In my last three “On California” articles, I’ve pounded away, perhaps ad nauseam, on how high housing prices have negatively affected our state’s economy.
So after all that, I wouldn’t blame you for thinking, “OK, we get it. High housing prices are a problem, but what can we do about it?”
Let’s take first things first. Before we can figure out what can be done to make California housing more affordable, we need to figure out how it got so unaffordable in the first place. It wasn’t always so.
Back in 1996, for example, median family income was enough to buy a median-priced home in Orange County. But only eight years later in 2004, median family income here was only 50% of that necessary to buy a median-priced home. In the U.S., however, housing affordability stayed about the same over that same time period. So between 1996 and 2004, something happened. But what?
Housing affordability is a comprehensive measure that includes things like income, mortgage rates and home prices. But increasing mortgage rates can’t explain why Orange County’s housing affordability declined more than the nation’s. Mortgage rates affected the county and the nation in equal measures. Median family income differences can’t explain it, either. Higher median income in Orange County increases housing affordability—not decreases it. That leaves home prices as the only remaining viable culprit. And indeed, something did happen to home prices in Orange County between 1996 and 2004.
In 1996, the median price of a home here was about $200,000. Only eight years later in 2004, it had increased a whopping 335% to $670,000. Over that same period, the median home price in the U.S. increased 60% from $126,000 in 1996 to almost $200,000 in 2004. That’s quite an increase, to be sure, but it pales against Orange County’s stratospheric rise.
This can be seen more clearly in Figure 2, which shows the ratio of Orange County to U.S. median home prices.
Notice that the ratio actually declined from 1990 to 1996. But by 2004, the ratio increased to 3.5, indicating that the county’s median home price was 3.5 times greater than the nation’s. Note also in Figure 2 that the median-priced home in Orange County went from being 250% higher than that of the U.S. in 2003 to 350% higher only one year later. But after 2004, except for a momentary downturn during the Great Recession, the ratio has fluctuated between a relatively narrow band of 3.0 to 3.5, indicating that the county’s home price disparity hasn’t changed much since the 1996 to 2004 price escalation. Not only that, but a similar story can be told for other county housing markets in California, such as Los Angeles, San Diego and San Francisco.
So, yes, something definitely happened between 1996 and 2004 that affected urban housing markets in California a whole lot more than the rest of the nation. Whatever that thing was may help explain California’s housing price riddle.
More on this mystery in my next edition of “On California.” And I promise, no red herrings.
