I’ve done my fair share of real estate investing over the years. Occasionally a person of the younger persuasion asks me for advice. My usual response is to do what I did: buy your first house in 1970. Though something of a wise-ass answer, it does dramatize the problem. I was still a couple years south of thirty that year and had an middle-level professional job which paid $15,500 a year. I bought a house in a changing blue-collar neighborhood where the newcomers’ collars were more likely to be metaphorically white. The house had about 900 square feet and cost me $19,500. I recently build a house in the same city and the permit fees alone were almost double that.
These days, that same job pays about $80,000. The house that I bought for less than $20,000 in 1970? Now, fifty years later, it would likely fetch at least $800,000. This means that the house I bought for about one-and-a-quarter times my salary would cost my current-day counterpart about ten times his or her salary. That is quite a staggering difference. I was comfortably able to purchase my first house. My successor cannot come close to qualifying for what was for me, an easily-affordable starter home. Taxes, insurance and a standard 80% mortgage would run over $4,000 per month which is unsupportable on an income of about $6,500 per month. It would take two earners at $80,000 each to qualify.
Randal O’Toole is the author of The Best Laid Plans (2007), a well-reasoned and well-researched anti-planning polemic. Those who appreciate the value of urban planning would call it a diatribe. Their opposites would be inclined to call it the gospel truth. I have an advanced degree in city planning and worked a dozen years in that field. I am entitled to a professional opinion. (These days, I describe myself as a recovering city planner.) I think O’Toole is way more right than wrong.
O’Toole points out that the ratio of income to housing costs was largely uniform from throughout the United States in the 60s and 70s. He reports that census data show that in 1969, median home values in the San Francisco metropolitan area were less than 2.3 times median family income. In 2005, O’Toole reports that two-thirds of the metropolitan areas in the United States still had ratios lower than 2.7.
He suggests that home buyers in areas where prices are above this level are paying a planning tax. This is the added cost which he attributes to planning policies instituted by governments to manage growth. He writes that, for 50-100 metropolitan areas in the country, the planning tax is $25,000-100,000, i.e. the median price of a house is between $25,000 and $100,000 higher than it would be were the value-to-income ratio at national average of 2.7. O’Toole’s planning tax in another 50 metropolitan areas is over $100,000. In the San Francisco metropolitan area, it is $850,000.
Almost every month for decades, there has been at least one newspaper article about how California housing is becoming less and less affordable. The continuing increase in the value-to-income ratio is a measure of this lack of affordability. Today, the housing crisis is in news almost daily. Supposedly something like half the households in the State cannot afford to live here. And yet here they are.
The truth is, that while demographics determine the demand for housing, it is government, rather than the market, that determines the supply. The market, thus constricted, responds by awarding the artificially-limited housing supply to the highest bidders. With standard mortgages available to finance 80% of the purchase price, the average price of a house on the market at any given time is likely to be the aggregate amount of money chasing housing times five. The price is high because over the last half century, California has had an expansive, healthy economy while government has simultaneously refused to let the supply expand to meet demand.
This disproportionate demand manifests itself by households doing whatever it takes to compete. This might mean multiple bread-winners, or it could be immigrant families sharing housing, or maybe it is young couples devoting fifty percent of their income to put a roof over their head rather the norm, which is generally considered to be thirty percent.
Two-thirds of home buyers are not first-time buyers. These seasoned homeowners buy each subsequent house with the proceeds from their current house. The value-to-income ratio is misleading because most buyers buy their homes more with their wealth – mostly the equity in their current house — rather than their income. The latter may or may not reflect the former.
In one way, housing prices in California are not the problem so often lamented, at least not for those able buy and certainly not for those who are well established in the housing market. These owners live in an appreciating asset. This has been demonstrably the case historically, the post-2008 hit to the market notwithstanding. First-time buyers wanting to get into the market aspire to have what older homeowners already have: the security of owning their own home and the nest-egg it provides.
Housing prices outpacing incomes is not simply an unintended consequence of government policy. It is rather a consequential phenomenon unconsciously brought about by the political process. The opponents of more and/or denser housing usually support their position on environmental and livability grounds, but reasons aside, Californians as a polity have deliberately chosen to limit the supply of housing and allow housing prices to rise as a result.
For homeowners, this has been a very good thing. Very few would not like to see the process reversed. Anyone in California who has owned for some time has been the beneficiary, not the victim of the rising value-to-income ratio. For homeowners who have owned their home for decades, chances are they could sell it for enough to get back their purchase price as well as every dime they have subsequently put into your home — taxes, insurance, repairs, mortgage interest, even improvements — all of it would come back to them if they sold.
Under these circumstances, housing in California is not expensive, it’s free.