In the 1950s and 1960s, Southern California was ground zero for the “American Dream” of owning a house. From tony Newport Beach and Bel-Air to the more middle-class suburbs of the San Fernando Valley and Garden Grove to working-class Lakewood, our region created a vast geography of opportunity for prospective homeowners.
Today, with house prices again skyrocketing, Southern California is morphing into something that more resembles a geography of inequality. Now, even the middle class is forced into either being “house poor” or completely shut out of homeownership, or may simply be obliged to leave the area. Even more troubling is that the working class and the poor suffer from the kind of crowded, overpriced housing conditions sadly reminiscent of those experienced during the Depression and the Second World War.
Judged by the “median multiple” – the median income divided by the median house price – California's prices for a generation have soared well above the national averages. Demographer Wendell Cox notes that, until the early 1970s, California's house prices were similar to those in the rest of the United States. National Association of Realtors data indicate that the median house price in California at that time was 7 percent above the national average. By 2013, the price differential had risen to 109 percent.
This has little to do with such things as construction costs, which have not risen as quickly in most of California as elsewhere, but are largely the result of soaring land costs and stiff fees imposed on housing. Attributable largely to regulatory factors that restrict building in many areas, the cost of finished land for comparably priced houses has increased nine times as much in California as in the rest of the nation since 1970. Portland State University economist Gerald Mildner refers to this as “Economics 101,” indicating that “as the demand for property in a region grows, the increase in demand translates into some combination of more space and high prices, depending upon the elasticity of supply.”
Beside regulatory restraints, California housing prices are driven up by the highest impact fees in the nation. An annual survey by Duncan and Associates shows that the average impact fee in California for single-family residence in 2012 was $31,100 per unit, nearly 90 percent higher than the next most expensive state and 265 percent higher than the norm among jurisdictions that levy such fees, which typically pay for capital improvements, like water and wastewater facilities, required by a new development. Many states and localities on the other side of the Sierras do not.
These fees also impact multifamily housing; the state's fees on multifamily units averaged $18,800, 290 percent above the average outside the state.
California's emerging housing crisis, then, is not, as some suggest, a reflection of the state's constrained geography or economic superiority. The two most-recent spikes in housing costs have occurred as the state's median income has dropped from well above to just about the national average. Neither can we blame a huge surge of new residents, since California's once-buoyant population growth has slowed to levels similar to those of the rest of the country.
Instead, the roots of our state's massive social regression lie in political choices made by the state, counties and cities. This trend likely will intensify, as regulators interpret the state's climate-change legislation to further penalize construction of single-family houses preferred by most California families. Particularly vulnerable will be the starter-home market, once the engine of California's egalitarian middle-class culture.
Some “new urbanists” and greens argue that such restrictions will eliminate wasteful “McMansions” and spur construction of more “sustainable” dense housing for the working masses. Yet, in reality, the impact of highly restrictive housing polices tend to be felt most by both middle-class families and the least-affluent, who find themselves unable to buy housing or, in some cases, are forced to spend huge percentages of their income on rent.
The growing affordability crisis seems likely to worsen as the housing market recovers. Given the paucity of new home construction, and ever-tightening regulation, California's housing market is particularly vulnerable to wild swings in prices; the year-on-year median house price increase as of May 2013 was the greatest since 1980, even greater than in any of the past decade's “bubble” years. Overall, price gains in the state were two to three times stronger than that in the rest of the nation.
This process has been further accelerated by the presence of investors in the local market. Investors, many from Asia, now account for upward of one in four home purchasers in the state.
Among the biggest losers here is California's middle class, particularly young families without large family endowments. Some 60 percent of U.S. households can now afford to buy a house, according to the National Association of Home Builders / Wells Fargo Housing Opportunity Index, but that percentage has dropped even in the Riverside-San Bernardino (40 percent) and Sacramento (50 percent) metropolitan areas, while San Jose, Los Angeles and San Diego had affordability levels of 20 percent to 30 percent. The lowest level, 17 percent, was found in the San Francisco metropolitan area. We can expect these numbers to worsen in the immediate future.
These numbers will impact a wide range of people, including many with skills desired by employers. According to an analysis of Orange County average salaries for National Core, a nonprofit housing developer based in Rancho Cucamonga, even a biomedical engineer or a nurse in O.C. does not earn enough to buy a house there. As economist and author Claude Gruen has suggested, more restrictive land-use regulation “is to the middle class what the economic disaster of slum clearance was to the poor.”
Nor will the poor, or renters, benefit from these policies. The nation, and the state, have had programs to help lower-income residents, but these programs meet only a fraction of the need. Los Angeles County had a waiting list 17 times its potential supply of housing, according to a 2004 report by the National Low Income Housing Coalition. With relatively little new product being produced, it's unlikely this situation can improve, as potential homeowners are shoved into the rental market, boosting rents higher.
The net result is that more Californians are becoming house poor or “rent” poor. According to American Community Survey data analysis done for National Core by this author and demographer Wendell Cox, this state has four of the six major metropolitan areas with the largest share of renters spending more than 30 percent of their income on rent – led by Riverside-San Bernardino, Los Angeles-Orange County, Sacramento and San Diego – are located in the Golden State. This includes a majority of renter household in the cities of Los Angeles, Glendale, Anaheim and Santa Ana.
Even more troubling is a growing percentage of working households suffering housing-expense burdens of 50 percent or more of income. California again leads the way, according the National Housing Conference, with Los Angeles and San Diego among the top five major metro areas.
This emerging social disaster has received little attention from the so-called progressives, whose policies in part are responsible for the state's growing housing crisis. In large part due to housing, and lack of good middle-class jobs, California now has the highest poverty rate (when adjusted for the cost of housing) of any state.
Not only are working-class Californians poorer, they also are subject to ever-higher levels of overcrowding. On a percentage basis, four California major metropolitan areas are in the 10 regions in the country with the most families doubling up. The top two are Riverside-San Bernardino and Los Angeles, followed by San Jose and San Diego.
Overcrowding is particularly tough on children, who suffer greater problems with health and academic performance. Another study associated psychological problems with children from overcrowded housing.
Long drives to work
Finally, the housing crisis also creates significant environmental problems. The unaffordability of housing has forced many Californians to seek shelter far from work. Among commuters traveling 60 minutes or more to work, Riverside-San Bernardino is third-highest, followed by Los Angeles, eighth, and San Francisco, ninth. Among major metropolitan areas with the highest share of commuters traveling 90 or more minutes one way, Riverside-San Bernardino ranks second, in a virtual tie with New York, followed by Sacramento, seventh, and Los Angeles, eighth.
For both California's middle- and working-class, our housing regulatory regime serves as a kind of tax – a nearly confiscatory one – that works particularly against families, the poor and those who do not possess considerable family wealth. The result is a California that is increasingly out of sync with the very dream that has brought millions from all over the country.