August 13, 2017
The kind folks at the Orange County chapter of the Building Industry Association were nice enough to invite me to join a recent panel on local housing market conditions.
I decided an early-morning seminar required a quick start, so I offered the audience of industry insiders and local elected officials a “pop quiz” on some housing supply and affordability trends.
The theme to my questions was that decades of rising housing costs aren’t as out of line with monetary sanity as one might think. That reality check doesn’t make it any financially less challenging to live here, but I think it does give policymakers some leeway when seeking cures to local housing hurdles.
So here are my 10 questions that say a lot of about limited affordable housing options.
Q: In past 30 years, Orange County home prices have increased five-fold while inflation has just doubled. Not a shabby return for owners. But, how did the Dow Jones industrial average do, better or worse?
A: Stocks easily outperformed housing in the period, with the Dow rising 11-fold — from 2,000 to 22,000 since 1987. It’s an example of the broad economic fundamentals that provide support for higher home prices.
Q: Orange County home prices are way up, with CoreLogic’s median selling price over the last five years growing at a rate equal to 10-percent-a-year average gains. How do the large profits of the crazy mid-2000s bubble compare with today?
A: Please do not forget how insane last decade’s real estate insanity was. One hint is that in the five years ending in 2005, local home appreciation was averaging 18 percent a year! That’s almost twice today’s upswing. So the current run-up looks pretty meek, comparatively.
Q: According to National Association of Home Builder data, the typical Orange County home sold in 2017 is affordable to 14 percent of residents making median incomes. But back in the 2007 bubble, was “affordability” better or worse?
A: Statistically, it was worse a decade ago with 4 percent affordability … but (a big but) … that era’s lax lending practices meant far too many people were qualified as borrower’s who could afford overly generous loan-qualification standards. Half-jokingly, affordability was actually 100 percent in those days, if that phrase simply meant “can you buy?”
Q: If you take CoreLogic’s estimated monthly house payment for an Orange County homebuyer from 1989 and adjust it for inflation, that cost is $3,094 today. So, how does that mortgage payment compare with what this year’s buyer pays?
A: The monthly house payment is lower by roughly $100 a month. That minor difference suggests that over 30 years the monthly cost of buying a typical Orange County home hasn’t changed much. Why? It’s largely thanks to interest rates falling to 4 percent from 10 percent. Yes, today’s down payments are much larger … as are property tax bills. But pricey housing has been an Orange County headache for a long time.
Q: Southern California rents are rising at a 5.2 percent annual pace this year, per the Consumer Price Index. How does that compare to average increases seen over the past 30 years?
A: It’s well above the 3.3 percent pace seen since 1987. While landlords can argue that high demand for rentals keep apartments full at these rising rents, I will simply suggest the industry should be careful. Rent control, bad in the long run for landlord and renter alike, becomes politically viable when housing costs are seen as unbearable.
Q: From 1990 to 2007, Orange County builders sold an average 7,000 new homes yearly, according to CoreLogic data. Since then — the bubble burst and the Great Recession — has homebuilding been better or worse?
A: New homes sales have cooled to roughly 2,900 a year in the past decade. The industry essentially shut down during real estate’s nasty downturn and has rebounded only modestly. In the 12 months ended in June, 4,600 new homes were sold locally.
Q: You can’t talk about housing without including jobs. From 1990 to 2007, Orange County bosses averaged 19,000 hires each year. Since then, has job creation been better or worse?
A: It’s worse. Catching up from the recession’s ugliness translates to a 10-year hiring pace of 6,000 annually. However, when considering employment’s impact on housing supply, recent construction has equaled 49 homes per 100 new jobs vs. 36 homes per 100 hires in 1990-2007! Consider that a modest improvement to the housing-shortage equation.
Q: Let’s realize first that most homebuying comes from the resale of existing homes! Orange County had 6,000 listings of such homes for sale in June. How’s that compare with 10 years ago as the bubble was bursting?
A: In June 2007, buyers had practically triple the number of homes to choose from. Triple! But with that era’s shrinking workforce, thus skittish house hunters, it was a recipe for real estate disaster. So, those who seek greater options … be careful what you wish for!
Q: In the past five years, builders accounted for 11 percent of all Orange County home sales. Those new residences were priced, on average, 33 percent higher than the overall median sales price. How does that new-home share and premium price compare with the previous 25 years?
A: From 1988 through 2012, builders sold 14 percent of all homes with prices that were only 23 percent more expensive than the typical sale. And that split says a lot about current development challenges. To soothe local density anxieties, developers and policy makers too often take the easy way. A common city-planning compromise is to agree to build fewer but pricier homes. That does not offer much help for the budget-pinched house hunter.
Q: High prices force people out of state, yes? For 2015, IRS data says 1.4 percent of Orange County tax filers left for other states. So how does that “retention rate” look vs. the state, nation … and Texas?
A: There is no mass exodus. Orange Countians must like it here. Departures per local tax filer run lower than California (1.5 percent); U.S. (2.1 percent); and Texas (2 percent)! Actually, that’s a big local problem: Proportionally nobody is moving, a trend that further stresses already tight housing supplies.