Fewer Can Afford California Homes

Monday, October 10, 2005
A "recent" study shows that fewer and fewer Californians can afford the median California home. (I emphasize "recent" because everyone who lives here has known this for quite some time).

The median price of a California home is now $568,890. To afford a traditional mortgage you would need to earn an income of $133,800. This means that 14% of California households can qualify for a traditional loan. This of course assumes you can put down 20% of the purchase price which amounts to about $115,000. Now how many households have that much cash lying around?

How on earth do people think this can be sustained? When only 14% (if that) can afford to buy a house in an area something is wrong. What I view as the real problem is that the people this really prices out are those that are younger and just entering the job market. This will cause more and more younger families to look elsewhere when deciding where to settle. This will have serious long term effects as the working population will age and the infusion of young (and cheap) talent will erode California's economy.

11 comments:

Jenn said...

Your blog is really interesting. Couldn't stop scrolling...
The housing thing is so bad I'm almost surprised there isn't some Prop on the next ballot trying to fix it. I don't really want the gov't to step in and meddle, but is there any other hope? Wish I knew more about economics...

T said...

Jenn, Thanks for the kind words about my blog. As for government intervention. If you read my blog long enough you will know that I'm very much against government interfering with any sort of market controls. It is just a bad idea.

With housing, it could be disastorous. If there was a price cap on housing, this would cause the supply of housing to be far below what the demand would be. People would refuse to move because the price they would get for their home wouldn't be enough. People would be stuck where they live because they couldn't sell their home for enough, and couldn't find anyone else willing to sell their house. This would cause the economy to stagnate. The problem would be further exacerbated if nothing was done about rental properties. Since there would be such a glut of potential buyers, they would have to live somewhere, driving up the price of rentals to unaffordable levels.

The problems go on and on. Government should never interfere with market forces. It causes terrible, unintended side-effects. In fact, the housing bubble was actually due in large part to government ineptitude. Greenspan kept rates so low for so long it caused a flood of people to get in to the housing market because of artificially low mortgage rates. Now that the fed is rising rates again, this is going to cause the exact opposite effect as people rush to get out.

Kat said...

perhaps if renters got some sort of tax break, they wouldn't be as disappointed about not being able to deduct a mortgage.

T said...

My preference would be that nobody got any tax break on anything. A Flat Tax would be more fair. But then you would get all the home owners hollering about losing their tax break, not realizing the whole time that this break probably raises their taxes. (Then again, if it were up to me I would probably do away with income tax alogether in favor of a sales tax)

But that is going to be a blog topic for another day.

Kat said...

don't get me started on the flat tax being "fair" issue.

Jen said...

Your young cheap california labor moves to nevada and drives our market up, too. Now only california expats can afford decent housing here.

T said...

Kat, I would love to hear why you think a flat tax is more "unfair" than a progressive tax. If you really think it would cost the poor more in taxes, lets just say you don't know what I know.

Kat said...

amen, jen.

t, i don't think a flat tax makes poor people pay more. i just believe a flat tax wouldn't tax the rich enough. :P

T said...

That doesn't make a lot of logical sense Kathryn. Given that taxes are at a certain level (taking government spending to be constant which it isn't) taxes must be borne by either the "rich" or the "poor" unless you want to throw in the middle class in there too.

I disagree with your assessment however. I think under a flat tax the rich would pay even more. You have no idea how much the rich get away with deducting. A flat tax isn't just about having one percentage, its about disallowing deductions like mortgage interest, business meals, etc. Things the rich take advantage of in much greater proportion than the middle class or the poor.

That's still not why I like the Flat tax however. I just think its more fair. I'm not about going after the rich or the poor. I just want a fair game where the Government isn't trying to pick winners and losers. In the end, everyone loses.

Amanda said...

There's a really good book on recent tax law history that outlines how little the rich actually pay in taxes due to fancy accounting and loopholes. I wish I could remember the title of it. Anyhoo, the gist is, the middle class is shrinking, AND paying more in taxes thanks to Presidents Reagan, Bush I, Clinton & Bush II (especially Bush II). It made me tentatively long for a flat tax - presuming we could get the rich folks to pay their fair share.

Barring the pipe dream of a universally-enforced flat tax, it would be nice if the IRS would stop focussing its auditing might on people poor enough to qualify for the Earned Income Tax Credit and have a look at rich folks who "technically" have no income because their money is tied up in bogus charitable trusts.

And, on to the subject of home prices...as long as California continues to see itself as a state of suburban (now, exurban) single-family homes, home prices will continue to rise. There simply isn't enough land in or around urban areas for single-family home prices to be affordable for working class and middle-class buyers. We need more multi-unit urban housing, and I firmly believe that the key to this is mixed-use multi-storey development with apartments and condos on upper stories, and sales tax-generating retail at ground level.

I break from T. in that I believe a certain percentage of new multi-unit construction should be set aside by local government mandate for low-income families in order to combat the ghettoization of the poor which separates poor and working class families from amenities like good schools, reasonably-priced food and safe streets which would help them move out of poverty.

T said...

Amanda, I disagree with your assertion that home prices can keep rising. It is almost impossible that that can happen. The only way it is possible if there is a dramatic rise in incomes which itself would cause severe problems because of the resulting inflation. There is more than a supply and demand problem here in terms of land. There is a problem with the ability of Californians to actually afford housing at current wages.

I also strongly disagree with the idea of providing low income housing. The problem with such ideas is that it causes middle and high income families to abandon such areas. You can't force these families to stay. "White Flight" and the resulting urban decay often make the problem worse than it orginally was.