High Housing Costs Help Mire Economy
Slowly but surely, reality is rearing its head. California has problems. All sorts of businesses--not just the aerospace industry--are moving out, and worse, so are successful, accomplished individuals in the 45-to-65-year age group. They leave behind a younger, less productive population that tends to consume more than it produces.
At least community leaders are no longer pretending that all is well. But so far they have rounded up only the usual suspects: congestion, traffic, air pollution, a costly regulatory climate that is hostile to business, to say nothing of a political leadership that confuses special interests and ideological agendas with the public interest, and that has made the word “corporation” an insult.
These are serious problems, but at least they are being faced. But another problem--the cost of housing--is not. The astronomical prices of family homes in the Southland not only put home ownership beyond reach of the young, and discourage productive people from moving here, but they also provide incentives to move out.
In the suburbs of Tacoma, Wash.--to pick a favored direction--a spacious, new three-bedroom home sitting on one-third acre sells for under $90,000. In contrast, the median Los Angeles home goes for over $220,000; that means that half the local homes sell for more. In desirable parts of town half-million-dollar home equities are common. It doesn’t take a rocket scientist to figure out the economic advantages of heading north.
And as if that were not enough, the law permits a 55-year-old home seller to stash a cool $125,000 gain, completely tax free. If the home sale brings more, as it often does, the rest of the gain can be rolled over into a replacement home, with no immediate taxes payable on that either. What a deal! No wonder Californians are cashing out and moving out.
For the younger readers who may not have witnessed the inflation of our land bubble, let me recount the history of a home in the San Fernando Valley, that I happen to know well. It was built in 1958 and sold by its original owner a few years later for $68,000. In 1968, it resold for $67,500. A dozen years later it was appraised at $325,000, and in 1989 (now a “fixer upper”) it was snapped up for $575,000. It was then extensively remodeled, and resold for--are you ready?--a million dollars.
How did we get into this pickle? Supply and demand, that’s how. In the 1970s, eager seekers of the suburban good life realized that the drawbridge to good areas was going up, and they bid up prices way beyond inflationary trends in a frenzied effort to get in while they could. The trickle-down theory did the rest. It was aided and abetted by mushrooming land-use and environmental regulations, and assorted government fees imposed on builders that in some areas added 20% or even more to the cost of a new house.
As prices of better homes zoomed out of reach, buyers had to settle for lesser ones and they bid those up too. Also, more women entered the work force, and their incomes financed the rising prices. Before long, the median San Fernando Valley home was going for a quarter-million dollars. Even the working-class families who bought the no-money-down, $10,000 homes in the mid-1950s, were suddenly sitting on retirement nest eggs in the six figures.
Faced with unaffordable homes in close-in areas, home-hungry families eagerly went on to snap up cheaper subdivisions farther and farther out on the urban periphery, overcrowding freeways, lengthening commute times, and adding to the air pollution many of them set out to escape.
Of course, developers are no dummies; they saw what was selling and what local zoning authorities approved. One result was an oversupply of large single-family homes in the outlying areas, and a shortage of well-designed, reasonably priced smaller homes, townhouses and condominiums in the parts of town where most people want to live. But close-in or far-out, ownership of a family home, no matter what its cost in money and lifestyle, got to be the Southland way of life. Of course, this could not go on indefinitely, and the consequences of this speculative orgy must now be faced.
To begin with, it was irrational to put so much wealth into housing. Money that should have gone into savings and investments in job-generating productive capacity has instead gone into back-breaking home mortgages. Californians have become compulsive housing overconsumers. Many are now slaves to their homes, living in dread of the possibility that one of the two family wage earners (now all but indispensable to home ownership) might lose a job. Ominously, foreclosures are up sharply.
Moreover, the obsession with owning the best home one can manage, and protecting its swollen equity, has produced a siege mentality. Homeowner associations are now the “vested interests” whose response to almost any sign of change near their turf is strident opposition. In the pricey suburbs, the cry of NIMBY--Not In My Back Yard!--has become not just a battle cry, but the supreme law of the land. This has had unfortunate consequences.
Our land-use control laws are driven by local politics, and aroused suburbanites vote in large numbers. Politicians--no dummies either--responded by pandering to the NIMBY crowd whose lust for good living in fast-appreciating, large homes has become the power behind municipal government. Good planning and public interest became frequent casualties of this process.
But there is no such thing as a free lunch. California needs job-generating businesses. They, in turn, must hire competent employees. But that is not easy if they have to attract people who face a doubling or tripling of their housing costs if they move here. California universities, for example, have had a very hard time attracting established scholars from other parts of the country for that very reason.
Conversely, Californians with six-figure nest eggs tied up in increasingly precarious home equities are not sitting around. The most enterprising ones are cashing in their wealth even now, and taking their skills and talents elsewhere. And that’s our loss.
Painful as it may be, we have to reconsider the idea that home ownership is everyman’s sure road to riches. If a home produces economic benefits, fine. But it should be a nice place to live, not a vehicle for speculation. Why? Because for all of its short-term appeal to greed, in the long run speculation has a painful downside, as we are learning the hard way. And that, ironically, may be the good news--if that lesson is learned.
