Coastal California housing least affordable in US

Persistent shortages of housing in Coastal California inflates both rent and home ownership costs relative to incomes, making housing an economic drain.

affordability_ceilingDespite the rapid home price increases from March 2012 to July 2013, I’ve consistently maintained we are not in a new bubble — at least not yet. The housing market reports I publish each month compare the cost of owning real estate to the cost of renting it, and as long as these two alternatives for acquiring homes is in balance, I consider the market affordable. The weakness in this analysis is that it assumes either renting or owning is affordable, but if neither one is affordable relative to incomes, the market can be very unaffordable despite the balance between ownership costs and rent.

I recently wrote that chronic shortages of housing supply inflates California house prices. When there are more jobs than houses or rentals, people are forced to bid up house prices and rents in order to obtain housing. This forces people to substitute down in quality and move further away from job centers, and it prices out the lowest bracket of wage earners, forcing them to live with multiple families in the same house or put upwards of 50% of their income toward housing. In other words, it lowers everyone’s standard of living.

L.A.-O.C. housing market is least affordable in U.S., Zillow says

By Tim Logan, August 20, 2014cant_pay_oc

Los Angeles and Orange counties are the least-affordable housing market in the country. And it’s likely to only get worse.

That’s according to new figures due out Thursday from real estate website Zillow, which found that renters here need to pay more of their income to afford a place to live than anywhere else in the country.

The Irvine Company recently added a large number of apartments, but these are high-end apartments which will do little to lower the cost of living. This new supply may slow rent growth in the apartment sector, but since the hedge funds stopped buying single-family homes earlier this year, rents on single-family homes will rise.

Adding to the affordability woes, Zillow is predicting that home prices here will climb 5.7% in the next year, outpacing likely growth in most people’s paychecks.

I have no idea why they believe house prices will rise that much given the stiff resistance the affordability ceiling provided over the last year, but perhaps the restricted inventory will cause house prices to rise more than wages next year. (See: With stagnant wages, what will cause rents and home prices to rise?) If prices do rise 5.7%, the price increases will outpace wages, and the market may become overvalued and even show signs of a bubble.

The real estate website crunched for-sale and rent prices and incomes across 35 housing markets in the U.S. It found that a family earning the median household income of $59,424 in metro Los Angeles — defined as L.A. and Orange counties — would need to spend 47.9% of its income to afford a median-priced rental apartment, and 42.6% to afford a median-priced house. Both were the highest share in the U.S., though L.A. tied with San Francisco in for-sale housing.

Prices here have grown much faster than incomes in the last few years, said Svenja Gudell, Zillow’s senior director of economic research. That’s pushing L.A. housing out of reach for many.

(See: Tepid wage growth and rising house costs prices out low-income households)

“For people who aren’t on the high end of income distribution — teachers, police officers — it becomes a real issue,” she said.

I question the reporters selection of people on the low end of the income distribution curve. The unions in California make firemen, policemen, prison guards, and school teachers more well paid than in other parts of the country.


Zillow’s figures echo a recent study by UCLA’s Ziman Center for Real Estate, which also pegged Los Angeles County as the least-affordable market in the country, and said that the rent crunch here has spread up the income ladder, to affect more middle-class households.

The shortage of available housing supply forces everyone to substitute down in quality. Further, loan modifications inflate rents as well as house prices, so banking policy also contributes to the problem.

It’s a twofold problem, economists say.

Housing prices here are high, though not as high as in the Bay Area, and comparable to New York, Washington and Boston. Those places score better on affordability measures, though, because people there tend to earn more than the average Southland resident. Median household income in the San Francisco area in the second quarter was $76,239, according to Zillow; in the L.A.-O.C. area it was $59,424.

Los Angeles has a lower median household income than comparable cities such as New York or San Francisco but only a small difference in median rents,” the UCLA report said.

Rising prices in the absence of rising wages is inflating house prices everywhere and making housing much less affordable. National home ownership affordability recently hit a five-year low.


Affordability for renters isn’t much better.

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Even for professionals with good incomes, buying a house in Southern California is a heavy lift, as Natalie Lohrenz sees every day.

As the director of counseling at the Consumer Credit Counseling Service of Orange County, she works regularly with first-time buyers trying to purchase a home in a place where the median house cost $600,000 in July, according to CoreLogic DataQuick. Last week, Lohrenz said, she met a registered nurse with a six-figure income who was struggling to buy a two-bedroom townhouse in Irvine.

“In the majority of the country, she’d have no problem at all,” Lohrenz said.

If she’s buying in Irvine, she’s choosing to substitute down in housing quality to live in a better community. She could obtain a single-family house in many nearby communities for the price of a 2/2 in Irvine.BaghdadBobCosts

One reason California is so unaffordable, said Gudell, may ironically be that it got hit harder in the housing bust than high-cost East Coast markets. Prices crashed. Investors scooped up homes cheap. Then as the market recovered, the price of what was left surged.

“They almost overshot,” Gudell said. “These California markets have these extremely high home values now, but incomes haven’t kept up.”

I find these reports in the financial media interesting because both the reporters and the people they interview have absolutely no idea what’s going on. Investors who bought homes at the bottom were not responsible for bottoming the market or for the subsequent rally. Sales volumes are still well below normal, so surging demand was not the key to the recovery. While investors did add somewhat to demand, it was the dramatic decrease in supply engineered by the banks that caused house prices to go up faster than wages.

If there’s good news, it’s that those price gains are slowing down. Zillow projects — based on supply, income growth and other factors — that prices here will climb 5.7% in the next year, more than twice the national average. But that’s barely half the pace they grew over the last year, and down sharply from the 8.7% annual jump the firm projected a month ago. Slow income growth is clearly putting a damper on demand, Gudell said.

If mortgage rates rise next year, the forecast appreciation will not materialize. (See: Zillow believes rising mortgage rates will slow home sales)

And the places where rents are climbing fastest tend to be places with strong job growth. Zillow said rents are up nearly 20% in the last year in Santa Monica and Venice, where tech jobs have surged. Rents have fallen in more remote areas such as Lancaster and Palmdale.

That trend probably will continue, Gudell said, as the housing rebound fades and growth becomes driven more by jobs and income.

“It wasn’t as much of a jobs story six months ago,” she said. “Now we have a healthy job market and that’s really what’s driving home values.”

Most housing analysts want to believe gains in housing are driven by fundamentals of job and wage growth, but that isn’t the case yet. (See: It’s a tough job market for SoCal real estate development professionals)


In the long run, that’s a healthy thing, said Keith Gumbinger, vice president of mortgage-tracking firm Price growth based on market fundamentals is a lot more sustainable than growth generated by market swings. Still, he said, it’ll take awhile to work out the damage of the last few years.

“We’re falling back to typical dynamics, and that should be healthier overall,” he said. “But income growth, wage growth, has been pretty weak. They’ve got a ways to catch up.”

Notice the truth is leaked in the last two sentences of the report.

The recent increase in home prices did wonders for bank balance sheets, but it did nothing to help consumers or the economy. Future homebuyers must pay significantly more to buy houses, and the extra money going to payments is not be circulated in the local economy to buy goods and services. Higher rents and higher home prices benefits existing landowners and bankers at the expense of everyone else. But despite the problems higher house prices create, few want the system to change, so Californians will continue to struggle with high housing costs, probably forever.


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