Tuesday, October 27, 2015

Solving Southern California's Expensive Housing Crisis

If California wants to reduce vehicle miles traveled, the job-to-housing ratios and home affordability must be addressed through robust market competition.
 
Why does it cost so much to live near Downtown Los Angeles?

Transit Talking Points by: Nicholas Ventrone, Community Engagement Director
riversidetransit@gmail.com


The Transit Coalition monitors the housing market simply because when one region becomes too expensive for its workers and their families, many people opt to buy elsewhere and commute in. That obstructs transportation mobility and the 91 freeway corridor between the Inland Empire and Orange County has been a prime example of that for over two decades. In contrast, when both the job-to-housing ratios and housing prices are in balance and violent crime is controlled, people will generally opt to live where they work. Look at the Coachella Valley and the rush hour conditions between there and the Inland Empire to the west. The balance and affordability there helps keep the I-10 corridor moving through the San Gorgonio Pass, even during peak commute times because people can live where they work in the south desert.

State politicians envision a reduction of vehicle miles traveled. But what is the fair way to address this? The short answer is not to over-regulate the private sector. It is to finally solve the state's expensive housing crisis.

Every now and then, I come across news articles that illustrate that an increase in home sales means increased property and land values. Thus, when more people stream into town, that could very well be an indicator of economic growth which is a valid argument. However, there is a very serious problem stemming from rapidly rising home prices in Southern California and the stats are hard proof.

If you've ever searched for ways to balance your family's budget, you know that financial experts suggest that about 30% of household income after taxes should go to housing-related expenses. Some professionals recommend that about 15% should go to transportation, 10% to healthcare, 10% to food, 10% to debt reduction or savings, 5% to utilities, and 20% to other items.

However, the truth is working salaries have generally not kept up with the rising home prices and rents which forces hard working Californians to spend well more than 30% of household income toward housing or commute very long distances which clogs our infrastructure and increases vehicle miles traveled.

Let's look at Irvine, a prime economic job center.

Have a good job in Orange County? Could you afford to live there too?

This master-planned city has a very robust employment hub on its western side dubbed the Irvine Business Complex. Jobs are plentiful and pay very well. For instance, people who are good at balancing financial budgets, organizing accounts, and managing purchase and sales orders (a.k.a. accountants) will find good and honest work in this portion of Orange County. According to the job portal site Indeed, a Senior Accountant salary is around $69,000 per year in Irvine. Sounds like a dream job for many.

Let's suppose a private firm in Irvine hired a guy named Tom to take hold of the company's accounting at the generous $69K salary. Tom is married with a stay-at-home wife and two children. He is the main provider of the house as the wife has to stay with the kids and cannot work. With the child tax credits, about $5,000 is taxed out from Tom's salary per year, leaving the net income around $64,000.

Could he afford to live where he worked by allocating 30% of his salary toward the house payments? Let's go ahead and see...

According to the housing web site Zillow, the median home value in Irvine is a whopping $733,100 with median rent at $3,000. Having a wife and two kids, Tom needs a 3 bedroom house.

A listing on Zillow has a 3-bedroom single family rental unit in the Deerfield subdivision listed for $2,985 per month. The house itself was built in the 1970's and is 1,906 square feet. Keep in mind that Deerfield is a master-planned neighborhood with a giant park that bisects the subdivision with multiple community pools, commons areas, schools, playgrounds, walking trails, and a community center. The vast open space and amenities can neutralize the small living space which would allow the family to move around enjoy the outdoors.

But the question is about affordability. The rent is $35,820 per year. That adds up to 56% of the net household income; almost double of what should be paid. Buying is out of the question. A similar property in Deerfield with four bedrooms at 2,100 square feet is listed at--ready?--$829,999 with an estimated $3,031 mortgage not including property taxes.

No wonder the 91 freeway corridor is so clogged. And its not just Deerfield.

There are traditional-sized tract homes all over Irvine and the surrounding areas selling for well over $1 million. People like Tom cannot afford to live anywhere near the Irvine Business Complex area and his salary is way too high to receive any form of government handouts. To be fair, prices are a little bit better west of Irvine in Santa Ana and Costa Mesa. There are some 3 bedroom condo units selling in the 300K's, but the living space is cramped. That's why the Inland Empire underwent urban sprawl for the last two decades which continue to jam the 91, I-15 and other east/west freeways.

Do you super-commute? Wait until you see this...

In the San Francisco Bay Area, the situation is worse. In fact, its housing prices are so bad that it is more affordable for a worker to live in Las Vegas and commute in daily into San Francisco by airplane.  I am not kidding. The Business Insider's numbers tell the truth. You want a new definition of super-commuting and urban sprawl, there it is. Sadly, if nothing is done to resolve the housing affordability crisis, expect these kinds of high prices to seep into the Inland Empire, commutes longer, and transportation networks jammed.

