Housing Unaffordability and Regulation in California

The following is from a reply to correspondence from a California reader of the 4th Annual Demographia International Housing Affordability Survey

Thank you for your email. You ask all manner of questions that probably deserve a good bit of discussion, and to which there are not easy answers.

It is important, I believe, to understand that the house cost inflation that has occurred in prescriptive (smart growth) markets… many of them on the coasts… is new. A decade ago there was nothing like the differences in housing prices between the prescriptive markets and what we refer to as the "responsive markets," where there is more traditional regulation. California had been perhaps 25 percent more costly than average, relative to incomes for some time (it is now more than double). I would argue that this was not so much the life style as it was the much stronger regulatory environment that arose in the 1970s (William Fischel of Dartmouth has published on this).

As for the pent up demand for coastal property, I would argue that this is a micro-issue. It does not explain why, for example, housing prices have exploded in the I-680 corridor or the Inland Empire. They have exploded there due to the regulations. There is plenty of land that can be developed in those areas, but it is largely forbidden or made so expensive with fees and regualtions that it is unaffordable.

There is no doubt that housing has become more attractive as an investment (shall we say, speculation, as all investment is to a degree). However, anyone speculating on housing in Atlanta, Dallas-Fort Worth or Indianapolis (or a host of other metropolitan areas) would have little, if anything to show for it. Those markets, where the restrictions are not so severe, have managed to avoid the cost escalation.

In my California presentations I frequently hear the attitude you indicate, that places like, for example, Dallas-Fort Worth are not at all attractive for one living in California. This is an understandable view, though mine is the opposite, having left Los Angeles for the Midwest 20 years ago.

I believe, however, this "California resident" view needs some perspective. In fact, since 2000, the Dallas-Fort Worth area has grown at a rate 8 times that of the SF Bay area (including the SJ area)… If current rates hold, DFW would exceed SFSJ in population before 2020. SD is losing domestic migrants at more than double the rate of Pittsburgh. The demand "equation" has shifted markedly. Kansas City and Indianapolis are growing at 3-4 times the rate of SFSJ. All of this is to say that your view is quite understandable and appropriate, but that the tide of demographics, at least at the moment, is nearly the opposite. There seems to be broad agreement that housing affordability is the issue.

The commuting issue is also important. While some people commute to the city centers (like downtown SF or LA), it is by no means the majority. In the SFSJ area, downtown SF represents little more than 10 percent of jobs (http://www.publicpurpose.com/ut-cprof-sf.htm). Downtown LA has a far smaller share. This is not unusual. Manhattan south of 59 Street has only 20 percent of metropolitan employment, central London about 20 percent of metropolitan employment and central Paris under 20 and dropping rapidly.

From a commuting perspective, this is not bad. Overall, commute times have generally stayed the same or even improved (though in some places where highway investment has been avoided, like SFSJ, times have gotten worse). One way commutes average 25 minutes in the US and the median is closer to 20. All of this is because the jobs follow the residents (some might argue the other way around), with employment spread throughout the urban area. The largest business centre in SFSJ is Silicon Valley. You are right on with respect to the problem of transit and employment corridors. In fact, transit is able to effectively serve only concentrated downtown areas, which is indicated by the strong share to SF, the strong, but weaker share to downtown Oakland and the nearly non-existent share to the "sprawling" Silicon Valley employment center. It is no different in Europe. As cities have expanded, suburb to suburb commuting has expanded, nearly all of it is by car, and it is generally faster than cars or transit to the city.

Meanwhile, in jest, I wonder where there is a $500,000 beach house in Calif. It can be difficult to find a 1500 square foot GI in the San Fernando Valley for that. Median price in SFSJ is far higher.

My sense is that California (and some other places) prices have risen to an unsustainable level, at least at historic economic growth rates. It would take a drop of 50 percent from peak to bring everything back into alignment with historic California norms. Failing something like that (the necessary drop might be higher or lower), historic economic growth could be difficult to sustain.

It is probably fair to say that all things being equal, people would rather live in California that what has been called "flyover country" --- the non-coastal Midwest, South and Mountain states. However all things are not equal (and, indeed, more people live in "flyover country").

Best regards,
Wendell Cox
4th Annual Demographia International Housing Affordability Survey