Home Buyers Feel Squeeze as Market Tightens in Region

A dearth of new housing construction threatens to send Southland home prices, already rising at the fastest rate in a decade, to levels that could put the dream of buying a home in Los Angeles and Orange counties out of reach of all but the affluent.

The trend, documented by a stream of reports over the last year from the Department of Housing and Urban Development to the California Assn. of Realtors, could have dire implications for the region’s residents and its economy. For hundreds of thousands of Southland families and individuals who do not own homes, soaring prices could erode their standard of living, create a permanent class of renters and deepen the divide between the haves and have-nots.

Some employers are again finding that skyrocketing home prices are a high hurdle in attracting new employees from outside the region. Some economists fear that it could lead to another wave of business out-migration, similar to the one seen earlier this decade when housing prices hit their previous highs.

“There is a crisis on the horizon,” said Richard Peiser, a real estate professor at Harvard University. “It’s inevitable. I don’t think it will be as severe as some make it out to be, and it will take longer to get here than predicted. But the basic ingredients are in place to almost ensure a [crisis] will happen.”

Although home costs in Southern California generally have outpaced the rest of the nation, the situation is worsening. The median price of an existing home in Los Angeles County was $204,000 in July, 52% above the national average. Five years ago, Los Angeles County homes were priced 43% above the rest of the nation, according to Realtor groups.

Vibrant job growth, heady profits from the stock market and high confidence have fueled the housing market. The burgeoning market is also stoked in part by demand among Latino and Asian immigrants, who make up 20% of buyers and are remaking many communities in Southern California. And California has once again become a magnet for those seeking employment.

To be sure, the current overheated housing market could be iced by an economic recession, continued sharp declines in U.S. stock prices or an exodus of employers frustrated with the region’s high housing costs.

Many Being Squeezed Out

But if prices continue rising at their present pace, the median price of a Los Angeles County home will soar 15% a year, to $352,040 over the next four years. Assuming a 20% down payment at 7.19% interest, that means the mortgage, insurance and taxes would amount to $2,315 monthly, a figure that only 18% of households will be projected to afford, said G.U. Krueger, an economist for the state Realtors group.

Prices in Orange County would increase by roughly the same percentage, to a median $472,250. The total monthly payment would be $3,105, a level that only 13% of households could afford. If interest rates were to rise, the affordability gap would widen dramatically.

At 47%, Los Angeles County already has the second-lowest home ownership rate in the nation, trailing only New York City. Making matters worse, the region’s six major counties rank near the bottom in a nationwide survey measuring the number of available homes versus demand, with Los Angeles County finishing dead last.

A growing number of residents--and businesses requiring room to expand--will continue heading north and east to places like Palmdale and Riverside, where land is cheaper.

“This is all about dirt, who has it and who doesn’t,” said John Husing, an Inland Empire housing economist. The trade-off, however, is more smog, more sprawl and more traffic as people commute to cities where job growth is highest.

The current crisis is in sharp contrast to the conditions of the early 1990s, when home prices were sinking amid a deep recession and many people who had owned their homes for only a few years had negative equity.

Now, with the Southland economy rebounding, demand for homes is back up.

The problem boils down to supply.

As jobs and population have accelerated, home construction to satisfy that demand has remained sluggish. These events have unfolded at the same time the region’s rising economic tide is lifting the yachts but stranding the rowboats.

Take, for example, Los Angeles between 1994 and 1996. For every person whose annual income rose above $100,000, four others saw their incomes fall below $40,000, a state Assembly committee found. The city’s largest group of wage earners during that period took home $20,000 annually or less.

“There are plenty of $6-an-hour jobs, but there isn’t any $6-an-hour housing,” said Secretary of Housing and Urban Development Andrew Cuomo.

Impact Felt at All Income Levels

Higher housing prices are being felt at every economic level and in every region of the Southland. In July, home prices in Los Angeles County rose 16% above last year. In Orange County, the comparable figure is 19%. Already, analysts said, home ownership for those earning less than $35,000 is “unrealistic,” and it remains challenging even for those earning $55,000.

Robert Passananti, a technology consultant for Deloitte & Touche, earns a six-figure income and stockpiles his savings. But buying his first home has been harder than he ever imagined.

After searching for six months, he and his wife, Hardip, settled on a new home in Irvine. But instead of being handed the keys, the Passanantis were placed on a waiting list that they were told numbered 500 names, for 140 homes. In the month since they made the decision, they said, the structure’s cost has increased $15,000, and they have opted for a larger lot, boosting the price another $10,000, to a total of $405,000.

“It’s frustrating,” said Passananti, 35, who learned that the model he wanted didn’t come with such features as air conditioning. Including upgrades, total costs could climb another $40,000. “We’re finding out the house we want is more expensive than we anticipated,” he said.

The squeeze on home buyers also is making it tougher for renters.

In Hollywood, Maria Nochez shares a one-bedroom apartment with four children ages 7 to 18. Cramming her family into 400 square feet, roughly the size of a small living and dining room, is Nochez’s only option.

She ekes out enough money baby-sitting to pay $500 a month in rent, receives about $200 a month in food stamps, and occasionally cleans hotel rooms.

She sometimes cries herself to sleep in a bed shared with her 7-year-old daughter, hoping, praying, that life will change.

“I’ve been looking for a cheaper place, but there’s no place” to go, Nochez, 42, said through a translator. Her application for subsidized housing was turned down six years ago.

Several factors have combined to make the supply of buildable lots scarce.

As home prices plummeted during the recession of the early ‘90s, few new parcels were put into the development pipeline. When the economy turned around, the number of available lots was far from meeting demand.

