Recent Sacramento homebuyers are among the most financially stretched in the country, having squeezed into the market in the late stages of a seven-year housing boom.
Area buyers took out mortgages in 2017 that were on average 3.2 times larger than their annual income, according to a study by Lending Tree, an online loan marketplace. The national average is 2.56.
That ranks Sacramento 10th nationally among the country’s 50 largest metro areas.
Six California cities are in the national top 10, a sign that Golden State residents are stretching more to buy a home than those living elsewhere.
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Los Angeles was number one nationally. San Diego, San Francisco, San Jose and Riverside also were in the top 10, in that order. The other cities in the top 10 all were in the West: Salt Lake City, Denver, Seattle and Portland.
Overall, nationally, the mortgage-to-income ratio has been on the rise the last few years, a sign that annual home prices are increasing faster nationally than household income growth, Lending Tree economist Tendayi Kapfidze said. “As a result, homebuyers have been stretching more and more to purchase their dream homes.”
Kapfidze said it makes sense that Sacramento and other large California cities are at the head of the pack, given the state’s rapidly rising home prices over the past six years.
But he and other economists say the data indicate buyers are nowhere near as leveraged as buyers were a dozen years ago in the lead-up to the historic mortgage meltdown that caused hundreds of thousands to lose their homes.
Back then, banks and brokers were approving large loans for buyers with little in the way of income under lax lending standards. Now, buyers are required to submit extensive income documentation in order to qualify for a loan.
The Lending Tree data is based on all reported mortgages initiated last year, according to federal data from the Home Mortgage Disclosure Act.
In Sacramento, the average mortgage in 2017 was $315,000. The median mortgage applicant’s income was $98,000.
Loan amounts locally are far lower than in the Bay Area. The average loan on a San Francisco home purchase last year was $845,000. In San Jose, it was $648,000. Those were, by far, the highest in the nation.
Sacramento’s status as a high-leverage market isn’t a surprise, said Roseville-based Dustin Hobbs of the California Mortgage Bankers Association.
Sacramento is still largely a government town, where wages do not increase quickly, he said. But that won’t stop many people from buying, especially if they think mortgage rates will continue going up.
“If you expect interest rates to rise, it makes more sense to push that ratio right now,” Hobbs said, “rather than wait for rates to rise and not even qualify for a mortgage.”
Brandon Haefele, CEO of Catalyst Mortgage in Sacramento, said higher debt ratios present challenges for buyers. It means calculating how much of their income they are willing to funnel into home payments, and how much they should keep for other expenses “for living, travel and family.”
The Lending Tree analysis is only one borrower measure of leverage. Another common way, Haefele said, is to compare a person’s monthly gross income with that person’s monthly debt, which often includes a mortgage payment, a car payment and a credit card payment.
By that calculation, Haefele said, a buyer should not be spending more than 35 to 40 percent of monthly income on debt.
Mark Hamrick, economist with Bankrate.com, said too many people “push to the max” to buy a home. Instead, they should settle for a lesser house than they dreamed of, and make sure to have an emergency savings fund set aside.
“You have to adjust,” he said. “You buy less of a home. Inevitably, there isn’t a huge level of buyers’ remorse if people give up a bathroom.”
He said his company also is urging people who have mortgages to pay down their debt and save for retirement. “Those are people’s biggest financial regrets,” he said.