Don’t Believe the Hype: There’s No Housing Shortage
- Chris La Farge
- May 30, 2018
- 7 min read
Updated: Aug 16, 2018
In this post, I turn to economics in order to assess the actual state of our regional housing market.
Over the last few years, news outlets have released numerous stories and headlines about Southern California’s housing crisis. A few examples: “California Housing Crisis: Working But On The Brink Of Homelessness,” was published on 4/16/2018 by NPR and highlights the struggles of a family in LA as they face possible eviction.[i] Another is “Southern California housing shortage: 1,066 fewer listings selling 2 days quicker,” published on 3/28/2018 by the OC Register about the declining number of listings in four SoCal counties.[ii] And another published last year by KQED News, “Searching for Solutions to SoCal's Housing Crisis, YIMBYs Say 'Yes' to Development,” covers an LA group that’s pro building taller and denser projects.[iii] The news outlets love these headlines because they grab our attention. Words like “shortage” and “crisis” imply a near state of emergency and elicit our concern.
These stories are music to the ears of apartment developers and home builders because they provide justification for the numerous planning approvals they want from cities and counties. Those approvals allow developers to collect big profits. Similarly, local politicians point to the housing “shortage” or “crisis” when their constituents become upset with some of these approvals. And Sacramento politicos throw these terms around to push for state legislation that erodes local planning discretion for the sake of residential densification. The most extreme example of which is Senate Bill 827.[iv] However, when we see headlines like these, we should proceed with caution, read the articles, and dig a little deeper to get a clearer understanding of what’s really going on.
What is a Shortage?
First and foremost, housing is a durable consumer good, like automobiles, refrigerators, washers, and jewelry, because they all provide years of use. So market forces work the same for housing as they do for other goods. Prices are determined by supply and demand which is economics 101.
According to Investopedia, a shortage is defined “as a situation in which demand for a good or service exceeds the available supply. Possible causes of a shortage include miscalculation of demand by a company producing a good or service, resulting in the inability to keep up with demand, or government policies such as price fixing or rationing. Natural disasters that devastate the physical landscape of a region can also cause shortages of such essential products as food and housing, also leading to higher prices of those goods.”[v]
I agree with this definition. So it follows that we should look at historic shortages to see their features. In recent years, the Venezuelan government has enacted price controls on food, medicine, and other consumer products, leading to cuts in production and supply. As a result, many Venezuelans must stand in line for hours at stores, in hopes of getting inside before supplies sell out. All this to get these basic goods. Sadly, some Venezuelans resort to searching for food and eating wild fruit and vegetables and even garbage.
In our own country, we experienced an oil and gasoline shortage in 1973 after OPEC cut production by 25 percent, thereby quadrupling the price of oil. In response, the federal government enacted price controls and rationing, leading to long lines of cars at gas stations. We experienced a second shock in 1979 after the Iranian Revolution. Again, long lines of cars formed at gas stations. Many have seen the pictures in history books and some remember it.
We’ve also heard of Russians standing in long lines for toilet paper when the Soviet Union’s economy started collapsing in the 1970s. And we’ve seen pictures of that. All three of these relatively recent shortages have featured long lines of people waiting to buy scarce goods. This is what we’d expect. Similar long lines form on Black Friday in front of major retailers because supplies of deeply discounted goods are limited. People line up for blockbuster movie premieres because theater seats are limited. And so on and so forth. In a true shortage, long lines form for limited supplies. People line up because there's not enough units for everyone, even though everyone has money to buy.
In our current housing market, there are no lines to buy or rent. On 5/29/2018, there were 256 homes listed for purchase and 25 for rent in just Whittier alone on just a single website, Realtor.com. Last month, the Unsold Inventory Index for SoCal was 3.5 months, which was higher than both the Bay Area and Central Valley indices of 2.1 and 2.9, according to the California Association of Realtors.[vi] This means that at the current sales rate, it would take 3.5 months for all existing inventory to be sold. A three and one-half month supply is adequate, so this is not exactly a shortage. The Bay Area’s supply of 2.1 months is tighter but even that doesn’t seem like a shortage. On the other hand, something on the order of less than a one-month supply would be a shortage. Therefore, we are not facing a housing shortage in Southern California.
Back from the Dead
While we don’t have a shortage, something's going on. It’s actually simpler than we might have thought. The Great Recession of 2007 - 2009 was the worst since the Great Depression, and it took housing prices down with the rest of the economy. The SoCal market bottomed in 2011 and the Obama expansion has continued unabated under the current administration. From 2006 to 2011, unemployment jumped from about 5% and peaked at nearly 13% in LA County. From 2011 to 2017, unemployment in LA County has steadily fallen to 4.6%.[vii] The unemployment rate graph resembles a rollercoaster. As more people have returned to work, they have also returned to the housing market.
Through the end of Trump’s first year, SoCal prices have recovered fully from their pre-recession peak. In 2007, the median price peaked at $505,000 . In March 2018, that previous high was surpassed as the median hit $519,000, according to data firm CoreLogic.[viii] The following graph shows the huge jump in unemployment coinciding with a steep drop in the median price in LA County. This was followed by a steady drop in unemployment along with a steady climb in the median price.
