Goodbye starter home: First-time buyers struggle with Southern California prices, lack of inventory

Buying a Southern California home is “crazy and competitive — and almost overwhelming,” first-time home shopper Imelda Pastrana said.

Even with two incomes, savings and little debt, the nurse and her husband still can’t afford an entry-level house.

After putting in their first bid for an Anaheim condo on Sunday, Aug. 13, they learned that 19 others also made offers for the property.

“We’re looking online almost every day, but a lot of those (homes) are out of reach,” said Pastrana, 37, who’s been home shopping off and on for three years. “You don’t want to rush into doing something, but you almost feel like you have to rush into placing an offer because you know other people are doing it too.”

See more: Pace of bidding wars picks up as homebuyers compete for fewer listings

For generations, the leap from renter to homeowner begins with a starter home — a small two- or three-bedroom house, a townhome or a condo. Then, as families build equity, advance in their careers and have kids, they move up to the bigger house in the suburbs, often with better schools.

But after a decade of bidding wars and relentlessly rising home prices, that entry-level ticket to the American dream is looking more like a Tiffany-wrapped jewel, out of reach for all but well-paid professionals or young adults getting down-payment help from their families.

The median price for starter homes has doubled and even tripled in Southern California and the Bay Area since 2012, according to a recent study by the brokerage Redfin. The minimum annual income needed to afford an entry-level home was as high as $160,000 to $245,000 a year.

Even in the Inland Empire — Southern California’s most affordable housing market — buyers need a six-figure income to afford a starter home.

See more: Bad news for house hunters: Mortgage rates hit 7.09%, highest level in 21 years

Redfin defines starter homes as the bottom 35% of all sales, less the very cheapest 5% that are likely too shabby to be suitable for first-time buyers.

Based on that, Redfin reported that from March 2012 through this past July, median starter home prices rose:

— 264% to $400,000 for 3,413 starter homes in Riverside and San Bernardino counties.

— 238% to $637,000 for 1,685 starter homes in the East Bay counties of Alameda and Contra Costa.

— 191% to $950,000 for 955 starter homes in Santa Clara and San Benito counties.

— 188% to $700,000 for 1,510 starter homes in Orange County.

— 171% to $583,000 for 3,345 starter homes in Los Angeles County.

— 150% to $620,000 for 1,707 starter homes in San Diego County.

— 120% to $922,500 for 598 starter homes in San Francisco and San Mateo counties.

Starter home prices are rising faster than values for costlier homes, the data shows, and are rapidly outpacing income growth. Median incomes during that period increased only about 50-60% in Southern California and about 60-80% in the Bay Area.

“First-time homebuyers are getting squeezed out,” said agent Joseph Huelskamp of EXP Realty in Riverside. “They want to get out of those (high) rents and start … building equity. (But) the amount of inventory in an affordable price range is very low. Super low.”

Young adults need help from their parents or other relatives to buy an entry-level home, added Ruola Fawaz, a real estate agent with Surterre in Newport Beach. Her son — a professor at the University of Wisconsin — will need Fawaz’ help buying a home.

“It’s shocking what’s happening now,” she said. “And what they’re buying is extremely expensive. To me, it’s scary.”

More than $1 million

It’s been 44 years since Huntington Beach broker Rick Caruso sold his first home to a first-time buyer. It was a three-bedroom, two-bathroom house with two stories and just over 1,600 square feet. The new owner — an auto painter with a stay-at-home wife and two small children — paid $44,000 for it in 1978.

In the intervening decades, the value of that one-time starter home soared almost 30-fold. In June 2022, an identical model next door sold for $1.29 million.

Does Caruso see any car painters among today’s first-time buyers?

“No. They’re smart kids with a good job and they’re connected to family. Or, they’re entrepreneurs, often with the tech industry,” he said. “(First-time buyers) are moving to condos and townhomes — or they’re moving to mobile homes.” 

Bill and Lisa Cramer bought their first California home in 2001, trading two years of apartment living for a new three-bedroom, 2 ½-bath detached condo in Irvine’s Northpark community. Their agent, Matthew Ingalls, described the condo as “a little box” and “a prototypical starter home.”

The Cramers paid $353,500, then sold it for $695,000 in 2005 to move back to their home state of Ohio.

On July 13, however, another couple paid $1.275 million to buy that same “little box.”

