The housing bust: will Los Angeles ever become affordable again?

Great Debates
1

I’m seeing a growing number of posts on message boards throughout the Internet expressing a sense of schadenfreude towards the current real estate market. “Those poor fools who bought $700K tract houses in the Bay Area! HA!”

All these posts articles about plummeting real estate prices seem … well, lost on me. No matter how much prices may fall, will I, living on a single income as an urban planner, ever be able to afford even a small single family house in Los Angeles, San Francisco, New York, Boston, or Washington? Likely not. Even anything but the smallest condo in a questionable neighborhood would be beyond my reach. In past booms, home prices never seem to drop to their pre-boom levels; they fall, but not back to anything resembling “normal”.

In 1992, I visited my then-girlfriend’s parents in San Bernardino. They lived in a house that they just bought for $130K in a middle-end subdivision - the same price my parents just paid for a just slightly larger house in a somewhat affluent Buffalo suburb. 15 year ago, it was possible for a middle-class family from Buffalo to sell their house, move to the Los Angeles area, and easily buy another house. It’s not possible now. Will it ever be possible again the future? I really don’t think so.

I can see a dual economy emerging in housing, ultimately limiting the nation’s mobility. Those living in the Rust Belt and some parts of the Midwest may never be able to migrate to areas such as Southern California, the Bay Area, New York City, or other areas where the housing market drove prices beyond affordability to mere mortals. When to comes time for me to retire, will I be able to afford to leave Cleveland, or will the Rust Belt’s housing prices, stagnant for decades, keep me trapped here forever while housing prices in the rest of the nation continue to explode, fall a bit, explode again, drop just a little, spike up again … ?

Ultimately, what does a dual housing economy mean for the country? The Rust Belt doesn’t seem to be experiencing an influx of housing refugees from far more expensive regions; the Buffalo, Cleveland and Pittsburgh boosters can’t stop bragging about the low housing prices of their respective regions, but it really doesn’t seem to be a factor in attracting new residents. Will the combination of cheap housing and low labor demand eventually attract individuals of low human capital to the Rust Belt, further dragging down the region? Will there be massive income disparities, where … oh, to account for housing prices, workers in California will have salaries that are three or four times the amount as their peers in the Rust Belt?

2

How much money do you make?

3

It depends on what you mean by “Los Angeles”. Prices are definitely falling out in the hinterlands. There have been big drops in Orange County and out in the Inland Empire. But prices are still going up in the heart of the city, particularly in the Santa Monica–>Downtown–>Pasadena corridor. The prices have gotten so high that many single-family houses are being torn down and replaced by condos.

Personally I think it’s because of the commute. Gas is so expensive and the freeways are so hellish that lots of people are willing to spend several $100K extra just for the convenience of living in the middle of town. If I’m right then prices in the center of the city will never come back down to the point where single family houses are a good deal for people moving from other parts of the country.

4

At some point, companies aren’t going to be able to justify paying higher wages to employees, just so they can afford a house to live in. Consumers/customers aren’t going to pay extra for a “Made in California” sticker.At that time, the jobs will be outsourced. Either to other parts of the US, or to other companies.

5

  1. The current US housing boom has gone on for much longer than other historical booms. Some people blame Alan Greenspan for being TOO good at keeping easy credit available, thus keeping the boom going for much longer than it should have. If this hypothesis is right, then the current housing bust will also be the biggest seen yet.

  2. House prices are tied to income. People are willing to pay as much to live somewhere as they can afford. The state that existed before was where you had places where the median house cost $600k and the median income was $50k. This is clearly not a sustainable trend, and as we can see, it is being wrapped up. However, are there places where the median house costs $1 million but the median income is $350k? Probably, and are you ever going to be able to live somewhere like that? Well, not unless you’re making $350k. (Just pulled the numbers out of thin air).

There are going to be ritzy neighborhoods, there always has been and that’s the natural state of things. Another natural state one should note is that in the long run, the cost of housing tracks inflation (since housing costs are a large portion of the consumer price index). If housing has been appreciating at a rate higher than inflation, then either your income is increasing at the same rate(entirely possible), or there’s a lot of funny money going around. With most places it’s not hard to see which.

