Business lobby sees "unprecedented housing crisis" in L.A.

The Los Angeles Business Council says in a new report that Los Angeles is being squeezed by an "unprecedented housing crisis" that is hurting the region's economy.

The council's "Workforce Housing Scorecard" argues that the gap between wages and housing prices in Southern California is the largest in the country and "has caused many middle-income workers to move farther away from job centers, enduring longer and more arduous commutes or forcing them to leave the region altogether."

More: "According to the Scorecard, nearly two decades of rising housing costs have squeezed low and middle income residents, causing many to sink an increasingly large share of their income into their place of residence. In 2007, a family earning the countywide median income of $53,000 per year spent more than 50 percent of their earnings to purchase a home in Los Angeles County –- far greater than the 30 percent recommended by experts."

Analysis/bloviation: The controversy, if there is one, in the report is that it blames the region's high housing costs not on the recent housing bubble but on a lack of new housing supply. New home construction, the report argues, has not kept pace with population growth and job creation in the region. The council: "For example, between 1990 and 2007, Los Angeles County reported a net gain of 1,433,531 new residents but added only 194,554 housing units –- a seven-fold differential."

The business council generally supports the development of more housing in Los Angeles, which is a tough sell right now, given the weakness of the housing market, and in particular the market for newly built homes. It's hard to convince financial institutions that this is a good time to lend money to homebuilders.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo credit: Associated Press

Comments

[sheila]

um, not to state the obvious, but wouldn't paying people fairly be the other half of this equation? it's not all about housing costs caused by this or that, but also about the incredible wage stagnation and "increased productivity" mythology of the job market here...

[JamesW]

I'm going to have to agree with this report.

I thought canning the Ahmanson Ranch project was a big mistake. That area was no way beautiful open space, it was hot as hell.

[flipper]

Gee - Maybe that's why you see all that development in downtown, koreatown, miracle mile, hollywood - they're for lower and middle class! ha ha ha
most of those places are condos converted to apartments. Most of the units are overpriced and many are sitting empty.

I'm not surprised the LABC missed the boat. If the LABC is so concerned about housing, it would make sure LA had a viable transportation system before building anything else.

Instead we'll have worse gridlock than ever and nothing to show for it, except for people like mike woo, labonge, garcetti along with lots of developers getting fat wallets.

money talks...and I think you know how the rest goes.

And frankly, I wouldn't belive the LABC until those numbers are reviewed by other people, who are more reputable than that outfit.

[sunsetbeachguy]

I love these reports and ratios without the long term context.

Show me the jobs to new housing units ratio over time, like say I don't know how about a housing cycle. (1989-2007)

Geez, both the authors and the readers are economic illiterates. Is it really that hard to produce a chart? Or is the ideology that must be supported damn the data?

[Stanley]

i see it as more of a debt crisis. people can be housed in rental housing just as confortably as they can in a home they purchase. but when someone borrows a 500k+ mortgage just to have a place to live, and then was basically counting on appreciation to bail him out if he ever needed or wanted to move, those options are now likely gone as new buyers can't bail him out, and the borrower must stay put, passing up potential career and personal growth opportunities as well as consumption leasure options that now must be set aside in order to continue to pay off ones masive debt. this is bad for mr/ms borrower and the local economy as a whole.

[Nick]

um, not to state the obvious, but businesses don't have a legal or ethical obligation to increase people's wages to keep up with hyper-inflated asset bubbles, especially when the economic fundamentals do not support such wage increases from a business perspective. Not to rain on the anti-business liberal parade, but government mandating an inflation/wage spiral to try to keep pace with the housing bubble would have been such a momentously bad idea that I'm not sure even the most liberal politicians even considered it. It's no more the other half of the equation than the government failing to write million dollar checks to all the residents of the country; both would have made bubble valuations seem reasonable, and both would have been exceedingly bad for the country.

On the other hand, there is certainly an increased productivity myth, and if you had said the CPI/GDP manipulation was a factor, I'd be inclined to agree. However, trying to force wage increases against economic sense to keep up with asset bubbles would be cutting off your head to get rid of a pimple (albeit an ugly huge pimple which is messy to pop).

[E]

They are correct that transit is an issue that has been neglected for far too many years.

They seem to overlook how stated-income and all flavors of ARM loans where people were qualified at the teaser rate also contributed to the false appreciation.

It would be interesting to see what the difference would be if they used a time frame of 2000-2007 rather than starting at 1990 WRT population and housing price increases.

[Joshua Reyes]

This is one reason why I think that we are on the verge of an unprecedented High-Rise boom on a scale America hasn't seen since the Roaring 1920's.

[Nelcisco]

sheila asks, would'nt paying people fairly the other 1/2 of the equation?
Nick responds: businesses don't have a legal obligation to increse people's wages.

I grew up in the LA area, mostly in the the San Gabrial valley, lived in Glendale, Burbank at one time. I've mentioned my story before but its not until I left the Los Angeles area and went the pacific northwest primarily the Tacoma Wa. area from '02 to '06 was when I realized what others from the outside of LA looking in were really talking about. I now live in the central coast and I love it.

flipper mentions developments in downtown, koreatown, miricale mile etc. overpriced and sitting empty.

