How long does it take to save for a down payment in LA?

In Los Angeles, where home prices tied a record high in August, one of the biggest obstacles for prospective homebuyers is gathering together enough cash to afford a down payment.

A new analysis from Zillow sheds light on why that is.

According to the report, it would take a homebuyer earning the median income in the Los Angeles metro area more than 18 years to save for a down payment on a median-priced home. That’s a longer period than in any other major urban area in the nation, other than San Jose.

The report assumes that buyers are going with a conventional 20 percent down payment. Based on a median sale price of $646,300 in LA and Orange counties, that’s $129,260 cash upfront for buyers. If a median-earning household put away 10 percent of income ($70,373) each year, it would take 18.4 years to reach that number.

This calculation assumes that aspiring homeowners will go almost two decades without getting a raise, which would be quite unlucky.

Since 1998, incomes have risen 62.5 percent in Los Angeles. If salaries continue to grow at a similar rate, median earners will be bring home roughly $110,000 annually 18 years from now, in 2036.

Unfortunately, over the last two decades home prices have also swelled considerably. In the LA Metro area, they’ve risen an astonishing 244.5 percent since 1998. If that rate of increase continues, median-priced homes could fetch more than $2 million in 2036. That means a 20 percent down payment would amount to over $400,000.

These kind of figures help to explain why many LA-area homebuyers put less than 20 percent down when purchasing a residence.

Given that the cost of a standard 20 percent down payment is prohibitively expensive for a great deal of home shoppers, many banks offer conventional loans to buyers with good credit who put as little as 3 percent down.

A number of programs for first-time homebuyers also help prospective owners secure loans with low upfront costs.

But keeping up with mortgage payments presents another challenge for those entering LA’s real estate market. Given current interest rates, monthly payments on a median-priced home (even after a 20 percent down payment) would be around $3,300 with insurance and property taxes factored in.

That represents more than half the pay that median earners take home each month, meaning that typical LA homes are out of reach even for a median-earning resident who happens to have enough cash on hand to make a 20 percent down payment.

Going in with a lower down payment will only increase monthly costs. For instance, if a buyer put 5 percent down on the same median-priced home, their payments would be higher by roughly $1,000 per month.

Los Angeles continues to be among the least affordable markets for buyers to enter. Zillow estimates that nationwide it takes buyers a little over 7 years to save for a down payment.

Wages have also kept pace with housing prices there a bit more closely than in LA. Nationally, income rose 52.6 percent between 1998 and 2018. Home values jumped 98.6 percent over the same period.

• Housing affordability in LA is at a 10-year low, says new report [Curbed LA]
• Housing costs eat up more income in LA than any other major U.S. city [Curbed LA]
• 5 programs for first-time homebuyers in LA [Curbed LA]
• The Los Angeles home-buying guide [Curbed LA]