For younger professionals like me living in California one of the most common questions is "Why do houses cost so much in this state?" Many people will give you the answers like:
1: The weather
2: People "Want" to live here, thus being more desirable, the prices are higher.
3: Jobs pay better thus the cost of housing is justified.
Perhaps there is some truth to these points. But after all is said and done, housing prices especially in places like San Francisco and Silicon Valley still don't make sense given what the average median income is. I had previously compared the median income in Austin to San Francisco. The median in Austin is $54,000. The median in SF is $65,000. But... the median cost of a home in Austin is just under $200,000. The median in SF is $656,000. Thus as can be seen, there's something definitely wrong with these numbers.
But moving on, there's another major reason why California and most of its major cities are so heavily overpriced: Proposition 13. The law was passed in 1978 . The law put a cap on property taxes at 1% and moved taxable values back to 1975 valuations. At the time it was deemed as necessary to prevent older residents from being taxed out of their homes. But instead of targeting just elderly residents the measure was given to ALL homeowners AND businesses.
Perhaps at the time nobody really sat down to consider what the long-term effects of the law would have on the state. In many ways the law is self-destructive for none other than the simple reason that as a rule, most states get a significant percentage of their revenue from property tax- both business and residential. The cost of government along with everything else goes up in time. Yet with proposition 13, with the taxable values on homes and businesses virtually frozen, this income only diminishes over time. Thus the law is counter-productive
This has created a number of problems. First of all such public services like schools, roads, and other forms of public infrastructure have had to function with less and less available taxes. Secondly these taxes have had to be collected via other means whether that be bridge toll hikes, additional income taxes, taxes on things like alcohol, and so on. But its also had a perhaps unforeseen impact on the way the state's housing market functions. In a normal market houses trade hands fluidly. Older residents living in larger homes with their kids long-gone tend to trade down for a smaller home, usually because the cost of taxes makes owning their home less financially desirable. With prop 13 there is basically zero incentive to move down. Additionally, there are clauses in the law that allows older homeowners to grandfather their homes to their children with the same tax protection. As a result the supply of housing is grossly limited, the average age in many Bay Area communities grows older and this results in grossly inflates the cost of housing. Another element to this is due to severe land use restrictions which I'll go into at length in the next post.
But the bottom line is that when the state government put this law into motion it began a new era in California where homes started becoming increasingly unaffordable and the state started a downward trend of financial disaster. The worst part is that nobody in Sacramento will EVER touch the law. Any mention of it gets all the old people in a rage because they cry that they'll be tossed out into the street. I'm in no way suggesting we do that. But at the very least the law needs to be grandfathered away. Let the old people keep their prop 13 protection.
As long as this law is active there will be no such thing as even reasonably priced housing in the state.
Tuesday, July 13, 2010
Monday, July 12, 2010
Domestic migration: A tale of what happens when your state becomes too expensive.
This is an older story from January featured on Mint.com.
http://www.mint.com/blog/trends/mint-map-moving-for-money/
Perhaps more than anything it illustrates what happens when the place you live in becomes too expensive. Before we continue further, here is a graphic showing more recent migration trends:
As you can see, there's a very distinct migration pattern going on here. The bottom line is that the 'classic' coastal states are losing domestic population at an accelerated, dramatic rate. These states all share the same things in common: They are expensive, have high housing prices, high taxes, and in many cases strict anti-development clauses in effect throughout their communities. What's more is that by having a limited housing supply such as the case in California and New York, home prices have still not fallen to acceptably low levels- especially not for first time home buyers and the middle class. In an economy like this where the job market is sour and wages are flat there suddenly exists even less incentive for prospective home buyers to stay.
The result are that California lost 680,000 domestic residents, New York lost 640,000, and the states of MA and NJ each lost 100,000-200,000. But what's even more apparent is that you can tell quite easily where people are moving to: The Southeast. TX, NC, TN, GA,SC, and even FL where all major gainers. These states- like those who lost share similarities with the exception that their common attributes are generally positive: Affordable housing, lower taxes, growing job markets, and better infrastructure.
Now, as a native Southerner my own perspective is that for a long time most people in states like CA and NY had zero interest in the South. The region has a somewhat checkered past. The weather is far from ideal especially compared to California ( our humid, hot summers are legendary) The region also suffered from a stagnate economy for decades. But at the same time as states like California, New York, MA, and others boomed they also became more expensive. We have reached a pain point in terms of disparity in costs between places like the Southeast and the two coasts. Simply put, people aren't stupid and if they live in one area that has starter homes costing $450,000-$500,000 versus the typical $150,000 or less equivalent in the Southeast, people will begin to seek out better opportunities.
