We often hear about the high cost of housing in California’s urban centers. How does this relate to each region’s broader economy — specifically their job markets?
Metropolitan areas with the highest housing costs in the nation are located in California. No coincidence, these metros have also seen the highest post-recession job growth in the nation. Between the end of the recession in July 2009 and October 2016:
- San Jose added 241,600 more jobs (a 28% increase);
- San Francisco added 239,400 more jobs (a 28% increase);
- San Diego added 174,000 more jobs (a 14% increase); and
- Los Angeles added 475,900 more jobs (a 12% increase).
Median home values have also increased during this same period of time by:
- 66% in San Jose;
- 58% in San Francisco;
- 43% in San Diego; and
- 41% in Los Angeles, according to Zillow.
Editor’s note — Using median home values is problematic when analyzing changes in a home’s value over time. It is also ignorant of the vast value discrepancy between expensive luxury property and smaller, more modest homes. A better method is the Case-Shiller/Standard & Poor’s tiered-price method, which measures how home prices change over time based on their original price tier. View California’s tiered price charts here and see how homes in different price tiers rise and fall at varying speeds.
To measure housing costs, Zillow looked at each area’s:
- median home values;
- how area median income compares to what is needed to qualify for each metro’s typical mortgage payment; and
- how the income-to-mortgage-payment ratio has changed over time.
Meanwhile, from 2009 to 2015 (the most recently available data) the average income has increased:
- 44% in San Jose;
- 41% in San Francisco;
- 23% in San Diego; and
- 27% in Los Angeles, according to the Bureau of Economic Analysis.
While income growth has been strong in each of these regions, the increase is insufficient compared to home price growth.
Will home prices continue to rise?
Have home prices increased so quickly in these metro areas due to the relatively rapid jobs recovery experienced in each? Or are the two measurements only indirectly related?
Zillow stays away from finger pointing. However, we at first tuesday say job growth is just one cause of rapid price growth.
In the simplest sense, more jobs means more people moving to an area in search of housing, including rentals and homeownership opportunities — a net increase in demand. But this by itself is not the sole cause.
The issue arises when builders fail to meet the demand increase. Since people need a place to live close to their new jobs, they are initially willing to spend more of their income on housing. When housing costs become unmanageable, residents move in with roommates to make ends meet. When that doesn’t work, residents move out of the area into the distant suburbs. The media has been especially earnest and salient in covering this exodus in the Bay Area.
This tells us the mismatch between escalating home values and incomes is unsustainable. Homebuyers can only spend so much of their income on housing before they are forced to leave. Home prices have already begun to falter in the Bay Area, particularly in the high-tier market.
For home price increases to be sustained, building needs to rise to meet the increased demand created by jobs. So why aren’t builders building?
It all comes back to zoning. Areas with the quickest job growth need to prepare for more residents by building taller, denser mixed-use units. Builders will happily supply the new units, but first local governments need to make room in their zoning code for this type of housing. Too often re-zoning efforts are blocked by a few vocal not-in-my-backyard (NIMBY) advocates who attend local city council meetings. However, the residents who want to move in but can’t due to high housing costs don’t attend these meetings, so lawmakers don’t hear from them.