Sep272016

People leave California because house prices are too high

It costs so much to live in California that many people flee the state in search of lower cost housing and a better quality of life.

California is an expensive place to live. Due to the chronic shortage of housing supply that inflates California house prices and rents, many people can’t afford to live in the state. The problem is particularly acute for low-income Californians who often spend 50% or more of their income on rent, sometimes doubling or tripling up with other families to afford the cost of housing.

When housing is in short supply, the substitution effect forces buyers at every price level to buy a lower quality house than they otherwise would. At the very bottom of the housing ladder, those buyers who can only afford the least expensive properties get priced out by higher wage earners substituting downward. If the inventory restriction is bad enough, large swaths of wage earners are priced out of the market.

So how do people respond when they can’t afford housing? Some become homeless and avoid housing costs altogether, but thankfully, this isn’t common. Most put more and more of their paychecks toward housing until they no longer take home enough to feed themselves. At that point, they seek roommates or other families to share accommodations with to split costs. If all else fails, which it often does, people pack up and leave the state.

Homeowners on the Move Are Choosing More Affordable States

Pricey states like California are seeing sellers pack up for cheaper places such as Texas and Arizona

By CHRIS KIRKHAM, Sept. 25, 2016

Homeowners making moves out of state are increasingly selling out of expensive markets like California, where price escalation is steep, and buying into lower-cost markets such as Texas and Arizona, according to an analysis by data company CoreLogic.

Overall between 2000 and 2015, 2½ home sellers left California for every out-of-state buyer coming into the state, the study found, whereas in Texas, Arizona and North Carolina there have been more buyers coming than sellers leaving. That trend has accelerated as the housing recovery has progressed, with out-migration increasing among homeowners in fast-appreciating markets like California and Colorado, and decreasing in more affordable markets such as Texas.

I lived in Texas while attending Texas A&M. It’s a diverse state with a strong economy, and although the weather is not as good as California’s, the quality of life is better on a lower income. Housing is generally affordable, far more so than California.

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“When most people move, they’re either moving for opportunity or affordability,” said Sam Khater, deputy chief economist at CoreLogic, who analyzed the data. “Moving across state lines you get a little bit of both. I can leave a place that’s expensive and rapidly appreciating, and I can get a job that pays the same or is better, but the cost of living is lower.”

I lived in a variety of states including Wisconsin, Texas, Florida, Nevada, and California. One thing I believe after living in these places is that a high quality of life on a material level requires making more than the median income wherever you live. If you make more than the median, you will have more choice in housing, the housing you find will be higher quality, and your money will go further when buying local goods and services. Everything is relative financially.

California migration by income

California doesn’t have enough housing units for sale or for rent. Until this changes — and it may never change — everyone endures a lower quality of life as they spend too much to provide shelter, forcing many to leave the state.

Prices increased 62% on average over that time in areas where movers sold homes, compared with a 37% price increase in markets where they moved.

California offers a prime example. The median sale price for homeowners leaving the state was $495,000, compared with a median purchase price of $315,000 in the markets where they moved—a 36% decrease.

california_house_gold_mineMany people take advantage of the differential appreciation rates and retire to a lower-cost locale. The family home is often the only retirement plan people rely on, which is a problem for those who want to retire during a recession.

For Californians moving to Texas, the gap was even wider: a $510,000 median selling price in California compared with a $307,663 purchase price in Texas—a drop of 40%.

Sahar Pezeshki, a Dallas-area agent at the real-estate brokerage Redfin, said she has seen Californians “coming in by the busloads” to Texas in recent years. The reasons run the gamut—job relocations, retirement—but she said most buyers are chasing the significant cost savings.

One recent client sold his condominium in west Los Angeles and discovered he had the money to buy two new homes in Dallas—one for him and one for his daughter.

“We can’t compete with the beaches of California,” Ms. Pezeshki said. “But when you have enough leftover money, you can go travel there once a month.”

I know a couple who moved to Florida when the wife’s parents retired. The parents bought two houses for cash so they could be near their grandchildren. It worked for the young family as they enjoyed a large house, and their only bills were taxes and insurance. However, they had to leave California to execute their plan.

Is slow growth more desirable?

Many jurisdictions in California have slow growth initiatives that limit infrastructure advancement and housing development. Ostensibly, this preserves the quality of life for everyone, but it mainly benefits existing homeowners at the expense of everyone else.

Preventing the construction of a sufficient number of housing units to meet demand ensures slow growth because the cost friction described above pushes people out. While many existing homeowners enjoy the inflated resale value of their home, when their children must leave the state because they can’t afford it, these enriched homeowners don’t get to see their children and grandchildren very often, an outcome that many find less appealing.

Perhaps slow growth is preferable to unbridled expansion, but the price many families pay is hidden — at least until they spend a holiday alone in their overvalued McMansion because their children and grandchildren live too far away to visit. Perhaps they will go visit them in Texas.

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