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kuhla

Rent is too damn high.

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I think it made sense during the housing crash/crisis, but that is over now. We need to stop it here because the market is too hot, but reintroduce it if it crashes again.

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https://www.ocregister.com/2018/02/15/california-rent-rates-have-risen-to-some-of-the-nations-highest-heres-how-that-impacts-residents/

Percent of income going to rent

percent-of-income.gif

EDIT: This Second chart is postentially misleading - I have made it a link instead
https://i0.wp.com/scng-dash.digitalfirstmedia.com/wp-content/uploads/2018/02/trulia-rents.gif

I don't have anything constructive to add, just posting more data showing unsustainable trends in housing costs, especially in California. 

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HUH?! That second image is wayyyyyyyyy off. "About $1000 Median Rent" in Fullerton, Anaheim, Brea? Hell no. It was not even that price two years ago. I would know.

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So I checked Trulia and their affordability chart is fucked up for multiple reasons.  It's listing median renting price PER BEDROOM
I think there are other issues with the chart as well.  I'm not sure it's calculating studio apartments correctly and I also think their figures in general are way off.  I checked their chart and they're saying Northern OC is roughly $800-$900 per bedroom.  I don't know if I believe that even if it was counting individual rooms for rent. 

Funny enough their rental ranges are showing $1,800 - $3,000 for Northern OC, so at least some of the information is accurate it's just being calculated incorrectly for rents/apartments.  I think this is because they used some weird formula from homes for sale like a sq/ft calculation or some median mortgage/month for each bedroom associated with a home. 

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Trulia's chart is probably correct because if you have a 2 room apartment for $1800, then its $900 per room. A 4 bedroom home for rent at $2500 becomes $625 per room which is something that's possible even in Northern OC. Essentially in order to see the prices on Trulia, you will need to share housing. The cost of living alone has been and always will be significantly higher than sharing portions of your living space.

FYI, I always charged between $400 to $700/room for my place which was the upper end of the market rate while I was involved in it (I haven't advertised since 2014 though so it may be somewhat higher now). At this point though I'd probably charge no less than $600 a room.

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Contrary to the current theme here:

"American homes are more affordable than they've been in 40 years — but that could change sooner than you think"

http://www.businessinsider.com/mortgage-rates-affect-affordability-cost-of-buying-a-house-2018-3

https://www.trulia.com/blog/trends/not-father-market/

Quote

Trulia found that the typical household in 1980 could only afford about three-fourths of the median home price, compared to the median household in 2016, which could afford a home 1.5 times more than the median home price.
.....
The markets that are too expensive for the average buyer now, including San Francisco, Seattle, and San Jose, California, were always too expensive.

 

I believe that due to the relatively high affordability of homes in the current market place driving up demand, rental prices are also driven up as a correlation. Low interest rates increase affordability but also price. Rental prices are tied to the price, not interest rate therefore renters are most impacted.

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This reads like is complete clickbait bullshit.  I have multiple issues with how they approached their data. 

This is the section I'm paying the most attention to:

Quote

Methodology

The Federal Housing Finance Agency’s House Price Index (HPI) was used to track house prices over time. Home price estimates in 2016 were obtained using Trulia data, and calculated over time using the HPI. For national income figures, we used Census Current Population Survey (CPS) data on median household incomes. For metro-level incomes, we used a combination of the 1990 Decennial Census and 1-Year 2016 American Community Survey data.  Unless otherwise noted, home prices and incomes are inflation-adjusted using the Bureau of Labor Statistic’s CPI, all urban consumers less shelter. The maximum affordable price is calculated using median household income assuming a 20% down payment and a 30-year fixed mortgage at the annual average rate, incorporating the cost of property taxes and insurance. The affordability score was calculated by dividing the maximum affordable price by actual home prices, and multiplying by 100.

Let's start with the first one.  They took 2 pieces of data, one of which from 1990 and the other from 2016 and basically averaged them and that's how they got their income figures.  If they had averaged ALL the data points from 1990 to 2016 I could forgive them, but you can't just take 2 data points and extrapolate them forever, or you get this
They're also using an index that EXCLUDES SHELTER COSTS.  When looking at... shelter costs.  Fucking brilliant. 
Then they really screw the data even harder.  They're assuming you pull a 20% down payment out of your ass.  It may come as a surprise to you, but if you gave people a 20% down payment, then yes housing costs have reduced because the mortgage interest has reduced. 