Finally I had to come to terms as a native angelino that the LA business culture is pathetic, culturally its a city driven by opportunity and greed and has no consderation to its citizens and how it affects their lives. Sheila unfortuately your concerns mean absolutley nothing to the big time investor, who come to LA and sees opportunity (nothing wrong w/ opportunity but need to be resonsible) for him/herself, will tear down a historical site or building and replace it w/ a parking lot or a mini mall because of profit. Folks please don't respond and say that Im anti-capitalist or anti-profit , don't misunderstand me I'm just posing this question. How much longer is this town going to continue to allow hotshot investors to flees the hard working citizens, I've said before the myth that everyone in LA make big $ has to change and see that not everyone has a sitcom & makes $1 mil per month, business lobbiests are not that stupid, they didn't want to see this coming 3 yrs ago, I saw it.
"LA is being squeezed by an unprecedented housing crisis"? give me a break, now they see it?,no,now its affecting them. First it was just a subprime issue, remember? they said it'll pass, I said no because they're not the only ones with ARM's. Anyhow I've said enough, point being if LA businesses doesn't change its thinking regarding greed, people will continue to leave, there are other parts of this country that a man and woman can raise a family in a commuity which LA isn't, its a city of churn 'em & burn 'em

[RyanT]

If it takes a family now earning $53,000 a year, half their income to purchase a home in LA, this equates to a home price of 6 times income levels which is unsustainable. This means you can expect home prices to continue to fall. The reason being is there is limited buyer support to keep prices up.

The article points out that experts say someone should use no more than 30% of their income for housing costs including mortgage. Today, this standard is enforced by lenders who are now returning to more responsible lending standards and restricting borrower to a maximum of 28% of their gross income for housing costs. This limitation acts as sort of a ceiling on home prices. If you do the math on this, you'll see that the maximum loan borrower earning $53,000 a year can get is about $200,000.

The bubble was an aberration from the norm because exotic mortgages doubled and tripled the purchasing power of buyers enabling prices to be bid up to unsustainable levels.

Home prices should be about 3-4 times income levels. During the bubble they shot up to 9 -10 times income levels. Prices are now correcting to their historical ratio. When you go from home price of 10 times income level back down to 4 times income you have a 60% correction.

You can find out the income to home price ratios for your zip code at www.UsHousingMeltdown.org

Look for the Home Price Ceiling tool.

[syscom3]

How about business going to where the people live?

And what about kicking out the illegals who undercut wages, take up available housing then turning the neighborhoods into 3rd world slums that motivate people to move out to better cities?

[nirad]

One of the primary reasons we face a housing crisis today is the passing of prop 13 30 years ago. The artificially low taxes that landowners pay on empty lots and other underimproved properties discourage building them out to their highest and best use.

[Enlightenment]

#1 - Overpriced houses and apartments. #2 - Need higher density housing in core parts of the city. #3 - Need more businesses to move to the fringes of the population areas where a lot of people have moved. #4 - Kick out the illegal aliens to free up more housing for the american citizens. Hey if they weren't here, then it would free up housing for american citizens. So shut up already on the racists remarks.

[Bling]

Facts:
1. People will not stop moving to So Cal.
2. Real estate goes up and down
3. People in LA are buying houses and living in them with other people other than families like roommates in order to pay for their housing. This will continue to create density that will : a) require more parking structures in neighborhoods and b) increase public interest in public transportation.

The city of LA should be planning for number 3 now.

[Chris in Cali]

I love California, but you need to make $100K or more to live a normal middle class life. I made that much this year and I still don't live at the beach! I can BUY a beach house in Florida for what I pay in rent and their prices are still declining... It is a completely rational decision to leave the state if you are middle class or upper middle class.

[Jon T.]

Only the crash that has already begun fixes the problem. An economy that is based on growth fueled by expanding credit and consumption eventually hits a wall, as has recently occured. Ten years from now our economy will look very different than the past ten years, or thirty for that matter. The new economy will be balanced, sustainable and not based on growth. The funny thing is that so many people talk about the necessity of low taxes on capital in order to generate growth, which is seen as necessary. The fact is that this model is at the very root of the problem we now face. This model promotes too much growth, which then requires demand that is simply not present. In order to artificially stimulate demand, credit is loosened, assets overinflate in value and then they suffer a price collapse as they revert back to what they are actually worth based on wages. Is this an intelligent way to run the economy of any society? Of course its not. This is foolishness masquerading as sound economic policy.

[tarbubble]

Ye gods, I actually agree with Nick.

But just to stimulate discussion (which i have seen complaints about the lack of), I'll ask: what kind of market regulation could have prevented this horrific bubble? Going though this cycle of insanity has turned me off of free markets. But since I can be honest and admit that I know almost nothing about economics, I'm curious to hear others' input. How could this have been prevented? I know we're always cyclical here, but what changed and made this one so vicious? Why did credit become so freely available?

