SAN DIEGO — The beige stucco townhouses and palm-lined cul-de-sacs of San Diego County exude a quiet tranquility, but that demeanor hides a difficult reality: Even after a sharp housing slowdown, cities in California are still America's least affordable places to live.
This means that California, which helped lead a nationwide real estate boom, could face more downward pressure on home prices.
Statewide, just 25 percent of households can afford an entry-level home, according to an index released this month by the California Association of Realtors. That's far below the national average of 61 percent who can afford to purchase a home.
Forecasters don't expect an outright plunge in California prices. With those palm trees and the Pacific Ocean beckoning, the Golden State appears sure to retain gilt-edged home values.
But if there's a floor under home prices in the nation's most populous state, there is also a ceiling.
"Home prices have gotten out of balance with incomes," says Mark Milner, a real estate analyst at PMI Mortgage Insurance in Walnut Creek, Calif. "Over time, those have to come back in balance."
The figures are eyepopping. First-time homebuyers paid a median price of $477,400 in California last year – 2-1/2 times the US median, according to the California Association of Realtors. The median entry-level condo in California sold for $360,160.
What happens here will be important, not just because California is home to nearly 1 in 8 Americans. It will help set the tone for the nation's housing market in the next year or two.
Moreover, the state's struggle over affordability represents, in extreme form, a national trend. Across the US, rents and home prices have risen faster than incomes over the past seven years.
In many large cities from Washington to Dallas, home prices have jumped in remote exurbs by nearly the same percentage as in the inner suburbs. For many buyers, a long commute is no longer a ticket to an affordable home.
California's affordability crunch doesn't ensure that house prices will fall. But clearly a period of rapid gains has ended. Prices last year fell 4.2 percent in San Diego, sagged 1.4 percent in San Francisco, and rose 2 percent in Los Angeles, according to Standard & Poor's Case-Shiller indexes.
Many analysts say the market here, and nationally, will stabilize this year. The economy remains generally healthy, they say, and builders have slowed down to avoid a pileup of unsold homes.
"There is reason to believe that [price] appreciation will be coming back soon," says Luke Tilley, a Philadelphia economist at Global Insight, who follows the California market.
Another camp of forecasters says California prices probably have further to fall. They note that housing downturns often take several years to hit bottom, and that high prices have sidelined many would-be buyers.
"We're expecting ... a sharper and deeper contraction," says Celia Chen, a housing economist at Moody's Economy.com in West Chester, Pa. She says the state's price run-up went beyond what could be justified by income or population growth.
The firm has predicted that several California cities will see prices drop further – some by 10 percent or more – and won't hit bottom until sometime next year.
In one measure of how high prices have soared, the California Building Industry Association recently found that 18 of America's 20 least affordable metro areas are in California.
Affordability has long been a challenge for the state, thanks to its sunny beaches and relative scarcity of buildable lots.
In San Diego, one result is that new construction is increasingly dominated by condominiums and multifamily units, not the traditional single-family home. Those are what buyers can afford, and what zoning rules call for in a region of smog and sparse water supplies.
"The day of the ... house with the white picket fence, for at least this part of the state, is really over," says Robert Pinnegar, executive director of the San Diego County Apartment Association, a rental trade group.
Land here is limited in all directions: by the Mexican border to the south, the ocean to the west, the Marine base at Camp Pendleton to the north, and the Cleveland National Forest east of the city. In turn, high land prices make it hard for builders to finance affordable developments.
Townhouses here can cost $400,000 or more.
Such prices explain why just 57 percent of California households own homes – far below the national average of about 69 percent.
Those prices also explain why a growing share of San Diego workers now live outside the county, in some cases commuting more than 50 miles or living across the Mexican border.
"It's kind of impossible to stop" that migration, says Susan Baldwin, a senior regional planner at the San Diego Association of Governments.
But she and other local officials have been trying to craft solutions.
A new light-rail route, for example, will link the city of Oceanside, to the north of San Diego, with Escondido and other nearby communities. Stops along the route are candidates for new high-density housing, she says.
Nonprofit organizations are also stepping into the breach.
Wakeland Housing recently opened Lillian Place, a 74-unit development near San Diego's downtown baseball stadium, with rents about half the typical rates. Partnering with local governments and others, the company has helped create 6,000 units of affordable housing around the state.
But that barely begins to address the need.
"We used to think of affordable housing as something that was for extremely poor people. [It] is now something that seems to be sneaking closer and closer to the middle class," says Ken Sauder, Wakeland Housing's president. "Our kids can't afford to live here."
For now, if fewer Californians can afford to buy, it's also the case that many homeowners have decided not to sell in the current market.
"The market is kind of pulling back to [only] people who are really motivated" to sell, says Peter Dennehy, senior vice president of Sullivan Group Real Estate Advisors in San Diego.
That's a recipe for a slower pace of sales, but not necessarily lower prices, he says.
The state has seen down markets in the past, however.
In the early 1990s, the end of the cold war hammered southern California's aerospace industry. Home prices in Los Angeles took six years to bottom out, 27 percent below their 1990 peak.
In the past year, there hasn't been a similar shock to the economy. No one is forecasting a repeat of L.A.'s 1990s experience.
But several uncertainties stand out, that could have wider ripple effects in the state's economy: Will a rise in foreclosures prompt banks to curb the flow of credit to buyers? Will large numbers of jobs in construction and other real estate activities be lost? Will consumer spending be affected by a cooler housing market?
These are all real risks.
It's not a time for homeowners to panic. Any price declines are unlikely to wipe out their gains of recent years.
But the affordability squeeze, says Ms. Chen, "leaves the market very exposed."