Are $1M Homes the New Normal for Middle Class Buyers?

In numerous cities, prospective homebuyers are faced with a stark reality: million-dollar homes are no longer exclusive luxury properties but are becoming the norm due to soaring prices.

Key Takeaways🏑 $1M Homes Becoming the Norm
The share of million-dollar homes is risingπŸ† San Jose and San Francisco lead with over 50% of homes priced above $1 million.
Limited supply for homes under $1 million in someπŸ“ˆ A majority of homes for sale in these cities are priced above $1 million, leaving few affordable options.
Monthly mortgage costs are soaringπŸ’° In areas like Santa Clara County and San Francisco, median home prices require hefty monthly mortgage payments, even for higher earners.
All-cash buying activity is on the riseπŸ’΅ A growing number of homes are being purchased with all cash, making it harder for average buyers to compete in the market.
High housing costs affect essential workersπŸš’ Government employees like teachers and first responders are finding it increasingly challenging to live in the communities they serve.

Redfin research

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The prevalence of million-dollar homes is on the rise nationwide. Recent research from Redfin revealed that 8.2% of homes in the United States now boast seven-figure price tags, a notable increase from 7.3% in February, coming close to the peak of 8.6% observed in June 2022.

Among the 90 million homes scrutinized, approximately 7.46 million units had crossed the million-dollar threshold.

LendingTree research

A separate study conducted by LendingTree pinpointed two Californian cities where the proportion of million-dollar homes surpasses that of properties priced below a million dollars.

San Jose leads the way with a staggering 66.28% of homes exceeding $1 million, closely followed by San Francisco at 52.91%. Los Angeles stands at 26.48%, San Diego at 23.15%, and Seattle at 18.70%.

These reports shed light on a disconcerting trend in various markets where million-dollar homes are no longer synonymous with opulence but have, rather surprisingly, transformed into options within the realm of the middle class.

Jacob Channel, senior economist at LendingTree and the author of the report, emphasized this shift, highlighting the limited affordable choices left for prospective homebuyers in these regions.

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Not many houses available under $1M

A cursory glance at Redfin paints a stark picture of the current housing landscape in select cities.

In San Diego, for instance, a total of 1,230 homes are currently up for sale. However, a mere 529 of these properties are listed at $1 million or less, as of this Wednesday.

What’s even more concerning is that out of these, only 114 homes offer three or more bedrooms, and a scant 63 units are single-family homes.

This starkly translates into a meager 43% of available homes priced at $1 million or less, with just 5.1% falling into the category of three-bedroom or larger single-family homes for prospective buyers, based on Redfin’s active listings as of August 30, 2023.

Jacob Channel underscores the stark reality of many housing markets today, emphasizing the soaring costs and limited options available to prospective buyers. He notes that these homes aren’t extravagant by any means, typically offering just a few bedrooms and modest amenities.

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For instance, Santa Clara County, home to San Jose and Silicon Valley, saw a median home sales price of $1.8 million in the second quarter, translating to a monthly mortgage of nearly $9,900, considering a 30-year interest rate of 7.28% for a jumbo loan and a 20% down payment of $360,000.

In a revealing trend, more homes in this area were sold for between $3 million and $4 million (391 units) than for less than $1 million (285 units) over a six-month period, as of July 15.

Even individuals with seemingly robust incomes, like those in high-paying tech and finance industries, are being pushed away from city centers. Earning $100,000 or $150,000 may still not suffice to purchase a modest and suitable home for one’s family, Channel emphasizes.

In San Francisco, the median home price remains high at $1.335 million (even after the recent drop), resulting in a monthly mortgage payment of $7,307 (with 20% down and a 30-year rate of 7.28%).

During the same six-month period, 897 units were sold for over $1 million, with 10 properties surpassing the $10 million mark. In stark contrast, only 100 units sold for less than $1 million.

This situation further exacerbates the problem, as the owners of million-dollar homes often become homebuyers themselves, armed with substantial cash to outbid others for their next property.

This cycle has contributed to a significant increase in all-cash buying activity, reaching a nine-year high at 33.4% in April 2023. This trend is detrimental to normal individuals who can’t afford such all-cash purchases.

The widening gap between essential government workers’ salaries and the cost of living in the communities they serve (such as teachers, firefighters, and police officers) poses serious concerns for cities like San Francisco. Creating an unhealthy and socially troubling situation, according to Patrick Carlisle, Chief Market Analyst for the San Francisco Bay Area at Compass.

(Source: Yahoo Finance)

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