Why LA's Sky-High Rents Just Keep Rising

Apr 15, 2016

 

Any Los Angeles Resident Knows the Cost of Living Is High

But did you know the average cost of a home in Los Angeles ($658,000)  is more than double the national average for houses of the same size? Real estate experts say that the gap between the cost of living in LA and the rest of the country will continue to get larger, all the way through 2018. When gainfully employed, educated people with salaries hovering around $250,000 a year are looking to move to nearby cities due to the inability to find a home within their budget that meets their standard of living, it is clear that California is pricing out its own residents. And the truth is - there isn't really much anyone can do about it.

The Cause

While no single problem can be exclusively blamed for the incredibly inflamed housing cost in Los Angeles, the generalized answer is that there are not enough houses to meet the demand, and in addition to that, the cost to build more housing keeps developers away. It is a vicious cycle of economics- people want housing, construction companies can’t fill that demand because the cost to them is too high, this takes money and jobs out of the metropolitan area as builders, investors, and developers look to the suburbs to build, so the demand grows, and the cost grows right alongside it. 

What is even more unexpected, is that the positive growth in jobs and the rest of the economy is actually putting more of a strain on housing cost. Los Angeles has added tens of thousands of jobs in almost all sectors of the market, from the lower level entry jobs, all the way to opening space for new executives and CEOs, and as you can expect, that means more people look to move to the city to fill the openings which the jobs have created; thus adding to the demand for housing that seems insatiable in Los Angeles. 

The Proposed Solutions...

The answer seems simple, right? Just build more houses. Unfortunately, nothing is ever that easy. Up until recently there was a push among lawmakers to, at the very least, keep the cost of housing under control through litigation.

The solution seemed to be aimed at reducing the cost for contractors to build homes and new developments. Prior to this year, litigation seemed to offer great tax incentives to builders willing and able to quickly build new multi-family units, especially in urban areas. Especially to those builders who made such new developments more eco-friendly and energy efficient. 

Many state law makers have focused energy and attention on low-income housing subsidies. The legislative analyst's report estimated that building affordable homes for the 1.7 million low-income households in California that currently spend half their salaries on housing would cost as much to finance each year as the state's spending on Medi-Cal.

...And why they have failed

As much as state litigators may want  to deal with the overwhelming housing shortage in LA, there is a huge problem - namely, that the majority of decisions regarding new developments and building fall into the laps of city and local government. The state governments’ hands are tied. Unfortunately, the smaller governments tend to have a much more narrow view of the situation, seeking to raise gains and find solutions for their city, without much consideration for the surrounding areas.

Additionally, the main tool that state legislators could possibly use to quickly build homes, is in direct opposition to a myriad of business and environmental interests. The CEQA (California’s governing environmental law), in many ways, prevents the building of new housing developments at any rate which would make an impact on the housing shortage. 

So the question becomes... what can we do? Should we sacrifice environmental protection laws in order to lower housing costs? It is a question that has to be addressed, but with so many political influences and issues, most lawmakers won't touch it.

And SoCal residents and home owners associations aren't making it any easier. Many of these local governing bodies are in stark opposition of rapid development of housing- because that means that their neighborhoods would have to face the dreaded "D" word... Density. 

Push-back from neighborhoods and suburban areas is obvious- no one wants to be crowded in, especially in the areas which are the most affected by the housing shortage (affluent coastal communities). So it seems as though lawmakers are blocked on all fronts.

Have Lawmakers given up?

This year, it seems as if state lawmakers have given up on dealing with the increasing housing cost. Little to no new solutions have been proposed, and those that have are not being passed through and put into place. The state is at a stand-still and lawmakers seem to be taking the “I guess we'll just have to wait and see what happens" approach.

As litigation passes to increase the minimum wage to $15 an hour, many people believe that this increase will alleviate the burden on low and middle income families and low for economic growth and eventually lead to a reduction in the housing shortage. 

"Economists worry that if lawmakers don’t fix the housing supply problems, many of the state’s efforts to improve the lives of low-income residents will falter. Many legislators cited high housing costs as a reason to boost California’s minimum wage to $15 an hour over the next six years. But 'unless something’s done to stem housing costs, much of that pay increase could be eaten up by higher rents, 'Thornberg said."  (LA Times)

The Verdict?

SoCal is in quite the pickle, and with legislators openly admitting that the housing problem is not a priority for this year, the residents will have to pay the price. Housing costs in Los Angeles will continue to rise, unchecked, until newer, bigger ideas come into place which can put a stop to the vicious cycle of demand, lack of supply, and the overwhelming influence of special interests.

 

Sources:

http://www.trulia.com/real_estate/Los_Angeles-California/market-trends/

http://www.latimes.com/politics/la-pol-sac-california-high-housing-prices-20160414-story.html

http://www.latimes.com/business/realestate/la-fi-casden-forecast-20160412-story.html