Why only a third of the people living in our great state can afford to actually live in our great state – and what do we do about it?
By Jay Lieberman
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 just yet. There are solutions.
IT ALL STARTED WITH THIS REALIZATION
At most of the city council meetings I have attended there seems to be lack of reasoning behind denials of new housing projects. Most denials are based on pressuring of the public present. The more disruptive they were, the quicker the project was shut down.
And I knew at that moment, what I was seeing is likely the largest cause 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. The US average affordability last year sat at about 57% of people in the country being able to afford a home. At the start of 2012, California was in line with that national average at 56%. Not so bad.
But by the end of 2016 that number tanked to 32%.
The picture gets bleaker as you take a tour through the different cities: Los Angeles – 29%, San Diego – 28%, Orange County – 21%, all the way down to San Francisco at 13%.
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 of the biggest issues of the drastic unaffordability of home ownership is caused by the lack of supply of new homes.
California requires about 180,000 newly built housing units every year to keep pace with the states’ 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 are way behind the 8-ball and need to figure out how to create a massive influx of new housing, and fast.
A simple problem results: 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 – unaffordability.
HOUSEHOLD INCOME NOT KEEPING PACE
To put further fuel on this fire, household income has not come close to keeping pace with the increase in home prices. In 2011 housing costs ate up only 24% of the median income of a California household. Just five years later that almost doubled to 46%.
With the additional costs to actually live in California beyond housing costs, a huge number of folks are dipping into any minimal savings they have or using credit cards. There is nothing left at the end of the day.
THE DOWNPAYMENT PROBLEM
Going back in time, everyone used to talk about how long it would take a family to save for the typical 20% down payment on a home as being 10-12 years. 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 now takes on average, over 25 years to save the same amount.
SEEKING REFUGE IN THE RENTAL MARKET
As we see, most people can’t afford to buy a home in California. So, what are folks supposed to do now?
There is another option…they rent.
As you may have noticed, the multi-family 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 multi-family investment property. What we found was astounding. Each tenant was spending over 60% of their income on rent. And rent was increasing 3%-5% per year.
Another Simple Problem Results: Due to the housing shortage, having led to artificial price increases, most people can’t afford to buy, and even if they could it would take them 25 years to save for it. So, they rent. But, rents have reached a level that is sealing the fate of those renters ability to save to buy someday.
For some, there is only one other option– leave the state.
WHAT DO WE DO ABOUT ALL THIS? – THE #1 FOCUS
In the opinion of this simple, humble, real estate broker, we need more new housing units. Period. That should be the #1 focus of attention. Any other focus is merely a band aid on the real problem.
We are short over 1,000,000 housing units just over the last 10 years in order to simply keep pace with our past population growth.
By having more new housing units available, prices on existing homes for sale will ease. This will slowly reduce de-mand for rental housing as home prices become more affordable. This will then slowly 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 bastard flopping hard on their 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 that 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. About 2 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 2 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. There is a need for protection of our gorgeous State of California. That is why so many people want to live here. I’m also a realist. We have to find a balance between the concern of protecting its natural beauty while allowing our children to afford to live here in the future.
We don’t want a State with 10 people and 1,000,000 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 256,100 people. Only a 0.66% increase.
A rounding error.
Compare that to the booming 80’s to early 90’s where on average we saw almost 700,000 people entering the State each year.
Because…people are priced out. So, they decide to move to an affordable state. Simple math. Simple decision. Does not 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 fewer 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 that they are better off not selling their home, thereby not freeing up an available home for another family to purchase, and so on and so on. This causes a lack of supply in the existing home market, artificially increasing pricing on that home due to competition, resulting in unaffordability.
Here are just a few of the more significant reasons for this.
First, 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 home ownership is the ability to exclude $250,000 (or $500,000 if married) of profit from the sale of your primary residence every 2 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.
Second, 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.
Third, 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 2 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 townhome. Causing them to make the choice of either having their kids sleep in the kitchen or just stay 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 it has an illness and provide the right medication in order 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’, ‘I will have a place to live.’ That there will be a place for folks to live like a Mensch and still afford a latte at Starbucks every now and then.
This is the diagnosis and that is the medication. Anything less would be considered a band aid on a heart attack.
ABOUT THEM – Jay & Michelle Lieberman have been called “provocative and entertaining,” but also “committed philanthropists”. Entrepreneurs and relentless innovators of the real estate industry, creators of the “Value-Driven Approach to Sell Real Estate”, founders of the Conejo Valley Teacher Only Program, hosts of the Conejo Valley Advice Givers Podcast Show, and attorneys and real estate brokers at Keller Williams World Class in Southern California. They feel honored and blessed every day they are able to serve their clients, their family, friends and their community. You can reach them at info@TeamJayMichelle.com.