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Thursday, Jun 30, 2022

On California

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People vote with their feet, especially when it comes to housing.

As the price of housing varies from one area to another, people have their feet ready to seek out more affordable housing. Because of jobs and other location-specific restraints, people may be bound to a particular location and, as a result, their feet may be a little sticky.

Over time, however, that stickiness gives way to being more footloose. It may take a while, but inevitably, when housing prices in a specific area become out of reach for many potential homebuyers, more and more people will vote with their feet in search of a better deal.

Recent findings by the A. Gary Anderson Center for Economic Research at Chapman University show that housing prices play an important role in where people decide to live. Since the Inland Empire area—made up of Riverside and San Bernardino counties—still serves, in part, as a bedroom community for Orange County, home price differences can be used to explain migration patterns between these two markets.

When the current recovery began, median family income in the Inland Empire was 74% higher than the amount needed to cover principal and interest payments on a median priced home.

In sharp contrast to this, Orange County’s median family income was 29% below the amount needed to buy its far pricier homes.

The sharply higher housing affordability in the Inland Empire was enough to convince many workers to brave the brutal rush hour commute on the 91 Freeway. This led to explosive growth in the Inland Empire, where double-digit increases in construction had strong multiplier effects, leading average annual job growth to hit almost 5% between 2013 and 2015—significantly higher than the 2.9% growth for California and 2.8% for Orange County over the same period.

This rapid growth, however, led to a sharp increase in housing demand in the Inland Empire—an increase that outstripped supply, thereby placing upward pressure on housing prices.

From the beginning of the recovery in 2009 through last year, as shown in the top chart on the right, the cumulative increase in the Inland Empire’s median home price was 84%—a rate more than double Orange County’s cumulative increase of 40% over the same period.

The faster rate of housing appreciation in the Inland Empire versus Orange County has narrowed the difference in affordability. Rather than median family income being 74% higher than the amount needed to purchase a median priced home, as it was at the beginning of the recovery, median family income in the Inland Empire is now slightly below the amount necessary to buy a home there.

Orange County’s ratio, however, has remained about the same.

As the affordability gap between the Inland Empire and Orange County has narrowed, the incentive to relocate has diminished. This weakening in the magnetic pull of greater relative housing affordability has had its consequences. As the middle chart here shows, the Inland Empire’s higher rate of appreciation versus Orange County has been followed by a drop in job growth. In less than two years, job growth in the Inland Empire declined from a high of 5.2% at the end of 2014 to 2.3% by the third quarter of last year.

This pattern, which is outlined in the bottom chart, will continue until the slowdown in the Inland Empire’s rate of job growth is enough to reduce its rate of housing appreciation until it falls into line with Orange County’s.

The Inland Empire’s economic slowdown has important implications for the entire state. While cross-county housing price differences have a strong magnetic pull on where footloose homebuyers decide to live, differences between states also matter.

It may take longer, but just as the Inland Empire’s economy has been negatively affected by its rapid rate of housing appreciation, so too has California’s, as people vote with their feet by not just crossing county borders but state borders, as well.

From 2007 to 2014, California’s net domestic migration was negative, with 625,000 more people moving out of the state than moving in.

Texas experienced the nation’s largest inflow over the same period, with net domestic migration of 212,600 from the Golden State alone. That represented about 34% of California’s total outflow.

Not surprisingly, the median price of a home in Texas over the 2007 to 2014 period was $128,931 versus $375,665 in California.

In the most recent reporting period from July 1, 2015 to July 1, 2016, the exodus from California gathered greater momentum, with 109,023 more people moving out than moving in.

The next installment of “On California” will examine how these migration flows across state borders are affecting California’s critically important Silicon Valley economy, and how that, in turn, is stifling statewide economic growth.

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