California's fast-food workers are now among the highest paid in the U.S. They still don't make nearly enough to buy a house.

By Aarthi Swaminathan

The disconnect between incomes and home prices in California is felt across the nation, due to historically low housing inventory and high mortgage rates

California's half a million fast-food workers will now make at least $20 an hour. But the pay increase won't move the needle when it comes to making buying a house more affordable in the state.

Under a law that went into effect April 1, fast-food workers in California must be paid at least $20 an hour, a 23% increase from their average hourly rate of $16.21 in 2022. That makes them among the highest paid in the country, though minimum-wage workers in a town outside Seattle make $20.29 an hour.

While the increase in fast-food workers' salaries will help offset the rise in consumer prices, it won't be enough to help them afford to buy a home in the state, based on calculations of incomes and home prices.

The new minimum wage for California's fast-food workers works out to about $41,600 a year. For workers in other sectors, California's minimum wage remains $16 an hour, or about $33,280 a year. To buy a house in the state, an aspiring homeowner would need an annual salary of at least $197,057 a year, according to separate analysis by the personal-finance website Bankrate. Buying a typically-priced home in California requires the highest annual salary in the country, Bankrate found.

Bankrate's calculation assumed that the median home price in California was $739,200 and that a buyer would make a 20% down payment and have a 30-year mortgage at 7.05%. It also included insurance and property taxes, and assumed that buyers are spending no more than 28% of their annual income on housing.

The disconnect between incomes and home prices in California echoes across the nation, due to historically low housing inventory and high mortgage rates. With the 30-year mortgage rate averaging close to 7%, monthly payments have increased significantly over the past two years.

To afford a median-priced home nationally, at $402,000, a prospective buyer would need to make at least $110,000 annually, Bankrate found.

To be sure, prices vary widely across California. The median sales price of a single-family home in the far north of the state as of February was $379,000 according to data from the California Association of Realtors, while in the San Francisco Bay Area, which includes San Jose, it was $1.26 million.

But home prices on average are still out of reach for the typical hourly wage worker.

"While there's strong evidence that raising the minimum wage helps lift workers and their families out of poverty, helps to close racial and gender pay gaps, and improves wages for workers beyond just those working at the minimum wage, none of that changes the very real structural issues at the heart of California's housing crisis," Kyle Moore, an economist with the Economic Policy Institute, told MarketWatch.

"$20 sets an important wage floor for workers in the fast-food industry and will ease the financial strain on many Californian families, but still falls short of what's necessary for even dual-income families to support two kids in California," he added.

For one fast-food worker, it took an act of extreme generosity from strangers online to help him buy a home, as MarketWatch detailed in a story earlier this year.

"Homes have become less affordable because home-price appreciation has so far outpaced wage growth," Jeff Ostrowski, an analyst at Bankrate, said in a statement.

"Why have home prices gone up so quickly? Blame supply and demand. Over the past few years, the supply of homes has been constrained by a number of factors, including muted homebuilding and the lock-in effect," he said. "But demand for homes has been growing, and there are more buyers than sellers."

The lock-in effect refers to homeowners who have relatively low mortgage rates staying put in their homes and not selling, because they don't want - or can't afford - to move to a house where their monthly payments would be much higher under today's mortgage rates.

Among the most populous counties, homes are most unaffordable in California - based on average local wages - particularly in Los Angeles, San Diego and Orange counties, according to a separate analysis by property-data company Attom.

California residents who make the state's minimum wage of $16 an hour aren't alone in facing an unaffordable and unapproachable home-buying market.

The annual income needed to buy a median-priced home is equally high in Hawaii, at $186,000, while minimum-wage employees there make $14 an hour.

It's also the case in Washington, D.C., where minimum-wage workers will make $17.50 an hour come July, but the annual income needed is $168,000.

Ultimately, "it's good to see policy being passed that will push employers to pay wages that are more in line with increasing rents," EPI's Moore said, "but solving the problem of access to homeownership will take a serious commitment to building, changes to zoning laws to allow for more multifamily housing, and in the case of wealth-poor families, access to capital."

How have housing prices affected your life and your views on the U.S. economy? MarketWatch reporters want to hear from you about your experiences. Write to us at readerstories@marketwatch.com. A reporter may be in touch to learn more.

-Aarthi Swaminathan

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04-06-24 0620ET

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