘cause (supposedly) the tarp over it (which is only for drinking water lakes) had a tear? Well, the reservoir is drained again, just as the winter winds start up.

The choice on foulups like this is usually incompetence or malice.

Destroying single family homes in CaCaLand is malice.

If you bought a home in California in 1980 for 100 grand and sell it today for even 850K. That’s pretty darn good. You can go practically anywhere and buy a bigger home and have a little nest egg left over.

It would be very painful but some housing markets need a strong dose of price/value DEFLATION, and, I think, propping up inflated house prices only perpetuates the problem. We do not need to make it easier for folks in California to pay, on average, $853,000 for a home. We need the average price in California to fall way below $853,000. THAT can only be done by building as much housing in California now as was happening in the 1950s, massively increasing supply (massive reductions in zoning and multiple other regulations and permitting requirements). Tricks to prop up California average home prices of $853,000 will only lead to that average going up even further.

Not to mention getting homeowners insurance and God help you if you live in a place where the government can cost you your home by not having water to put out fires or they can neglect levees and let you get flooded while they concentrate on earthquakes that never happen and global climate changes.

“If you bought a home in California in 1980 for 100 grand and sell it today for even 850K. That’s pretty darn good. You can go practically anywhere and buy a bigger home and have a little nest egg left over.”

I looked up my first SFH in Mission Viejo that I bought in 1984 for $112k and it now has an estimated value of $1 million. It’s also been neglected, judging from the weeds and overgrown trees and bushes.

I purchased a new home in northern AZ in 2017 for $242k and now it is worth about $440k. If I wanted to sell it, I’d get a full price offer within a week.

the statement
home equity, it acts as a kind of forced savings plan. It’s perpetually tempting not to save.

true, folks that cannot or won’t pile money into savings accounts end up ignoring the fact if they own or buying property are creating a savings account by amassing equity in their property. That equity is seen as usable collateral by banking and can provide instant loan access so the asset doesn’t have to be liquidated.

If you bought a home in California in 1980 for 100 grand and sell it today for even 850K.

I did buy a home in Cal in 1980, closed just after Jan 1, for 100K at 13% interest.

It is on market these days for 560K. I sold it for 140K in 1991.I estimate someone put in 75 to 100K in upgrades during the interim.

My realtor buddy is of the opinion that there are areas of the US that are way out of bounds with reality.

There are demographic shifts that are being created by the proliferation of work at home jobs. These shifts will be amplified by the acceptance of AI. Right now places like California and New York can charge more for homes because they have industries/jobs that pay enough to make it financially work. As those job disperse geographically, the inflated housing markets will crash. Would you rather live in New York, living in a two bedroom apartment for which you are paying $4K to $6K a month, or live in someplace like Lexington, KY, where $4K a month gets you a 4 bed, 5 bath, 4500 SF home on half an acre? Which is the better place to raise a family? Which is safer?

There is going to be a correction.

“You can go practically anywhere and buy a bigger home and have a little nest egg left over.”

Don’t I know it. Californians from Bay Area bought every scrap of land the past three places I lived and drove the costs up so high no locals could afford it anymore on the local economy.

If you bought a home in California in 1980 for 100 grand and sell it today for even 850K.

If you take into account all the money you paid in taxes not much of a gain.

Every deal in California is a 3 card Monte deal.

we bought our five acres with well and house and garage and “Barn” for $80K in the mid 90s. Today it is work maybe a little more than $240K...This is here in California in a desirable area of Butte County. Granted its a mobile home that is dated in the late 70s.

At the prices I see quoted, I don’t see how any “average” person there could afford anything but a tent in the desert. Of course, I have my own idea about an average person.

Good for "Boomers". Bad for everyone else.

Also, they refuse to permit zoning changes to increase residential density. You should be able to buy a condo for 400K in Palo Alto, but obviously you can't do that because they refuse to allow that to happen.

At the prices I see quoted, I don’t see how any “average” person there could afford anything but a tent in the desert. Of course, I have my own idea about an average person.

Look at the top line of prices!!

Median Home Sales Prices
Southern California
Existing Single-Family Homes by County, 1990-2025
https://www.laalmanac.com/economy/ec37.php

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