What is a “Middle-Class House” in California?

Alex Lazo had a nice story in this morning’s LA Times about the absence of housing supply in Southern California. One person he interviewed was frustrated because he could not find anything he wanted at $525,000. As he pointed out, he is a “middle-class” guy.

This underlines a problem with California. Even after the crash, large swaths of the state (not just Malibu) have expensive houses.

Let us think about what a middle-class household can afford. The median income for a family of four in California is about $70,000. Once upon a time (i.e., before around 2002), the “front-end” ratio for a mortgage borrower was supposed to be no more than 28 percent of gross income. The front-end ratio is the ratio of principal, interest, property taxes and insurance to gross income. If one assumes that a borrower can get a 30-year mortgage at a 3.75% rate, pays 1.1% of property value in property taxes, and an insurance premium of 0.2% per year, AND assumes that the borrower has a 20 percent down payment, a household earning $70,000 per year can afford a $250,000 house. So the value of a “middle-class” house is $250K. This is a long way from $525,000.

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About Richard K. Green 103 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

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