[Nick]

First, ye gods, someone agreed with me. :)

Preventing a bubble is a hard problem; much harder than analyzing the results. I personally don't think I know all the answers for how to optimally manage the market, but here's some things I might try:

- Fix accounting standards, for real. The disclosure rules need a massive overhaul, and the SEC needs some will and teeth to enforce the existing rules. If public company losses are blindsiding institutional investors, the SEC has failed to do its job.

- Prevent the government from encouraging risky lending. That means no applauding it before Congress (looking at you, Greenspan), no FHA 3% down "sure fail" loans, no GSE's buying or insuring alt-A garbage, etc. The government should be a lender of last resort and highest safety, not the Indymac stand-in.

- Stop the backdoor bailouts (looking at you, Fed with ongoing 2% loans to banks) and outlaw them, convincingly. As long as the big IB's think they can/will get a bailout, they will engage in risky behavior. This is blatant taxpayer socialization of losses, and not only is it a moral hazard, it encourages repeat performances.

Those are good for a start, but here's the really hard and important one:
- Get rid of the deficit-consumption model, both at the individual and government level, and re-tool the economy to once again produce, and not just consume. This would require tax changes (encourage business and saving/investing money, tax consumption instead), government spending changes (balancing the national budget), infrastructure changes (stop lying about the CPI and GDP, publish real numbers), and more political will than is left in the entire Republican and Democrat parties combined.

That's what I would try to do, in a fantasy America, for what it's worth.

[tarbubble]

Nick, thank you for the input. I am genuinely trying to understand the markets/economy (no easy task while back in college as a pre-nursing major) and appreciate your knowledge. My one point of dissent in which I have personal experience - 3% down FHA loans are not always doomed to fail. Without the FHA 3% program we never would have been able to buy our first home, 6.5 years ago. We know other young-ish families who also used the FHA with successful results, or who are hoping to use it now that house prices are coming back to earth. Did this program also abandon prudent underwriting standards during the bubble? If so, then I'm not surprised many of its recent loans have failed or will fail. If carefully implemented, it can be a useful program.

[Nick]

It may be true that all 3% down loans would not fail, but no private lender in their right mind would give a 3% loan in a down market, and when housing prices decrease most 3% down loans will fail (especially those given to people who qualify under the FHA program). I'm not trying to disparage people who get FHA loans; that's just what the statistics say.

I applaud the people who get FHA loans and make their payments to maturity, but IMHO if you can't put enough down to qualify for a standard mortgage from a private lender, you should not be buying a house yet. Remember, the availability of low down payment loans just causes houses to be less affordable, because more people can/will buy homes they can't afford, driving up prices. The market would be better off, and more affordable for everyone, if these loans did not exist.

I should add, to my previous points, an extension of reasoning. The fact that the GSE's are the housing market right now is a glaring example of the problem. The GSE's are supposed to purchase the safest loans, so that banks can always make safe loans. There should never be an issue with their solvency if they are following their mandate: the safest loans have the lowest default rates by definition. The fact that we are going to have to bail them out with taxpayer money is a testament to the gross failure of their oversight and regulations. If we want to prevent another bubble, that absolutely has to be fixed; and the fact that they are _still_ buying most of the mortgages originated today speaks volumes for the lack of political will to do anything more than token gestures to address the real problem.

That's my opinion, standard disclaimers apply. :)

[sheila]

money quote:

"Rental prices have skyrocketed as well, doubling since 1990, while wages have increased by only 18 percent, and have fallen when adjusted for inflation."

and

"Southern California’s housing price/wage gap, the largest in the country, has caused many middle-income workers to move farther away from job centers, enduring longer and more arduous commutes or forcing them to leave the region altogether. As the Scorecard points out, this migration has deprived the region of much-needed labor for essential services like teaching, hospital support, and public safety."

yeah, i see your point. much better to just fully eradicate the skilled labor force in the middle class rather than pay them a living wage. a total win for business, society, and employees! gee, Nick, you are CEO material. CEO of Enron, that is.

[some fat guy]

Da'American way of life (L.A. way of life) is not sustainable, folks. BTW - more peeps are coming. Get used to it!

[SoCalJim]

By the way, that is a beautiful soot-laden skyline shot of the ever impressive downtown LA skyline (or seven groups of buildings), or is that "marine layer"? Or bad photography? Somone needs to do some photo editing... Or maybe that is representative of the pressure pushing down on people and home prices as this epic correction continues.

[tarbubble]

Nick, I can understand and appreciate your points, but can't agree with all of them as a blanket. Not all low-down loans are created equal. Low-down loans for specific markets, with strict underwriting standards and absent the current particularly violent bubble, can be made to work and give people who are on the class fringes (say, shooting for middle class but not quite there yet) a leg up into ownership. Not everybody will qualify for the FHA program - not everybody should. There should be a clear history of honoring financial obligations and avoiding debt - strict underwriting! The ideal of an "ownership society" is a good one; people to tend to care about that which belongs to them. It's good for society in general, but as we have seen all too clearly, even the most noble ideas have to be more tightly controlled.