This whole story is beyond belief. The fact that the governments continue to fail to take action on this situation is unbelievable. Southern California has a massive freeway network, yet we still have some of the worst traffic. Every environmental organization that opposes urban sprawl should be demanding the state and local governments to take action.

So, what's being done about it? I've been hearing in the political arena that the government needs to dump more money into this situation through more Section 8 and subsidized housing and increasing the minimum wage. Although I do support safety-net housing in general and believe the minimum wage should be tied to inflation and set a point at around $10/hour that incentivizes mobile people to work instead of receiving welfare, that will not get to the bottom of this situation, period. In fact, The Press Enterprise opined that red-tape regulations mandating developers to set aside property to be sold below market value has made overall housing even less affordable.

I believe politicians and entrepreneurs well know the true answer and we the people must hold the power structure to account into taking action. And every environmental organization should back this.

Concept: Spacious Family-Friendly condo units stacked 20 stories high in a block within the Irvine Business Complex area with plenty of open space commons. Good competition like this all over Southern California could allow buyers to rent or purchase these huge family units for about $1,500 per month.
Note: Concept only. Not officially proposed.
The marketplace needs to be allowed to address the high housing demands, grow the infrastructure via in-fill development, and lower prices and improve quality through competition.

A high school 12th grader can tell you that if demands are high and supplies lacking, prices are going to go up. However, if there is robust competition between developers all around Southern California, the buyers' selection improves. Quality and selections go up including the incentive for entrepreneurs to look into improving manufactured housing technology to further speed up development and lower capital costs. China has already used pre-manufactured panels to erect full-size skyscrapers in mere days that can withstand powerful earthquakes.

The strong competitive market will control and reduce the high prices without government subsidies. A perfect example of such market competition is the robust options to travel in between Vegas and California. With many airlines, bus companies and potentially a private high speed rail firm all competing, travelling between these two points is very affordable. Unfortunately, trivial red tape and broken loopholes in CEQA law obstruct the marketplace from investing in California's heavy demands for better in-fill housing. Smaller-name developers won't come in and compete because the government is tapping into their profit margins with trivial rules and high taxation that chokes up in-fill development.
 
That's why smart growth development remains generally slow. That's why people like Tom can't afford to live near the Irvine Business Complex employment hub. That's why present-day developers build on cheaper land so that they can at least make some kind of profit from their projects with the all the red-tape bureaucracy.

I must mention that inventory in Irvine and South Orange County is growing. Although nowhere near the rate it should be, the increased supplies have finally started to lower purchase prices with the bargaining power there--long controlled by sellers--now in the buyers court. But prices are still unaffordable for many workers and supplies still short. That means competing in-fill developers and investors need to be better incentivized to grow the inventory, build family-friendly units, better compete, and improve housing options to finally meet demands, just like how market competition has lowered travelling rates and fares between California and Las Vegas.

Tom should have the option to find a quality home or a spacious family-friendly condo unit for $1,500 per month including property taxes under a competitive market with a short 15-20 minute bus ride to-and-from work.

Robust competition will grow buyer's selections which will lower unit prices and rentals. That will allow more workers the freedom to be able to live where they work.

What about land and property values and existing homeowners?

Infill development will not only preserve, but will elevate land values while keeping unit prices in check. That's because if the owners of Orange County's retail shopping centers were to convert their sprawling parking lots into vibrant mixed-use transit villages, the property value would soar. But the individual housing units would be plentiful, affordable, and family friendly.

For existing homeowners in Orange County, especially those who bought high, this is a tough sell. But if the governments work with the lending banks, landlords and residents and offer heavy tax credits and property tax breaks for writing off the price drops and discourage residents from walking away, these entities will more likely back this project. The common goal should be to ensure people can afford to live where they work.

Concept: Smart Growth development in South LA.
Note: Concept only. Not officially proposed.
Here in the Inland Empire, the same patterns must happen too as the logistics and medical sectors drive the regional economy. Plus, more high paying white collar jobs need to find their home here as well. The doctors, nurses, receptionists, truck drivers, manufacturers and procurement workers all need be able to live where they work too and not have to spend more than 30% of their household income toward rent, mortgage or property taxes. Both Corona and Southwest Riverside County where housing prices are on the rise need to look into redeveloping their commercial corridors with additional infrastructure and local jobs. Temecula already has big plans to address this.

If California really wants to reduce vehicle miles traveled on Southern California freeways as we hear from state politicians, our governments should really consider this fair and fact-based proposition.

Who will take charge of it?

2 comments:

  1. I think you're leaving out one very important way that development in our country is over-regulated: zoning laws and parking minima. Segregated zoning and massive parking requirements make it very, very hard for developers to build the smaller, denser, mixed-use housing that buyers are looking for, and so those places are very expensive. Building tract houses on dairy farms is consistent with the zoning code, so they get built.

    We rarely agree about government regulation, but here's a case in which deregulation could really improve our streets and cities.

    ReplyDelete