6

West S.F. Valley is still growing. The house I grew up in (bought for $36K, sold for $300+) has appreciated from $500K to $750K in the last few years. New tracts are still being built, and they’re in the 7-digit range.

Don’t know how bad it’s gonna tank when the housing bubble truly bursts.

7

The trend is already happening to some extent. In places like Silicon Valley, government employees, and workers in other (necessary) sectors with lower paying jobs cannot afford to live in the communities they serve.

8

What is the monthly mortgage payment on one of those $700,000 tract houses, and who on earth can afford to make said payments?

9

I have at least one relative who did just that - bought himself a condo in LA for $650k or some such. I reckon the place will be worth $200k in a year or so.

As far as I can gather, most people who buy them expect to sell them before their interest rate adjusts up, for a profit. It’s just like any other speculative bubble, since real estate is favored by taxation policy and allows for such high leverage ratios, the numbers are bigger.

Of course, most Americans are smart enough to put nothing down, which reduces their risk to essentially zero (California is a no-recourse mortgage state IIRC, if the housing market tanks, just pack up and walk). But my relative, being the foolish Chinese immigrant, actually put down something like $250k as a down payment, so now with skin in the game, he’s sunk. The lesson here being: When in Rome, etc.

10

I figure, 20 years or so, the Boomers are going to start dying off. Good chance of housing going lower then.

But not until then.

11

Elsewhere, maybe. But California? No way. Too many new residents crossing the border every day.

12

Wrong. We can afford to live, we can’t afford to buy. I live there and I do that. And same with my co-workers, even the lower graded ones. Yes, some have to have room-mates or be a two-job family, but rents aren’t horrible. 1 Bdr can be found for $800. A reasonable house in an reasonable neighborhood is $750K, however.

13

This discussion revives a question I have been thinking about:

Why are there poor people in big cities? How do they afford the housing? Why aren’t more wealthy people buying up the property they own/rent and making it impossible for the poor to live in the city?

I understand that there are government low income housing and rent control programs, but until I see some figures on what percentage of the millions of people from the lower income bracket that participate in such programs, I still gotta wonder how they do it.

14

why? because of presumed increased inventory?

methinks not

boomers will pass their castle(s) on to their offspring - and the population in Los Angeles will be ASStronomical in 20 years

cow-a-bun-ga

15

Naturally. Unless the death of the boomers is offset by immigration (because the birth rate isn’t getting it done). Supply and demand.

And the offspring will tend to put them on the market. Particularly where there are multiple kids, the thinking is usually to sell the house and split the proceeds.

16

I suspect the home ownership trend in Los Angeles will gradually change until it will be common to have property pass from generation to generation — this is my guess

17

I can’t see this happening. Not only because of multiple children wanting to split the estate, but also because the house is often sold to help finance retirement in a less expensive location.

18

Or… cuc-a-mon-ga!

19

I’ve wondered the same thing. I grew up in a rural area and now live in a metropolitan one.

Yes, subsidies help some. However, it appears that many will ‘stack’ up in an apartment and split the rent. $1200 sounds like alot…but if you have 3 people sharing it, it’s only $400 per month.

In a rural area, you are more needing of a car. IN the middle of a city, a car is truely optional. Public transportation gives you inexpensive access to jobs. Speaking of jobs, from my experience rural area == minimum wage if you are low skilled. In the city, it is possible to find many different types of jobs, many which pay above minimum wage. Just driving to work, I saw a factory wanting line workers with an advertized pay of $10-$12 per hour. Not going to get rich, but sharing the apartment at $400 per month, making $10-$12 an hour with no car…you can live.

Also, unless you grew up in the rural area…moving there gives an extreme risk of loneliness. Despite all talk of ‘small town hospitality’, rural areas seem to be pretty hostile to people moving in…especially if you are low skilled. In addition, if you are non-white…

So…liveable rent if you stack up. Many oportunities to find like minded people also needed to roommate…different types of jobs available for low skill and paying above minimum wage…more oportunity to make new friends…

…No wonder the poor head to the cities.

20

And do you have a cite for this aside from you own personal experience? How many cops and teachers do you think will have roommates just to live in a certain community where they have very little chance of ever owning a home?