You need to make $300,000 to afford a starter home in San Jose

Don’t have a job in tech, a trust fund, or a winning lottery ticket? Then good luck affording a starter home in the Bay Area.

According to a recent Redfin report, homebuyers in most California cities need to be making nearly twice the median income to afford even a starter home.

In Oakland, the buyer of a median-priced starter home — defined as a property whose price falls between the 5th and 35th percentile — must earn $194,004. In San Francisco, it’s $285,426. And in San Jose, the buyer of a median-priced starter home must earn an eye-popping $299,414 — more than anywhere else in the country.

Nationwide, a household earning that much is in the top fifth percentile of earners. But in the South Bay, despite being way above the median household income of about $170,000, it’s barely enough to get your hands on a townhouse.

At least that's been the experience for Vihar and Priyanka Patel, 29 and 31, who even make over the $299,414 the report says is necessary to afford a starter home. The couple, who both work as software engineers, have failed to get their hands on a home despite looking for nearly two years.

Recently they put in a bid for $1.7 million on a three-bedroom, two-and-a-half-bathroom townhouse listed at $1.55 million. But the seller came back and said they didn't want to pay for the closing costs, or for the Patels' agent. That would have meant an extra $42,500 in up-front cash that the Patels couldn't pay. They lost the bidding war to another couple.

"Like my friends say: getting outbid for a home in the Bay is a rite of passage," Vihar joked.

Still, behind his sense of humor, he's frustrated at how little buyers in San Jose seem to get for their money.

"That $1 million plus is a huge sticker shock," Vihar said. "And the amount of issues that these homes have that the seller expects us to fix — termites, needing a new roof … they don’t care, because they know someone’s going to buy their home."

The income needed to afford a starter home in the Bay Area is even higher than a year ago — and much higher than before the pandemic — as mortgage rates have remained elevated and home sale prices are near record highs. The median sales price of a single-family home in the nine-county Bay Area was up 3.6% year over year as of July, reaching $1.3 million.

The Bay Area's perennial issue of low inventory is also compounded by policies like Proposition 13, which curbs property tax increases by freezing a home's value in place at the moment of the purchase. That means that even people who would like to upgrade to a larger home end up staying in their starter home to avoid paying higher taxes.

With so few homes available, affluent buyers who dominate the market here are pushing up prices by bidding well over asking price on homes, agents say.

That's the exact situation Vihar has seen play out on the market. "There are people who are willing to pay much higher than asking because they just want to get into a home," he said. "They're the ones with the winning bids right now."

In the rest of the country, getting into a starter home — while still out of reach for many families — is much more doable. Redfin estimates the median monthly mortgage payment for a starter home in the U.S. overall at $1,981, requiring an annual household income of around $80,000.

Redfin's analysis assumes a down payment of 3.5% — the minimum down payment to get a loan backed by the Federal Housing Administration — and that the buyer is paying 30% of their income in housing costs.

In reality, most Bay Area buyers are coming in with higher down payments.

Virtually none of the starter homes on the market in California would be affordable to someone earning the median income, according to the Redfin report.

“Homes in the Bay Area are so expensive that even many high-earning tech employees have been priced out of the area, so they’re looking at neighboring cities,” said Craig Pellegrini, a Redfin Premier agent in the San Jose area. “I have one client who wanted to buy in Palo Alto, but they can’t afford it anymore so they’re looking in Sunnyvale and Santa Clara. That’s pricing out a lot of lower earners in those neighboring cities completely.”

For most buyers, even those making upward of $300,000 a year, buying a starter home in this market means compromising, said Clarence Madrilejos.

"Their expectations have to be more realistic for what’s on the market," he said.

As land values rise and the number of vacant lots available for development shrinks, many first-time homebuyers are opting for condos as a more affordable option than a single-family home. Even sharing walls, though, comes at a steep price.

"That low million dollar range is almost nonexistent now," said Hamed Barakzoy, a real estate agent based in Pleasanton. "It can even be challenging to find that for a townhome."

Those looking for the more traditional single-family starter home are forced to head to far-away exurbs like Mountain House over the Altamont Pass in San Joaquin County, settling for long commutes in return for more reasonable prices.

"Reasonable" is relative, though: The median-priced single-family home there is $1 million, versus $1.8 million in Santa Clara County.