California high prices caused by land use regulation
Schahrzad Berkland
6 Comments
I've had an article in the works about the cause of the California boom and bust cycles. Land use regulation. City land use regulation causes lengthy entitlement processes, which keeps builders 3-15 years behind the change in demand. Look, they are still building, 3 years after they should have stopped. It took them 5 - 7 years to get in gear to meet the rising demand caused by underbuilding in the 90's.
Our bureaucrats ensure we will keep having housing booms and busts, and I can't wait to ride the next housing boom to the top. Bureaucrats are giving us market timers a free handout. Instead of me writing my own report on the cause of boom and bust cycles, I will copy this excellent article from the OC Register, which in typical great fashion, covers all of CA and not just Orange County. Thanks, OC Register!
This article also describes we are losing population due to our unaffordability, so the growth projections for California will not be met. The growth projections of a few years ago are not being met, and our growth rate is off by up to 80%! So for all those who say "everyone wants to live here", I say they are living in a fantasy world. People are continuing to leave. Where people want to live, or what kind of car they want to drive, doesn't matter. It's all about what they actually do. (Can you imagine Mercedes tripling its inventory because "everyone wants to drive one"? What kind of childish marketing is that? That is exactly what the "everyone wants to live here" crowd is implying - that people can buy what they want.)
California suffered a net outward domestic migration of more than 900,000 people during 2000-06.
What is going on? Try housing affordability. In the three large coastal metropolitan areas, median home prices have exploded to more than 10 times median household incomes. Historically, this "median multiple" has been 3.0 or less and remains so in many parts of the United States. People have moved inland to take advantage of lower housing costs. But now housing costs are escalating substantially inland and, not surprisingly, growth has slowed.
What is driving escalating house costs? The standard answer is that low interest rates have fueled excessive demand. But if low interest rates were the cause, Atlanta, Dallas-Fort Worth and Houston, the three fastest-growing metropolitan areas in the high-income world, would have experienced similar cost escalation. But they haven't – their median multiples all remain below 3.0.
In fact, California has brought the housing affordability crisis and the resultant slower growth on itself. California's strict and bureaucratic land-use regulation has driven the price of developable land through the roof. At the same time, areas with more liberal (yet environmentally sustainable) regulation have managed to preserve housing affordability. Median home prices are about $150,000 in Dallas-Fort Worth and Houston and $175,000 in Atlanta. There are similar, even lower, prices in many other areas.
California may be pricing itself out of the future. Given the choice between a rental unit 20 miles from the coast in San Diego and a 3,000-square-foot house on a third of an acre in the suburbs of Kansas City or Indianapolis, it is not surprising that places like the latter are now domestic migration winners.
View Printer Friendly Version
Email Article to Friend
Reader Comments (6)
You should read the latest from realtor Purva Brown. She has posted an argument that median incomes and median home prices have no relationship. She uses San Diego to bolster her argument. purvabown.com
I left her a Real Estate 1.0 lesson for dummies on her blog here
Most realtors are just salesman, not consultants. They just want to spend as little time as possible to make as much money as they can.
I am having a very hard time finding a broker that I want to work for. Realtors cannot sell homes, only brokers can. So realtors must go find a broker to work for before they can buy or sell any homes. I'm looking for a broker who is honest enough, that he tells people that prices are dropping and has put at least 3 people into a rental property in the last year. Know of anyone like that?
"I'm looking for a broker who is honest enough, that he tells people that prices are dropping and has put at least 3 people into a rental property in the last year. Know of anyone like that?"
Hahahahahahahahah. Good one!
I know for a fact that Bob fits this criteria. So does realtor LH, a colleague on the San Diego Reinvestment Task Force. Last week at the meeting she said several investors called her about downtown investing, and she told them to wait at least another year.
I have 5 brothers, all of us grew up in Huntington Beach. We are between the ages of 34 and 41. We all make mostly average incomes with little or no debt. Most of us are married, educated and there are only 3 new children between the 6 of us. There is one doctor in the family, he is the only one that could "afford" to live anywhere near where we grew up. He is the most educated, highest income, no kids, his wife also a doctor. They are in the worst financial shape by far mostly due to the mortgage of a 2200 sqft. condo. The rest of us moved to neighboring states, are financially sound, and love our clean uncrowded neighborhoods. Now the doctors are looking at losing even more money as their home depreciates and they have become unhappy with their surroundings. The recent fires, and their temporary evacuations made matters worse.
Your article hits home.
Joe, is your California brother considering to sell his house, or does he want to ride out the downturn?