The housing market is already unaffordable in many parts of the U.S., but in these California cities, the typical home is expected to be worth at least a million dollars in the next 10 years, according to a new analysis.
The analysis from real-estate company Zillow
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which was provided exclusively to MarketWatch, looked at home values over the next decade. Economists at the company said they used a “fairly conservative” method that blended their short-term forecast and historical average for each market, and found that four cities would have typical homes worth more than $1 million a decade from now.
They also noted that it is “very hard” to predict home values that far out, considering that there could be external shocks which are unpredictable. “As we saw during the pandemic boom… there’s a lot that can happen to put home values on a completely different path,” Bachaud said.
Putting that caveat aside, the most-expensive cities ten years from now are commonly known as expensive, high-cost metros: San Diego, San Francisco, San Jose, and Los Angeles.
Homes in San Francisco and San Jose are already worth more than $1 million today. The other two cities currently have a typical home value of less than $1 million, according to Zillow’s data.
But a decade from now, the typical home in San Jose would be around $1.5 million, the most expensive in the nation, Zillow found, followed by San Francisco, at $1.19 million, and San Diego, at $1.09 million. A typical in Los Angeles a decade from now would be about $1.05 million.
“The housing shortage is the biggest reason home values have risen so much over the past decade, and why they are expected to continue to rise,” Nicole Bachaud, senior economist at Zillow, told MarketWatch.
The U.S. is short of at least 2.3 million homes, according to an estimate by Realtor.com.
“The oversupply that followed the Great Recession ushered in a decade of underbuilding,” she added. “When the huge millennial generation reached the age when we typically see people buy their first home, there was a lot of competition for relatively few available homes, which has driven prices higher and higher.”
Housing inventory a big driver of home prices
Over the last year, despite a surge in mortgage rates, housing demand continued to outstrip supply and home values rose to an all-time high.
The typical home in November was $387,600, up 4% from last November. While home values have come off from a peak of $416,000 in June 2022, prices are still rising faster than wages.
One of the big drivers of home prices is a low supply of homes.
With few homeowners interested in selling their homes, that keeps a lid on the number of resale listings. Homeowners see little incentive at the current moment to sell, as they would need to give up their low mortgage rate in the 3% to 4% range or even lower for a 30-year mortgage rate in the 6% or even 7% range.
A lack of newly built homes will also push home prices up over the next decade, Bachaud added. “We are in a construction boom, which is good news, but recent Zillow research has shown we are 4.3 million homes short of what we need,” she said. “It’s important this construction boom continues into the coming years.”
Strong demand from home buyers will also pressure prices up.
“Demand for homes should remain high as the massive millennial generation has largely hit its prime home buying years and many millennials have had to delay their first home purchase because of affordability challenges,” Bachaud stated. “How well the U.S. is able to meet that demand with new construction will go a long way to determining how much home values rise.”
Income required to afford a million-dollar home
To afford a million-dollar home, Zillow also calculated how much a buyer would need to make.
Putting aside property taxes, property insurance and mortgage insurance, the typical buyer who plans to put down 10% with mortgage rates at the 6.7% range, they would need to earn at least $232,000, Zillow said.
Insurance costs can vary widely by state, according to an analysis by Bankrate. Some states may also require a separate flood insurance policy, if the area the home is in is prone to flooding, for instance.
But if one were to use rough estimates for taxes, insurance, and mortgage insurance since the buyer would be putting down less than 20%, “you’d need to make $287,000 to comfortably afford a $1 million home,” Bachaud said.
In contrast to the million-dollar home prices out west, the typical cost of a home across the nation will only be worth about $394,000 in 10 years, Zillow said, using the same forecasting method.
Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, also a subsidiary of News Corp.