I generally focus on Southern California and CAR generally puts out decent statistics on a regular basis.  Here's data from January 2018. 

https://www.car.org/en/marketdata/data/countysalesactivity

Highlights include: OC's January 2018 median housing price of $780,000 up $40,000 Y/Y (5.4% if you prefer percentage). 

If you're wondering what real data is on down payments, National Institute of Realtors (NAR) released data (sourced in the LA Times)

Quote

The typical down payment for 60% of first-time home buyers is 6% or less, according to NAR’s latest data. But the association’s research finds few adults ages 34 and younger (just 13%) realize they can buy a house with a down payment of 5% or less.

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I do not agree with both your points of extrapolation and and income figures.

Quote

They took 2 pieces of data, one of which from 1990 and the other from 2016 and basically averaged them and that's how they got their income figures.  If they had averaged ALL the data points from 1990 to 2016 I could forgive them, but you can't just take 2 data points and extrapolate them forever, or you get this

This methodology is fine as they are only comparing two data points, 1990 and 2016 and compare the states between the two points. Fundamentally they are saying this is the affordability in 1990, and this was is the affordability in 2016. The extrapolation issue comes up when you're looking at trends on the year over year graph to determine trends which was not primary objective of this article so the fault that you're putting is in that year over year chart which they probably utilized the CPI data for.

Quote

They're also using an index that EXCLUDES SHELTER COSTS.  When looking at... shelter costs.  Fucking brilliant. 

On the topic of the CPI, it makes absolute sense that they used the index that excludes shelter cost because that IS the correct way to use it for determining purchasing power. To include it would be STUPID because it would bias the CPI towards the exact issue you're trying to investigate. When conducting any type of analysis you want to separate the impact of your variables so why would possibly want to obfuscate the variable you're trying to study? 

Quote

Then they really screw the data even harder.  They're assuming you pull a 20% down payment out of your ass.  It may come as a surprise to you, but if you gave people a 20% down payment, then yes housing costs have reduced because the mortgage interest has reduced. 

Maybe I'm special. Maybe a lot of the people I talk to are special. I suggest to everyone who is considering buying a home to save at least 20% to avoid PMI. I put down 20% on my home. I actually realized I probably should have saved to 25% because my lender told me I could've gotten an even better rate had I put down 25%. While yes, you could buy a home with only 3% down (FHA loan), its not advisable for the reasons you mentioned plus higher borrowing costs.

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I understand your point about comparing 2 specific years, by comparing two sets of data.  I was looking at it more as a trend, which was incorrect on my part.  It looks like they are still doing some extrapolating by running those numbers back to 1980 instead of 1990 for whatever reason. 

I also understand why you believe narrowing the CPI variable by removing shelter costs is the correct way of determining what purchasing levels were in 1990 vs 2016.  I personally would like to see what it does when you include shelter costs, and what it was without.  As it stands I have no idea what the effect of this CPI adjustment is.  CPI index's ignore tons of variables (energy is the common one) which I don't particularly agree with.  Not to mention the market basket of goods changes on a somewhat regular basis.  It means comparing CPI from 1990 to 2016 is not as apple to apples as proper data science might like.  Personally I either go with very simple comparisons such as: how many years wages does the median house cost (ie you make 78k and the house is 780k it's 10 years wages, etc.) or go more complex and look at the rate of which people were buying homes, how much credit an average earning person was capable of getting and even other factors like the average % of total earnings was spent on housing costs on a monthly basis. 

You aren't special.  You aren't even a statistical outlier.  But you do not represent the majority.  As the article I linked clearly states, more than 60% of buyers (not just first time buyers) do not put 20% down, the average being 6%.  In the current market (and especially in California) I expect most buyers to be putting less than 10% down.  I would love if the average person could afford to put 20% down, but just on simple math that means you need to put $156,000 down on the current median price home in Orange County.  Considering the median income in Orange County is $75,998 that represents more than 2 years of gross income for at least half of the population in OC.  Saving that amount of money would be a severe hardship for a large portion of the population. 

I personally believe that even if you threw out every other argument I have against the data, this was the single largest factor in their conclusion.  They're assuming that the average person has ~$156,000 lying around, that they can put down on a house.  NAR data clearly shows that as false. 

Considering Tulia is a real estate company, it would be in their best interest to promote a rosy real estate picture and so it does not surprise me that they came up with this particular conclusion.  I believe it's an inaccurate portrayal of the data, even though some of their analysis was relatively sound.  - Insert witty expression about: lies, damn lies and statistics. 