In SoCal (LA, Orange, San Bernardino, Riverside, Ventura, and San Diego counties), the median price was below $300,000 for three years from 2009 through 2012, and inventory also peaked in 2011 at almost an 8-month supply.[ix] If you were fortunate enough to maintain a good job and credit, then housing was available and relatively affordable during that short-lived era. After 2012, more people went back to work and more investors entered the market, thereby reducing the excess inventory and pushing prices up.
Believe this Hype
As prices have rebounded fully and surpassed their 2007 highs, housing has become unaffordable and home ownership has become unattainable for many. Even many households with two adults working full-time struggle, as in the case highlighted in the “California Housing Crisis: Working But On The Brink Of Homelessness,” article. 600,000 people in LA alone spend half their income on rent, and more than 8,000 people became homeless for the first time in 2017.[x]
There are other indicators. The California Association of Realtors’ Housing Affordability Index (HAI) for the LA Metro Area has dipped to 32% in the first quarter of 2018 from its high of 56% in 2012. Similarly, the Affordability Index has fallen from 71% to 43% over the same period in the Inland Empire. This indicates that only 32% of households in the LA Metro (which includes Whittier) and 43% in the Inland Empire “can afford to purchase the median priced home in the … regions of California based on traditional assumptions. C.A.R. also reports its traditional and first-time buyer indexes for regions and select counties within the state. The HAI is the most fundamental measure of housing well-being for buyers in the state.” These figures are based on median home prices of $500,000 and $350,000 and minimum qualifying incomes of $103,500 and $72,450 for the two areas. In comparison, the Affordability Index for the United States as a whole is 57% based on a median price of $245,500 and income of $50,820, indicating that Southern California is more expensive than most of the country.[xi]
We know that housing is expensive in Southern California. However, if a household is high-income and has cash, they can buy or rent. In fact, almost 25% of all California home sales were all cash in 2017.[xii] On the other hand, if a household is low or even moderate income and does not have enough cash, they cannot buy. They may be able to rent. For the 68% of households in the LA Metro and 57% in the Inland Empire that do not have the qualifying income, home ownership is not affordable. This the reality for these majorities. Therefore, the real shortage is the shortage of affordable housing. The data proves this and many are experiencing it.
According to the U.S. Department of Housing and Urban Development, housing is considered affordable when a household spends no more than 30 percent of its income on it.[xiii] In order to be affordable to households below median income, affordable housing must be subsidized. This subsidization is almost always provided by the government.
The waiting lists for the Section 8 Housing Choice Voucher Program are closed at both the Housing Authority of the City of Los Angeles (where I worked for nearly a decade) and the Housing Authority of the County of Los Angeles, the two largest housing authorities in SoCal. One cannot even register for these lists. And the situation is the same at affordable housing developments across the Southland. If one needs affordable housing, he or she will be waiting a while.
To reiterate, if one is high-income and has cash, there is no shortage and no wait. In stark contrast, the long waits for limited Section 8 vouchers and affordable units are equivalent to the long lines seen in the non-housing shortages that I described earlier. This indicates a shortage. In March, the California Housing Partnership Corporation released a report estimating that Southern California (LA, Orange, San Bernardino, and Riverside Counties) is short 797,551 affordable units.[xiv] That’s a big number and this is an issue whether it affects us directly or not. Discussion will continue. But for now, believe this hype: There’s an affordable housing shortage in Southern California.
Agree or disagree with me? Please take the one-minute, three-question Housing Shortage poll by clicking this link here or scrolling to the bottom of this page. Your name will be kept anonymous. The poll will close and I will publish the results after a sufficient number of responses are collected. So don't wait! Finally, all comments are welcome below.
[i] https://www.npr.org/2018/04/16/601970552/californias-housing-crisis-working-but-on-the-brink-of-homelessness
[ii] https://www.ocregister.com/2018/03/28/southern-california-housing-shortage-1066-fewer-listings-selling-2-days-quicker/
[iii] https://www.kqed.org/news/11615303/searching-for-solutions-to-socals-housing-crisis-yimbys-say-yes-to-development
[vi] https://www.car.org/marketdata/data/countysalesactivity
[vii] https://www.scpr.org/news/2018/02/21/81009/la-s-economy-is-strong-but-not-for-all-workers/
[viii] http://www.latimes.com/business/la-fi-home-prices-20180423-story.html
[ix] https://www.car.org/marketdata/data/countysalesactivity
[x] https://www.npr.org/2018/04/16/601970552/californias-housing-crisis-working-but-on-the-brink-of-homelessness
[xi] https://www.car.org/marketdata/data/haitraditional/
[xii] https://www.dailynews.com/2018/03/13/are-foreign-investors-driving-up-real-estate-in-your-southern-california-neighborhood/
[xiii]https://www.hud.gov/program_offices/comm_planning/affordablehousing/
[xiv] https://1p08d91kd0c03rlxhmhtydpr-wpengine.netdna-ssl.com/wp-content/uploads/2018/03/CHPC-State-Housing-Need-Report-2018-Web.pdf
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