Only about a third of the state’s population can actually afford to live there.
California is in the middle of a full-on crisis of housing affordability. The supply of homes for sale in our golden state has dropped off the proverbial cliff, income has not kept pace with price increases, and most folks don’t have the down payment to buy.
Don’t head for the hills and go off the grid just yet. There are solutions.
It all started with this realization
At most of the city council meetings I attended, there seemed to be a lack of reasoning behind denials of new housing projects. Most denials were based on pressure from people there, and the more disruptive they were, the quicker the project was shut down.
And I knew at that moment, what I saw was likely one of the largest causes of our California housing problem. As things usually go, it starts at the ground floor.
So, let’s start there.
The California housing crisis: the numbers tell all
There is one thing everyone seems to agree on: fewer people can afford to buy a home in our gorgeous sun-drenched state.
And the numbers are very clear.
According to the Joint Center for Housing Studies of Harvard University, the homeownership rate in 2016 fell to 63.4 percent, after 12 consecutive years of decline.
At the start of 2012, California’s average was 56 percent. Not so bad. But by Q1 2017, that number tanked to 32 percent.
The picture gets bleaker as you take a tour through the different cities: Los Angeles, 29 percent; San Diego, 28 percent; Orange County, 21 percent; all the way down to San Francisco at 13 percent.
What happened, and what’s the fix?
There are a number of reasons for this, but we will focus on what I believe are the most significant factors.
The supply of housing has fallen off a cliff
One major cause of the affordability problem is lack of new homes.
California requires about 180,000 newly built housing units every year to keep pace with the state’s population growth. But California has not been able to produce even 100,000 units per year. This mounting deficit has been going on for over a decade.
We need to figure out how to create a massive influx of new housing — and fast.
No new housing leads to lower supply. Competition increases for existing home sales, leading to artificial increases in those home sale prices, leading to — you guessed it — affordability problems.
Household income not keeping pace
To add fuel to the fire, household income has not come close to keeping pace with the increase in home prices.
In January 2011, the median household income in California was $60,374. Compare that to January of 2016, where the median household income rose to $64,500, a mere 6.8 percent total increase over five years.
Compare that to the increase in median housing price in California for the same time period.
In 2011, the median house in California cost $279,200, while in 2016 it rose massively to $467,160 — a 67.30 percent increase during that five-year time period.
In addition to housing expenses, people must factor in the cost of actually living in California; a huge number of folks are dipping into any minimal savings they have or are using credit cards. There is nothing left at the end of the day.
The down payment problem
People used to say it took 10 to 12 years to save for the typical 20 percent down payment on a house.
Fast forward to today, with the massive increase in housing costs far exceeding any pay increases, along with the almost nonexistent interest rates on savings accounts, it can now take up to 19 years to save for a down payment.
Seeking refuge in the rental market
The multifamily property market has been extremely strong for over 10 years. (For landlords, this is due to strong and increasing rental rates.)
I recently did some due diligence for a client on a potential multifamily investment property. What we found was astounding: each tenant was spending over 60 percent of his or her income on rent. And rent was increasing 3 percent to 5 percent per year.
Due to the artificial price increases (caused by the inventory shortage), most people can’t afford to buy, and even if they could, it would take them nearly 20 years to save for a down payment.
So, they rent.
But the price of rent has skyrocketed so high in some parts that renters are unable to save for a future home. For some, there is only one other option — leave the state.
What do we do about all this?
In the opinion of this simple, humble real estate broker, we need more new housing units — period. That should be the no. 1 focus of attention. Any other focus is merely a distraction from the real problem.
Over the past 10 years, we’ve been unable to keep pace with population growth and are short over 1 million housing units.
By having more new housing units available, prices on existing homes for sale will ease. This will slowly reduce demand for rental housing as home prices become more affordable. This will also begin to reduce the rental rates on those rental units to a level that the average California resident who could not afford to purchase could now afford to rent.
The system over time will begin to stabilize. This fixed focus is all about creating more competition from the bottom up.
Right now, the unaffordability in the California housing market is like a teeter-totter and someone on one side is getting ready to jump off sending the other poor slob flopping hard on his ass.
So how do we get more new housing built?
The barriers to development
The first thing to look at is why folks are not building. What are the pain points and challenges in the development process?