Sidenote: I've seen a few articles with a similar tone to this one.  They often suggest that we're living in some sort of golden age and that everything is getting cheaper/better.  I personally get somewhat emotional when seeing these articles because I do not believe that to be the case.  While I admit to being a jaded asshole, there are plenty of things that have gotten better over time - I don't believe housing affordability is one of them.  I dislike when people present these arguments with some... less than stellar statistics, as their basis.  I tend to view most articles written like this one with extreme prejudice/skepticism.  Not only do they not pass my inner barometer for bullshit, but they generally paint this disjointed idea that "the statistics say the complete opposite of generally accepted facts!"  It's fun to see when the statistics actually bear this out, but they should always be treated with extreme skepticism. 

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I think in our area the market is responding to demand; no matter how high they raise it, there are people who will pay it. That being said, when it comes to housing/rent costs we are in that weird microcosm like other heavy urban areas like Seattle, NYC, San Fran, etc. where everything is cranked to 11. That doesn't mean the rest of the country is not having high housing/rent costs issues too just not as severe. I'm thinking of this chart....

image.png

....from the financial thread. That is not limited to CA.

On the one hand we need more housing to hopefully meet demand and push down prices. On the other hand CA has strong environmental regulations which are good. It's a complicated issue.

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20 hours ago, kuhla said:

On the one hand we need more housing to hopefully meet demand and push down prices. On the other hand CA has strong environmental regulations which are good. It's a complicated issue.

My summary is:

  • Higher prices mean that regulation costs become a lower percentage of the total impact. 
  • Zoning regulations, protectionism, and tribalism type laws are bigger obstacles than purely environmental regulations IMO. This is a city or county government limitation more than state laws.
  • There is plenty of profit to be had in this sector as the demand prices clearly show it, but the market cannot react to supply and demand due to regulations.

Here's a few numbers for you to consider after talking to a few civil engineers I've met:

  • Cost of building a between home is roughly $120 to $200/square foot (these are 2016 numbers) in California's labor market. From design, permitting, to move in. Everything else is land zoning etc. That puts the price floor at around $200,000 for a new single family home. If you add in 50% profit for SG&A, that's still only $300,000. All the prices you see is entirely based on location and value of the land. When I bought my home, it was valued at $160,000, the land was $300,000.
  • Costs are not much different when you're talking about MDU (Multi-dwelling units). It's still in the range of $100-200/square foot, with cost savings in the construction due to shared utility access etc. and simplified design/engineering, which are offset by the higher construction costs of multi-story construction.

Not sure if you drove around OC a bunch in the past few years but I saw plenty of in MDU construction in Irvine, Fullerton, Anaheim, Santa Ana, Garden Grove, Westminster etc. So the market is responding, but the time it takes from idea to construction is probably 2-3 years at a minimum between market realization and supply relief. And while I saw plenty of MDU's go up, they are all located in the highest priced markets....(obviously you want to maximize your limited resources to construct at the highest potential profit area for a multitude of reasons). So no, prices won't for the average layperson. 

Without a massive bulid out across the demand markets (instead of just high price markets), that is supported by government to address demand risks (market recession, loan markets drying etc.), I don't see any reasonable savior for rent prices to drop.

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And how does that circle back to rent control? We all agree there is a supply issue and demand is not going to change any time soon. I was on a wait list for my current apartment and what I pay is pretty average compared to the surrounding area. If every apartment was covered by rent control, would that mean we are more likely to see wait lists everywhere?

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I realize that this is going to come off as me shitting on many of Jedi2155's points, but honestly you're doing what most people do when confronted with a complex topic and oversimplifying it.

So about the higher prices meaning regulation is a lower percentage - that's now how this works.  Regulation is not a fixed cost, it fluctuates depending on multiple factors and it specifically affects apartment/condos/MDUs more than single family residences.  You don't generally need to perform traffic studies, environmental impact studies when building a single family residence, you do when you build a 50+ unit structure.  Even comparing regulatory costs between SFRs you'll see variance depending on the city or individual inspector.  Sometimes developers get "lucky" and things that are signed off on in inspection do not actually meet code, other times you run into fun issues like the city planner telling you to build a 14' deep retaining wall because they just graduated as a civil engineer and are following what they learned in a textbook about commercial construction codes - also if you try fighting them on it you won't win. 

