Q. Why are houses so much more expensive in Southern California than, say, Battle Creek, Michigan?
A. Higher incomes
Any reasonable, thinking person would accept that as a basic economic fact. If jobs don't pay much, people can't afford much. Supply and demand, baby.
My follow-up question is, if we can so readily accept that other parts of the country are less expensive because higher prices couldn't be supported by local incomes, why do so many (still) readily accept that the rules don't apply in California?
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Battle Creek, Michigan Metropolitan .... The median income for a household in the city was $35491.
ReplyDeleteLBC: The median income for a household in the city was $37270
So how much premium of house prices can people in LBC afford?
If you use the old 3X income for MI, $105k. for LBC, $112k. even with the "sunshine bonus" of 4x for LBC, that is $149k for the median housing unit.
(And do we get to subtract for the gangs?)
FreedomCM
Wow, I guess there's not much difference between Battle Creek and LB. Yikes. I'm going to change my example from Battle Creek/Southern California to Santa Monica.
ReplyDeleteIt's just odd to me that people can so willingly accept the basic idea that Pacific Palisades, CA and Omaha, AR have different price points because people don't make as much in Arkansas. Simple. Yet when it comes time to assess the prices in California, people suddenly forget about price vs. income.
It's all about sunshine and South Coast Plaza and that basic fundamental principle goes out the window (of the HELOC-leased BMW).
And by the way, Freedom...we don't get a discount for the gangs but LB residents get a killer deal on burglar bars.
ReplyDeleteI believe your reasoning is backwards. The higher home prices are a result of demand which dictate the higher salaries. It's what I like to call the weather tax. The weather in So Cal, especially near the beach is hard to replicate anywhere else in the country. More people want to live here, which makes prices more expensive.
ReplyDeleteAnon,
ReplyDeleteYou are absolutely correct that demand is a primary driver of prices (for example, South Central LA has the same great weather as West Hollywood, but obviously can't command the same prices because of lower demand) but my overall point is that people seem to have lost sight of the importance of the Income vs. Price calcuation when determining property valuation. I have noticed that the reason many "forgive" the unsustainability of 5x, 6x, or 9x income ratios is because of "the weather tax" or "not enough land" or other such demand-based explanations.
I'm totally with you and I think our wires are just getting crossed. You are saying that house PRICES are determined by demand, which in turn results in higher incomes to attract workers and I completely agree. What I am saying is that VALUE (and determining whether a price is justified) is driven by incomes and that we are still completely out of whack--especially in Long Beach. Weather is irrelevant if incomes can't support home prices.
We're seeing evidence of incomes not being able to support prices (irrespective of the consistently high level of demand) in the form of rising foreclosures, and now that the Great Equalizer of crappy lending practices has disappreared, the lack of financing and sales volume also demonstrates that incomes will always rule the day.
I'm really happy to see the influx of commenting activity lately. Thanks for stopping by...