Sep162015

Los Angeles County rents rising at 7% annual rate

In LA County, the rate of rental rate increase now exceeds the rate of home price appreciation. Both exceed the rate of wage growth.

lowly_renterIt costs too much to live in California because the chronic shortages of housing supply inflates California house prices and rents. Starting in the 1970s with regulations like CEQA, California began to restrict growth. This inhibited builders and developers from bringing new product to market to meet demand in many areas. Nimbyism became public policy, and as a result, we don’t have enough homes, either rental or owner-occupied, to meet our needs.

When any commodity is in short supply, prices tend to rise; rentals are no exception. There are not enough rentals to go around, so people substitute down in quality to obtain a place to live. In Orange County, the Irvine Company built thousands of new apartments over the last several years, so rent increases are smaller in Irvine or OC; however, LA County apartment construction has not kept pace with demand, so rent’s are rising much faster there.

LA County housing market analysis

The median home price in LA County now exceeds $500,000.

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With rents rising so rapidly, even the huge (66%) home price rally hasn’t made LA County unaffordable by historic standards.

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In late 2013, the year-over-year rate of price increase was nearly 50%! This surpassed the appreciation rates seen during the housing bubble. Fortunately, this rate of increase has dropped back down to sustainable levels over the last few months.

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The big story in LA County is the relentlessly rising rents, now reaching 7% year-over-year. The rate of rental rate increase now exceeds the rate of home price appreciation.

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An improving economy explains much of the increase, but as the Orange County experience shows, the rate of increase would be smaller if more supply were brought to market to accommodate demand.

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Because rents have been rising so fast, and since the market was so undervalued two years ago, the LA County housing market is as affordable today as it was in the 1990s — which wasn’t very affordable. Since both rents and house prices are rising faster than wages, the lowest tier of the housing market gets priced out.

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However, since the ratio of rents and house prices is near historic norms, the market still rates highly for home purchases.

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The poster child for unaffordable housing is San Francisco. While LA County is pushing out the lowest tier, it has a long way to go before the problems are as acute there as they currently are in San Francisco. However, I doubt that’s much comfort to the three or four families sharing a tiny house in LA’s poorer neighborhoods.

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