Texas has by far been perhaps the biggest winner in terms of growth for the past several years. All of its major cities such as Dallas, Houston, Forth Worth, Austin, and others have all had major gains in population. The same reasons apply: Affordable housing, growing job prospects, and better infrastructure.
http://money.cnn.com/2009/12/23/real_estate/fastest_growing_states/index.htm?postversion=2010010511
Unless states like California can somehow get their housing market under control and back to a level that real incomes can afford ( namely in changing the way Proposition 13 works) expect this trend to continue.
http://www.mint.com/blog/trends/mint-map-moving-for-money/
Perhaps more than anything it illustrates what happens when the place you live in becomes too expensive. Before we continue further, here is a graphic showing more recent migration trends:
The result are that California lost 680,000 domestic residents, New York lost 640,000, and the states of MA and NJ each lost 100,000-200,000. But what's even more apparent is that you can tell quite easily where people are moving to: The Southeast. TX, NC, TN, GA,SC, and even FL where all major gainers. These states- like those who lost share similarities with the exception that their common attributes are generally positive: Affordable housing, lower taxes, growing job markets, and better infrastructure.
Now, as a native Southerner my own perspective is that for a long time most people in states like CA and NY had zero interest in the South. The region has a somewhat checkered past. The weather is far from ideal especially compared to California ( our humid, hot summers are legendary) The region also suffered from a stagnate economy for decades. But at the same time as states like California, New York, MA, and others boomed they also became more expensive. We have reached a pain point in terms of disparity in costs between places like the Southeast and the two coasts. Simply put, people aren't stupid and if they live in one area that has starter homes costing $450,000-$500,000 versus the typical $150,000 or less equivalent in the Southeast, people will begin to seek out better opportunities.
Texas has by far been perhaps the biggest winner in terms of growth for the past several years. All of its major cities such as Dallas, Houston, Forth Worth, Austin, and others have all had major gains in population. The same reasons apply: Affordable housing, growing job prospects, and better infrastructure.
http://money.cnn.com/2009/12/23/real_estate/fastest_growing_states/index.htm?postversion=2010010511
Unless states like California can somehow get their housing market under control and back to a level that real incomes can afford ( namely in changing the way Proposition 13 works) expect this trend to continue.
Sunday, July 11, 2010
A tale of gross comparisons.
To more or less illustrate the biggest difference in housing costs between the Bay Area and other cities I spent ( no kidding) a total of 2 minutes clicking the real estate links on various real estate sites in cities across the country. I started with SF and wound up picking a comparable house in Austin, TX. Here are the winners of today's exercise. To be fair I chose houses that are fairly close in size, bedroom count, proximity to downtown, in the same general condition, with the same compliment of amenities.
The house on top is a 3 bedroom house with a garage, central heating and air, garage, and a recent general renovation. So too is house No.2 below. The biggest difference is that the house up top is in Austin, TX and has an asking price of $124,000. House No.2 to the left is located in the Bay Area and has an asking price of $699,000. Neither one of these are exactly mansions but rather fairly modest suburban houses. The comparison in price shows that the Austin house costs almost 7 times less than its similarly sized Bay Area cousin.
One common reason I hear people frequently give as to why houses cost so much more in the Bay Area is because people make more money. Thus the additional cost is justified accordingly. But looking at the median income for the area in which the Bay Area house resides, the median family income is approximately $60,000. But in Austin the median family income is $54,000. So yes- the median is higher in the area that the Bay Area house resides yet the median in Austin is only $6,000 a year less yet the median price for a house there is under $200,000. Long story short, the cost of living in the Bay Area is significantly higher and takes a bigger percentage of the average family's take-home pay if they have a mortgage.
Saturday, July 10, 2010
So what is this blog all about?
This particular blog states exactly what it means: Escape from California. But before I start here's a tiny bit of background info on myself. I moved to the San Francisco Bay Area a little less than 12 years ago. Having grown up in the rural South, the atmosphere, weather, culture, and scenic beauty were refreshing and enjoyable. That was until I started looking at buying a house after getting married. Then it became painfully clear that almost any house within a reasonable distance from work was going to cost an absolute arm and a leg.
High house prices in and around the Bay Area, LA, San Diego, and other Cali metros is legendary. Many people who do buy often are in their 40's and even 50's. It takes sometimes well over a decade to save up for a down payment and when the house is finally bought, its common for the mortgage payment to take up 50% or more of the income. During the housing bubble prices were astronomical. Small houses that hadn't seen an update in 50 years in questionable neighborhoods were going for $500,000-$600,000 or more. What most people would call a 'decent' house in a 'decent' neighborhood would often go for $700,000-$800,000. Almost a million dollars for a 3 bedroom house with a small yard. Then the bubble burst. It was the moment many of us who decided to wait and see had been hoping for. But when the dust settled ( and it is still settling as we speak) all that happened was that houses in the ghetto fell in value like a rock while most anything halfway decent fell maybe 10%-%15. In other words that aforementioned $700,000 house might be $650,000.
