Home cost increases curbing ownership

The American dream has always included owning a home.  A place you can paint your favorite color, hang a picture, adopt a pet, and best of all know your monthly payment is buying something for you.  There is a feeling of independence and stability when you become a homeowner. 

Since demand is high, there should be a lot of housing available that aspiring owners can buy.  Isn't that what we learned in Econ 101?  Markets respond to demand.  But when it comes to housing that isn't the case - and the reasons - well, it's complicated.

California's homeownership rate hit a high in 2006 of 60.2 percent.  Since the recession it has plummeted to 54.2 percent - almost 10 percentage points lower than the U.S. average of 63.9 percent. 

Pre-2005 ownership increases were to a great extent based on loose lending standards.  The memories are still vivid - a housing bubble that burst resulting in the worst recession in 50 years.  Now officials fear that lending constraints may have gone too far making it impossible for families to meet even minimum loan requirements. 

California's housing costs are the second highest in the country - roughly two and a half times the national average according to Zillow, an on line real estate data base.  In Los Angeles County the median priced single family house is $477,250.  To purchase this home and not pay more than the recommended 33 percent of income, a family needs to make $119,257 per year - far above the average Los Angeles County income of $54,.954.

There are many things driving up the cost of housing.  A recent study by the California Legislative Analyst found that the California Environmental Quality Act (CEQA) was a major reason for high housing costs.  The report stated that the CEQA and entitlement permitting process for a housing project takes local governments about two and a half years to complete. After the project is approved, there are frequently more delays for legal challenges.  All this time, costs add up and are eventually added to the purchase price.

Home loan approvals take into account what new owners will pay in property taxes.   Under the 1978 Prop 13 rules, residential property taxes are capped at one percent of assessed value indexed at two percent per year.  According to the Association of Realtors, a median housing in California costed $70,890 in 1978.  Today that house costs $449,700.  A seller who owned the house prior to the passage of Prop 13 is paying around $1,475 per year in taxes.  Property taxes for the new owner would be over $4,400.

Local zoning rules limit the number of units that can be built.  The rules are usually meant to protect current residents from added traffic congestion and other impacts of new development.  The unintended consequences are that housing projects are either downsized or moved further outside the urban core adding either higher unit costs or transportation costs for the buyer.

A recent Los Angeles County Economic Development Corporation (LAEDC) Business Scan showed 399 new single family housing permits were issued in Los Angeles County in March.  Year to date single family housing permits are slightly below last year's numbers.  But there were 1,631 permits issued in March for multi-family housing, an increase of 153.4 percent year to date.  That's good news.  In the end, no matter how we do it, the solution is more supply.