Who Is To Blame for High Housing Prices

Many people complain about the high cost of housing, especially here in Southern California. There was a very interesting opinion piece on the subject over the weekend here in LA. The article starts as follows:

Out of curiosity, I looked up the value of a two-story tract house I bought in a middle-class San Jose neighborhood back in 1983, for about $130,000. The home — which I sold for about $140,000 in 1985 — would now haul in an estimated $1 million or more, based on recent sales in the same neighborhood. That’s roughly eight times more than I paid for it. But in the 34 years since then, California’s median household income has increased by roughly three times, not eight.

Now, for those of us who have purchased more recently — say in the mid-2000s — there’s not as much of an increase. Houses in the San Fernando Valley, where I live, were on the order of $600-$800K back at the top of the market (if not higher). They dropped some, but have come back to those prices. Orange County? As the OC Register notes, new homes in the Pacifica San Juan neighborhood of San Juan Capistrano “includes two-story townhomes ranging from from 1,836 to 2,068 square feet in space; three or four bedrooms; three bathrooms and two-car garages. Prices start “from the low $700,000s.””  Mind you, these are townhomes, not even detached housing. How can Millennials purchase housing?

Not having been a renter, I can’t speak to how the rents have changed. But my sister-in-law recently started a discussion on this based on that Register article where she noted salaries are up (for some) on the order of 6%. Comments on her post (which was restricted to friends, which is why I’m not citing names or linking to the post) noted that “you can’t even rent very well for $60k a year. That’s about $1600 a month. Barely a two bedroom apartment in a nice area…” Another person commented “As a renter in CA my ass feels sore and raw. Rents for higher and higher and we where told it’s based on the housing prices in the area. The housing market crashed and rents didn’t come down and we where told it was because more people had to rent because they lost their homes. ” My daughter, however, rents, and she could tell you how expensive it is to rent in places like Los Angeles (she ended up having a roommate in the West Adams area) or up in Berkeley — especially compared to what she can rent in Madison WI.

Why is this happening?

The article explains it as follows:

How to fix all this can’t be covered in one little corner of the newspaper. The short answer, though, is to build more housing. But bureaucracy, land scarcity and construction costs, limited funding for affordable housing and well-intended environmental restrictions all stand in the way of new projects. And so do people up and down the state who are OK with new housing unless it happens to be in their neighborhood.

So let’s explore that last sentence a bit: “And so do people up and down the state who are OK with new housing unless it happens to be in their neighborhood.”

Building new housing (let’s assume non-rental, stand-alone, single family residences) increases the housing stock, and has a little dilution effect on overall housing prices. Large developments have a greater effect, but as we saw in places like Porter Ranch that have added loads of single-family houses, the demand is such that prices don’t drop all that much. Maybe we’ll see a big drop with the new Newhall Ranch development. Building multi-family developments — think condo developments with higher density — creates even more affordable homes, but still there isn’t a significant drop in housing.

Rentals can make housing more affordable, especially if you dump a lot of rentals in the rental market. This, after all, is how New York City (especially Manhattan) works: almost everyone there is a long term rentals with large housing corporations (the only one that can afford the buildings) taking the rental income and making the rich even richer. There is extremely high density and low car ownership, owing to the density of transit. Los Angeles doesn’t have that transit density, but that doesn’t stop builders from trying to increase density. It is unclear whether that will work, especially with parking and transportation issues. Most likely, people will end up paying one way or the other.

So what is doing us in with respect to housing. My supposition? Human nature. To put it another way: People are not willing to take a loss in value for their house even if it makes other houses in your neighborhood more affordable. People are not willing to have more housing constructed in their neighborhood if it lowers values solely due to the increase in supply. No one wants to see their property values drop. Your house is your main financial asset. You can’t afford to take the loss. Let it happen in another neighborhood. And thus, the NIMBY is born, with the net result that home purchase prices stay sky-high. The impact, of course, of this is that less folks buy (and thus can use the mortgage deduction), and more folks — if housing is available — rent. This increases the demand for the rental units, which (as the supply doesn’t increase as fast), increases the rent.

So, why not build more rental housing? Because those same folks that don’t want more low-density single family housing in their neighborhood don’t want high-density housing. Think what that will do to the traffic! We won’t be able to get anywhere! And if we make housing more affordable, all that riff-raff will move to our neighborhood, lowering values even further. Oh, and don’t get me started on what adding low income housing does to our housing values!

In the end, it is people who are protecting the values of their single family homes that keep the market high. Banks and other financial institutions are complicit in this: making it easier to take out riskier loans with lower down payments to make more expensive houses affordable, and then selling off those loans so they don’t keep the risk in the community (that’s part of what caused the housing crisis). Remember: What they can’t make in interest rate income they can make by having a smaller percentage of a larger base amount, with a longer loan. So what if they homeowner loses the loan? They can forclose and sell it to someone else making even more money the second or third or fourth time around.

The high housing prices also mean that those who can afford to buy and built multi-unit housing are those at the upper end of the financial spectrum. If these multi-unit complexes are built as condos, you have the same problems as above: housing prices that keep raising (which also keeps raising the prices of the detached non-condo houses). If they are built as rentals, the landlords want to keep the prices up — and thus they fight any low income units. But eventually there will be higher density, which will give us — you guessed it — Manhattan.

And that, folks, is why housing is so expensive. You have no one but yourself and human nature to blame.