That's just it. After the damage of the bubble pop, the Bay Area and most anywhere else in California remains to be a prohibitively expensive place. To make matters worse the very choicest of areas like San Francisco are actually starting to go back UP again. Stories about mad bidding wars where home buyers will outbid someone by $100,000 on a tiny 1 million dollar house in the city are starting to crop up again.
Houses are one thing, but taxes are another. I make a fairly decent income. So does my Wife. All told, over 30% of our income goes to taxes. Additionally, everything else is taxed to death. Beer, wine, gas, electricity, and so on are all taxed at enormous rates. Perhaps if the taxes went towards keeping the state's services and infrastructure afloat would I understand. But every single year that I've lived here there has been a budget crisis. This year schools are getting shut down. Freeways are absolutely riddled with pot holes. The reason this is happening is because the state taxation system is totally dysfunctional. I'll go into this at length in another post. So not only are houses expensive, but so too is the general cost of living, and its only getting more expensive all the time as the state desperately seeks ways to squeeze more money out of the populace via hikes in bridge tolls, registration fees, alcohol tax increases, and so on.
Thus with that said I started thinking about moving out of the state around four or five years ago. Just a quick look on any real estate site in just about every other state besides what I refer to as California's "evil twins" on the East Coast- NY, MA, NJ, and so on, $150,000 gets you a pretty nice house, and what's more, you could theoretically live in a cool old neighborhood close to town.
Looking around online I found that just about any site that mentioned relocation, moving out of California, Disgust with high housing prices and the cost of living, and so on were overloaded with reader comments. A little more research showed that close to 700,000 people left the state in 2008 alone. Obviously this is a common idea amongst people like myself. This topic is what this blog is all about. My plan is to be out of this state within a year. The clock starts now...
High house prices in and around the Bay Area, LA, San Diego, and other Cali metros is legendary. Many people who do buy often are in their 40's and even 50's. It takes sometimes well over a decade to save up for a down payment and when the house is finally bought, its common for the mortgage payment to take up 50% or more of the income. During the housing bubble prices were astronomical. Small houses that hadn't seen an update in 50 years in questionable neighborhoods were going for $500,000-$600,000 or more. What most people would call a 'decent' house in a 'decent' neighborhood would often go for $700,000-$800,000. Almost a million dollars for a 3 bedroom house with a small yard. Then the bubble burst. It was the moment many of us who decided to wait and see had been hoping for. But when the dust settled ( and it is still settling as we speak) all that happened was that houses in the ghetto fell in value like a rock while most anything halfway decent fell maybe 10%-%15. In other words that aforementioned $700,000 house might be $650,000.
That's just it. After the damage of the bubble pop, the Bay Area and most anywhere else in California remains to be a prohibitively expensive place. To make matters worse the very choicest of areas like San Francisco are actually starting to go back UP again. Stories about mad bidding wars where home buyers will outbid someone by $100,000 on a tiny 1 million dollar house in the city are starting to crop up again.
Houses are one thing, but taxes are another. I make a fairly decent income. So does my Wife. All told, over 30% of our income goes to taxes. Additionally, everything else is taxed to death. Beer, wine, gas, electricity, and so on are all taxed at enormous rates. Perhaps if the taxes went towards keeping the state's services and infrastructure afloat would I understand. But every single year that I've lived here there has been a budget crisis. This year schools are getting shut down. Freeways are absolutely riddled with pot holes. The reason this is happening is because the state taxation system is totally dysfunctional. I'll go into this at length in another post. So not only are houses expensive, but so too is the general cost of living, and its only getting more expensive all the time as the state desperately seeks ways to squeeze more money out of the populace via hikes in bridge tolls, registration fees, alcohol tax increases, and so on.
Thus with that said I started thinking about moving out of the state around four or five years ago. Just a quick look on any real estate site in just about every other state besides what I refer to as California's "evil twins" on the East Coast- NY, MA, NJ, and so on, $150,000 gets you a pretty nice house, and what's more, you could theoretically live in a cool old neighborhood close to town.
Looking around online I found that just about any site that mentioned relocation, moving out of California, Disgust with high housing prices and the cost of living, and so on were overloaded with reader comments. A little more research showed that close to 700,000 people left the state in 2008 alone. Obviously this is a common idea amongst people like myself. This topic is what this blog is all about. My plan is to be out of this state within a year. The clock starts now...
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