28% of SoCal Home Buyers Relying on Parental Co-Signers

The Associated Press
The Associated Press

About 28 percent of Southern California purchasers of single family homes are relying on parental co-signers to buy unaffordable houses.

The California Association of Realtors’ affordability index that measures the percentage of residents that can get a mortgage to buy a single-family home at the average state selling price $517,000 hit a new low of just 32 percent, second only to Hawaii.

The affordability Index varies dramatically by region due to very wide price differentials. About 13 percent of Californians can afford to buy the average San Francisco home selling for $895,490; 47 percent can afford to buy a Central Valley home selling for $301,190; and 35 percent can afford to buy a Southern California home selling for $514,580.

California’s average single family dwelling’s selling price is 217 percent higher than the $237,800 average selling price for a home in the United States. That means the average Californian must be able to make a monthly mortgage payment of $2,037 to buy the average new home, versus an average of just $937 for the average American.

Californians may seem rich according to home prices, but their average family earnings of $63,636, is just over 12 percent higher than the U.S. average family income of $56,516, according to Advisors Perspective blog.

Although such an outrageous mismatch between steep California housing prices and only slightly above average family income, would seem to argue that California real estate is in bubble territory and at risk of a price crash. But RealtyTrac found that 28.9 percent of San Diego home buyers, 28.2 percent of Los Angeles buyers, and 20 percent of other California metropolitan home buyers qualified for a mortgage by getting a co-signer.

Co-signers are not just a California trend, RealtyTrac reported that about 22 percent of all mortgage applications granted in the first three months of 2017 included at least one non-married co-signer, up from 20 percent with a co-signer in the prior quarter.

ATTOM Data Solutions, the largest multi-sourced property database in the U.S., reports that Miami had the highest percentage of co-signers at 40.2 percent, followed by Seattle at 37.4 percent. But the highest percentage for any region was Southern California, where mostly parents were co-signer on 28 percent of new mortgages.

Parents co-signing on a mortgage for their millennials children could represent more than an investment, because it makes sure the little darlings do not spend the rest of their life living in their parents’ basement. But co-signing loans have consequences if millennial children default and their parents are legally obligated to pick up the loan payments.

RealtyTrac’s website offers a function that evaluates the investment return for buying a single family house for cash, and then renting the home. Affluent California houses along beach communities offer just 3 to 5 percent rental yields for cash buyers, the worst in America.

Although there are tax advantages for buying investment real estate, the poor California investment returns do not include the costs to evict a defaulting renter. This is would be much more challenging for parental co-signers, if the defaulting party is their child.

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