The average home price in Orange County hit $1 million last month, becoming the first Southern California county to ever hit that expensive mark and underscoring just how expensive the region has become.
The threshold was crossed as Orange County’s average selling price for new and existing homes, condos and townhomes rose to $1,020,000 in March from $985,000 in February, according to data released this week by researcher DQNews. It represents a 22% increase in the median price over the previous year.
Million-dollar homes quickly spread throughout Southern California during the pandemic, becoming commonplace in communities like Highland Park and West Adams in Los Angeles County that were once considered relatively affordable. The median price in Los Angeles County rose to $840,000 in March, up 12% year-on-year.
The Orange County milestone marks a meaningful wealth increase for local homeowners, at least on paper. But it comes as a regional lack of affordable housing has pushed people into homelessness and prompted others to leave the state in search of housing they can afford.
According to a recent survey by the Public Policy Institute of California, 64% of California adults view housing affordability as a major concern, with more than half of adults concerned they don’t have enough money to pay their rent or mortgage.
The $1 million home boom was fueled by several factors. An intense housing shortage has sparked brutal bidding wars that are driving prices far in excess of what is on offer. Investors are also gobbling up more homes to flip or rent, accounting for about a quarter of Southern California home sales.
Another major reason for the rapid rise in $1 million homes is that more people can afford such a high price.
Rising incomes, a booming stock market, and mortgage rates falling below 3% during the pandemic opened up the $1 million opportunity to a wider range of buyers.
If borrowers paid back 20% and had minimal debt, they had a very good chance of getting a loan on a $1 million home if they were making at least $150,000 annually.
In Orange County, where many high-paying technology, healthcare, and finance jobs are based, the median household income in 2020 was $94,441, and nearly 30% of households made at least $150,000, according to analysis by Beacon Economics to US Census data.
Although home prices were lower during the housing bubble of the early 2000s, more Orange County residents can now afford to buy, reflecting rising incomes and lower mortgage rates.
In the second quarter of 2006, the median price of an existing single-family home in Orange County was $700,000 – a price that only 10% of the county’s households could afford, according to the California Assn. from real estate agents.
By the fourth quarter of 2021, the median price of an existing single-family home had already surpassed $1 million, according to the association’s calculations, and 17% of Orange County households could afford it.
The decade-long rise in home values means many homeowners are left with a stack of equity that allows them to sell at a profit and buy a much more expensive home, even if their incomes haven’t increased.
“It kind of feeds back on itself,” said Christopher Thornberg, founding partner of Beacon Economics. “Equity is traded in equity.”
Debbie Felix, a broker at Seven Gables Real Estate, said many parents also give down payments to their adult children.
Just a few years ago, she said, a three-bedroom home in Fountain Valley cost about $900,000, but today it’s common for such “starter homes” to cost upwards of $1 million.
She’s preparing to list a 1,633-square-foot, three-bedroom home in Fountain Valley for nearly $1.15 million.
“It’s crazy,” she said. “This house will probably cost $100,000 more.”
Whether home prices in Orange County and elsewhere will rise from here is an open question.
Mortgage rates are rising rapidly, making buying that $1 million home harder than it was just a few months ago.
March data from DQNews represents closed sales, meaning many buyers have opened escrow and fixed their rates in February. Interest rates were rising then, but are still more than 1 percentage point lower today.
According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage hit 5.11% this week, up from 3.55% in early February. Interest rates were below 3% in November.
Assuming a buyer pays 20% to buy a $1 million home, the monthly mortgage payment — including property taxes and insurance — would be $4,840 if the interest rate is 3.55%, the average from the start February.
With an average mortgage rate this week of 5.11%, that monthly payment would be $5,574 — an increase of $734 per month, according to a Redfin mortgage calculator.
The change will throw some people off the $1 million asking price, and several real estate experts say they expect home prices across the market to rise in smaller increments as borrowing costs are higher.
But analysts said they don’t expect prices to fall, citing rising incomes, low inventories and homeowners’ reluctance to sell for less than their neighbors.
Thornberg said Orange County and the rest of Southern California are relatively inexpensive compared to other major metropolitan areas around the world. Given that the area is home to large industries, entertainment, and nice weather, real estate prices will “continue to rise.”
“It’s not a bubble,” Thornberg said. “Everyone has to get used to that.”