We live in a very progressive state. With that majority belief, and our areas of natural beauty, there is a strong hold on keeping that beauty forever. Those who come forward to develop housing run against this thought barrier in most of our California towns.
Digging into that retention of beauty in California has led to an incredible amount of local, county and state restrictions on development of any kind.
A client of ours told me a very telling story about a piece of land he purchased in Orange County a few years back. It was about two acres, which he slated for a 25-unit condo project. A gorgeous development. Open space, water treatments, materials blending into the natural surroundings.
Eighteen months later, he was confronted with the costs of permits and approvals — totaling $483,000.
And this was before he would bring a shovel to the job site.
At one of the public hearings for his development, 82 people showed up, yelling and screaming that it was going to destroy the natural beauty of their neighborhood. I’ve seen this area, and there are maybe two trees within a 2-mile radius.
Fast-forward to today: he gave up, sold the land, and it’s now a parking lot.
Don’t get me wrong. Our gorgeous state of California should be protected — its beauty is the reason why so many people want to live here. But I’m also a realist. We must find a balance between protecting natural beauty and allowing our children to afford to live here in the future.
We don’t want a state with 10 people and a million grizzly bears. The bears don’t pay taxes.
Massive exodus out of California
Anyone with a mother like mine would get a verbal tongue lashing if her kids could not live within a 10-mile radius of her home. So we are in a bit of a Catch-22. Go broke living in our state or get yelled at by your mother every day.
We see this dilemma in the dropping growth rate in California. For those of us stuck cursing in traffic, it is important to understand that we only saw an increase in population in 2016 of about 280,000 people.
A rounding error.
Compare that to the booming ’80s to early ’90s where on average we saw almost 700,000 people entering the state each year.
People are priced out. So they decide to move to an affordable state. Simple math. Simple decision. It doesn’t need to be any more complicated than that.
Less residents, less revenue, less treasured beauty
With less people in our state, there is less tax revenue coming into the coffers, less infrastructure being built and maintained, less growth in industry, less spending on consumables — it goes on and on all the way down through every level of our lives in California.
With less revenue coming into the state due to less residents in the state paying taxes, there are less funds available to manage all of the gorgeous hills, valleys, mountains and beaches. The very thing all of the building restrictions and regulations are attempting to protect.
Some other factors
Existing home sales have dropped dramatically as well. To note, there are pocket areas where existing home sales are booming, but it’s very micro and area-specific.
A significant number of people are making the decision to not sell their home, which adds to the inventory problem.
This causes a lack of supply in the existing home market, artificially increasing pricing on that home due to competition and resulting in unaffordability.
- Here are just a few of the more significant reasons for this:
With home prices so high, folks are concerned about the ability to shield all of the profits of a home sale from being taxed. A great benefit of homeownership is the ability to exclude $250,000 (or $500,000 if married) of profit from the sale of your primary residence every two years. But, in today’s market, profits in a lot of cases are exceeding that exclusion amount and sellers are staring down large tax bills. So, what do they do? They stay put.
- The property tax system in our state is based on the most recent sale price of a home. Someone who bought their home 20 years ago for $250,000 is paying taxes of about $3,500 a year. Let’s say they purchase a replacement home today for $800,000. That new bill skyrockets to about $10,000. So, what do they do? They stay put.
- And this is one of many lifestyle decisions causing folks to not move. An issue we hear over and over again from potential clients is they don’t want to move as they can’t replace what they have. Plus, their kids are or will be coming home to live with them during and after college.
For instance, one of our clients has a four-bedroom home with two kids in college. But, due to the increased costs of owning a replacement home today, they could only afford to get into a two-bedroom town home.
So they have to choose between having their kids sleep in the kitchen or staying put where everyone is comfortable.
It just doesn’t make sense to sell.
The necessary prescription for change
This crisis in California is very real.
We need to treat it like an illness and provide the right medication to lift our beloved land by the sea up to its past glory.
And the first pill we need to prescribe is easing development hurdles to rev up the engines of economic prosperity. This will get people excited, increasing the perception that all will be OK, and people will be able to afford a place to live (and a latte from Starbucks every now and then).
This is the diagnosis, and that is the medication. Anything less would be like putting a Band-Aid on a heart attack.
By: Jay Lieberman
December 21, 2017