Zoning regulations are generally handled by cities/counties, that's true, but you should also look at local government and see some of the wonderful things that take place there.  I can tell you personally that the current mayor of Fullerton is a real estate developer, and who has voted against land development/subdivision of properties (even ones he's previously owned and sold).  The wonders of small town government rear their head frequently.  I've heard from multiple contractors that Brea is a much easier city to work with for example.  There are also fun rules like setbacks, "historic" locations, and other nonsense that can create serious issues. 

Profit is currently very high and home flipping is currently an issue.  I'd like to see taxes imposed on people who have shorter holding periods for real estate, because it's very hard for families to compete when home flippers and other cash heavy buyers are bidding on the same homes. 

Your prices for construction and land are going to again vary dramatically depending on location.  Every city has expensive and "cheap" parts, you can't just make an average of $200,000 for building costs and everything else is land value.  There are some undeveloped parcels of land that you can see listed on the MLS and I can tell you that they're hard to sell.  If development was an easy thing there shouldn't be vacant land in desirable parts of Orange County, but there are.  There's also issues of where you source your materials, who you use as contractors/subs and huge variances in how much your development costs might be depending on location and even the time of year.  Not to mention the vast majority of contractors are more focused on remodels rather than new housing construction.  Most new housing is handled by large corporations building out sizeable developments, because without their cost efficiencies these units wouldn't be profitable.

@Kuhla - If you want to talk about wait lists we could bring up the Sweeden/Stockholm example.  I know that's by no means a perfect system but it's a real life example with all of it's own problems. 

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36 minutes ago, Malaphax said:

......honestly you're doing what most people do when confronted with a complex topic and oversimplifying it. 

I don't want to go off on a tangent and I don't want to promote anti intellectualism ideas but I also want to broadly state that I don't like the idea of discouraging discussion of complex topics only for those with fair/good grasps of a topic. Even if a statement(s) is oversimplified, if there is seemingly logical and objective data to back it up, then it is worthy of inclusion.

 

Your post seems to indicate that Richard's points are generally true but there are just additional layers of nuance to them that need to be considered. NIMBYism is a real problem especially for higher density housing projects. Large numbers of regulations add a lot of time and complexity to everything (which means more money). The large profit margins in the real estate market are distorting everything and making unhealthy activity viable (house flipping, single families competing with cash investors, etc.).

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Jedi2155 and anyone on this forum is absolutely encouraged to provide their viewpoints.  I am also allowed to provide mine and explain why I think a more simplified viewpoint is inaccurate.
Allow me to clarify my point, and provide an example. 

I've met people who look at homes and get hung up on price/sqft.  In fact they often get so hung up on this ratio that they neglect other elements of the home like the age of the home, additions, inspection reports and other critical factors.  Regardless of their view that a house was worth X because of a specific price/sqft ratio, if a buyer isn't willing to pay X, then your ratio is wrong.  A home's value is determined by what a market participate will pay, not some ratio, not a Zillow estimate, and not even an appraisal price. 
This level of over-simplification by trying to reduce real estate to simple ratios generally does not work.  You can of course use numbers in aggregate to get a general sense of a market, but much like BMI using a simple ratio meant to be applied at a population level and applying it to an individual case - your results are mostly inaccurate.  Estimates can also change, the time of construction alone is probably 6+ months and the market can drastically shift in that time alone - six months ago the housing market was considered hot and growing, today we're seeing a cooling trend and flat sales numbers. 

Looking at average construction costs for homes and then extrapolating that data to suggest that all other value is related directly to land value is not accurate.  Undeveloped land has far lower value than developed land, from a pure tax perspective it's better to buy something developed than undeveloped as you cannot depreciate land.  The land/property split on most appraisal reports are broad estimates, that are inflated.  Land + Home = Higher value than either a home or land individually. 

 

Getting back on track, I agree that NIMBYism is a concern, but I tend to take a more moderate view of their complaints.  The current reporting on a suggested project in Fullerton (and Venice today) to house homeless brought out quite a few people that live in homes very close to that site who were not pleased.  I know that I'd likewise be concerned if a similar project was proposed near my home. 

I also think housing density can run into similar issues.  I don't think simply increasing density with larger housing complexes is an end all solution, as this could increase traffic and the usage of other city resources.  I'd be far more willing to let someone build large housing projects if a certain percentage of residents worked within a specific range of the structure, limiting the traffic impact and hopefully keeping tax revenue inside the city that approved the housing project.  I'm sure there are other more creative solutions to impose moderate limits on housing without wrecking the free market and engaging in more aggressive forms of rent control, I'd be interested to see what other people could come up with. 

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