“Wow,” Cramer, 52, said of the latest sales price. “That would be a real tough one for a first-time homeowner to get into.”

In 2016, Daniel and Katelyn Irvin paid $362,500 for their first home, a 1,000-square-foot, two-bedroom townhome in Laguna Niguel. When their first son was born, they picked up and moved to a house in Mission Viejo.

Their starter home, meanwhile, has almost doubled in value in the past seven years. According to Redfin, similar units in the complex are now valued as high as $652,000.

“I don’t know if ridiculous is the right word, but it’s crazy,” Daniel Irvin, 37, said recently. “At the time when we bought it, it was in that price range of affordability. … Where it’s priced at now, that’s something we wouldn’t have been able to afford.”

Where are the listings?

First-time buyers purchased a third of California homes sold in 2022, the California Association of Realtors most recent homebuyer survey showed.

Those first-timers typically bought homes in the 1,400- to 1,500-square-foot range, paying a median price of $642,000. Their typical age: 35.

Nevertheless, the share of first-timers who can afford to buy an entry-level house fell to 32% this past spring, down from 66% in 2012, the Realtors’ first-time buyers affordability index showed. Entry-level houses were affordable to just 33% of Southern California households and 28% of Bay Area households.

“The share of first-time buyers shrank … (due to) the housing market’s combination of historically low inventory, persistently high home prices and rapidly escalating interest rates,” Jessica Lautz, the National Association of Realtors’ deputy chief economist, said last fall.

“Right now, there are hardly any … starter homes on the market,” added Danute Mazeika, an agent with Realty One Group West. “Many days, we’re looking at the market and saying, (where are the) new listings?”

To make matters worse, entry-level buyers are competing with higher numbers of cash offers.

More than 36% of the nation’s starter homes were bought without a mortgage last May, the second-highest number in a decade, Redfin reported.

“The most affordable homes for sale are no longer affordable to people with lower budgets,” Redfin Senior Economist Sheharyar Bokhari said in a statement. “That’s locking many Americans out of the housing market altogether, preventing them from building equity and ultimately building lasting wealth.”

Paying a premium

Ramiro Villegas has been renting a house in Victorville since he lost his last house to foreclosure in 2012. He chose to commute more than an hour to his tech job in San Bernardino so he could be close to his daughters, who were living with his ex-wife.

But once his youngest daughter graduated from high school with plans to leave for college, he was free to move with his wife, Christina, and her two daughters down the hill and closer to work.

The couple planned to buy something in the $500,000 range. When they finally closed on a four-bedroom, 1,600-square-foot house in Redlands this past May, they paid $646,000, a steep price for a safe area with good schools and a shorter commute.

“We realized if we really wanted all of those things, we’d really have to pay a premium for it,” Villegas said.

Newlyweds Niles and Megan Pentecost are typical of today’s first-time buyers: young, professional (both work as software analysts) and benefiting from some assistance from Megan’s parents.

Priced out of the market for a single-family home, they ended up buying a 1,478-square-foot, three-bedroom condo in Aliso Viejo. They paid $865,000, more than double the condo’s previous sales price 11 years earlier.

Their six-month search “was a little bit of a roller coaster,” Megan said.

“Every weekend, we’re going to a bunch of open houses, and we noticed that there was a ton of people there,” Megan said. “So, it was it was just kind of hard because you wouldn’t want to get your hopes up or anything because you could just see all the people that are probably thinking the same thing.”

They ended up in three bidding wars before finally coming up with the winning offer, paying $46,000 above the original asking price.

Pastrana and husband Jorge Garcia are anxious to move after 11 years in their one-bedroom apartment, watching their rent double and their neighborhood deteriorate.

They determined that this year, they’ll save their money and buy something — even if they have to buy a condo instead of a house.

“Since it’s just two of us and our cats, we figured we’d be more comfortable in anything bigger than our one-bedroom apartment,” Pastrana said. “Rent keeps going up, and we’d just rather be paying into something that we own, like you know, an investment.”

Pastrana is even willing to leave Garden Grove, her hometown. She’s learned you have to compromise just to get your toe in the door.

“It’s draining. You get your hopes up, and then they come right back down,” Pastrana said. “Even though we have a decent income, it’s hard. It’s like, how much more do we have to earn to be able to afford something?”