When I joined the Chapman faculty as an assistant professor of economics 43 years ago, my starting salary was $12,500.
That may not sound like much, but with it, I was able to buy a nice, new 1,200-square-foot home in Fullerton for $22,000.
A useful proxy for one’s ability to afford a housing purchase is the home price-to-income ratio. For that starter home in Fullerton, my ratio ($22,000/$12,500) was 1.8.
A 20% down payment on that home was $4,400, about a third of my $12,500 salary. All this made it possible for me to become an Orange County homeowner back in 1974 without stretching my budget too much.
That wouldn’t be the case today. Jumping forward 43 years, a new assistant professor at Chapman will receive a salary of about $80,000. A new Fullerton home, similar to the one I bought in 1974, will now cost somewhere around $480,000. That would put that new professor’s home price-to-income ratio ($480,000/$80,000) at 6.0. A 20% down payment would be $96,000—20% higher than that new professor’s starting salary.
It will be difficult, well-nigh impossible, for that new Chapman prof to come up with a down payment of almost $100,000, especially with student loans to pay off.
So instead of buying a home and having a piece of the American dream like I did, starting out today in California most likely means finding rental housing.
But even here there are challenges. Median rental rates in California, according to the U.S. Census Bureau, are 37% higher than the nation’s.
The disparity, of course, is even greater in urban areas of the state, most prominently in the Bay Area. For example, San Francisco’s median monthly rent for a 2-bedroom apartment is $4,730, more than double the statewide average of $2,100, and almost four times higher than Sacramento’s $1,250.
Because of California’s housing affordability problem, builders are responding by producing a greater proportion of lower-priced multifamily units comprised largely of rental units.
The proportion of multifamily units has skyrocketed in only 20 years, from 19% of all new housing units in 1995 to 54% in 2015. The reason for that almost three-fold increase is obvious. On average, each multifamily housing permit in 2015 had a value of $160,000 versus $315,000 for a single-family unit.
As housing prices and rents increased, so too did residential density. The ratio of California’s population to the total number of occupied housing units increased from 2.55 per unit in 1980 to an estimated 2.80 in 2015.
To stay at the earlier 2.55 ratio, we would have had to increase California’s total housing stock from about 14 million units in 2015 to 15.3 million units. To say the least, that difference of 1.3 million units is not insignificant. It represents 13.5 years of California’s 2015 annual production of 96,000 units.
The relatively high cost of buying or renting a home in California rears its head in many ways. Those like me, for example, who were able to buy a starter home and ride the great California housing appreciation wave were able to accumulate some wealth and keep housing costs in check.
Renters subject to regular rental increases don’t have that luxury. As a result, they tend to be more footloose. That factor perhaps in part explains why between 2010 and 2014 almost 100,000 people, on a net basis, moved from California to other states, while Texas and Florida gained more than 100,000 each.
Recent research conducted by the U.S. Census Bureau reports that renters are five times more likely to move than homeowners. Of course, higher rental mobility is also related to other factors, such as age, income and marital status. But even after using regression analysis to correct for these other factors, renters are still significantly more likely to move than a homeowner with similar socio-economic characteristics.
Closer to home, this means that Chapman’s newly appointed professor is more likely to be lured away in the future by another school in an area where housing costs are considerably cheaper. When I started at Chapman, I counted my blessings while basking in the sun-drenched confines of Orange County, happily seeing my home appreciate in value every day. I didn’t return calls from recruiters asking me to consider higher salaries at schools in places such as Athens, Georgia, or Fort Worth, Texas.
I was content to stay put.
Newer California migrants might not be—and that is the rub.
Recent research conducted by our A. Gary Anderson Center for Economic Research points to another, even more alarming, effect of higher housing costs. Several areas that had experienced above-average economic growth in the state have slowed recently. Evidence suggests higher housing costs as the most likely culprit.
More on that in my next column on California housing.