Orange County Land Prices Double Since ’93

In Orange County, prices generally have doubled from 1993. Standard-sized lots in prime areas like Coto de Caza cost $107,000 during the recession, but today fetch more than $225,000, said Irvine land broker Les Whittlesey.

The booming job market also has been a factor. Across the state over the last three years, California has produced roughly four jobs for every new home and apartment unit built, a ratio that virtually guarantees rising prices and a tight supply. In Los Angeles and Orange counties, 278,300 new jobs were added since 1994, but only 78,320 new homes were built.

“The imbalance between supply and demand is greater there than anywhere in the country, and if it continues, Southern California will have the lowest vacancy [rate] and tightest housing market in the country,” said Mark Zandi, an economist at Regional Financial Associates, a national economic consulting firm in Pennsylvania.

Compounding matters is that the Southland is again viewed as an attractive place to live by outsiders. Over the next two decades, the region is expected to absorb about 6 million people, or “two Chicagos,” as one study put it.

Population bursts often fuel anti-growth sentiments, causing citizen groups to rally to preserve neighborhoods and open spaces from further development. That, in turn, drags out the government approval process, as potential threats ranging from endangering wildlife to road congestion are taken into account. For smaller residential projects, the approval time can take two to three years, up from only six months in the 1960s, while larger projects can take more than 10 years.

“It makes for good-quality communities, but it makes for a scarcity of land,” said Glenn Brown, vice president of land development at Los Angeles-based Kaufman & Broad Home Corp., one of the nation’s largest builders.

It’s not uncommon for lots to have fees of $30,000 tacked on, up from $4,000 to $6,000 in the 1970s, as the cost of providing everything from sewers to schools has been passed on to builders, who in turn pass them on to home buyers.

By the time builders are ready to lay the foundation and nail the drywall, they often have invested $100,000 or more in a single lot in places like Orange County, where finished lot prices can account for 40% of total home costs.

City governments, lobbied by the citizens who want their homes to appreciate, tend to approve projects that exceed property values in a given neighborhood. That means dense developments that could lower median prices are discouraged in favor of pricier ones.

And many cities have found that housing raises the need for more services, such as fire and police, creating a bigger financial burden on public resources. As a result, many municipalities tend to favor retail development and the sales tax revenue it generates.

The Bay Area is often cited as a national example for housing gone haywire.

In Atherton, located on perhaps the state’s priciest real estate, the only municipal employee who lives in town is the city manager. The police chief, suing his landlord to keep his $2,000-a-month leased home, will be forced to move his family back to Auburn, about 200 miles away, and visit on weekends as he rents a nearby apartment, said Mayor Malcolm Dudley.

In Orange County, where job growth is running nearly as high, a recent study urged the creation of a coalition of business, government and community leaders to address affordability. The Los Angeles Economic Development Corp. is planning an October forum on the issue.

“The same pressures that built up in the late 1980s are building up now,” said Carl Neuss, managing director of Institutional Housing Partners, a real estate venturecapital firm in Irvine. “At the time, I never thought that it would happen again, that California had learned its lesson. But that hasn’t happened, and history appears to be repeating itself.”

Southern California historically has had some of the least dense housing of the industrial world’s major cities, including New York, London and Tokyo, and there is strong opposition to increasing the density.

Cheaper housing, such as condominiums and townhouses, often meet stiff resistance. Residents fear that they drag down property values, while planners fret over the traffic and transiency that accompany “attached” housing.

Brown recalls a group of Pacoima residents who packed a meeting to talk about a planned 55-unit condo project. “They saw the word ‘condo’ and were up in arms,” Brown said. But after learning that the units actually were detached, and resembled small single-family homes, their passions cooled. “They wanted to be sure it was consistent in character and value to the homes they were in,” he said.

For many developers, construction liability lawsuits have turned condo construction into a nightmare. Strict laws and a 10-year window that allows homeowners to file lawsuits has turned the practice of such law into a cottage industry.

Barratt American Inc., a subsidiary of a large British company that made its name building condos, concentrates solely on single-family homes now.

The company’s breaking point came in 1995 when it was hit with an $18-million complaint over a 300-unit complex it built. Barratt wound up settling for about $9 million, more than half of what it cost to build the project.

As a result of the suit, its insurance soared. The firm’s president, Michael Pattinson, acknowledges there were some problems with the condos, “but I don’t want to build an attached product knowing I have a high probability of being sued and that the first $250,000 comes out of my pocket.”

After peaking in the mid-1980s, multifamily construction--condos, townhouses and apartments--has declined by 93% in Los Angeles County, 89% in San Diego County and 74% in Orange County, according to the Construction Industry Research Board, a Burbank-based firm that compiles housing statistics.

By far the hardest hit segment of the home-buying market has been at the bottom of the economic ladder.

Southern California’s poor--those who spend more than half of their incomes on rent--totaled 753,000 last year, nearly equal to the population of San Francisco.

Low-Income People Far Outnumber Units

The Southland has four low-income renters for every unit available, the highest disparity in the nation and double the national average, a Center on Budget and Policy Priorities survey found. Experts believe the plight of the poor will worsen as the strong economy boosts apartment rents higher.

A typical apartment rents for more than $900 a month in Los Angeles and Orange counties, up more than 8% from three years ago. A typical minimum-wage earner would have to work 125 hours a week in Los Angeles County--18 hours a day, seven days a week--to pay rent, according to the UCLA Advanced Policy Institute. With costs rising so quickly, many families have been doubling up, even tripling up.

The L.A. Housing Department said that 25% of poor renters live in overcrowded conditions, many of them having seven people or more sharing a two-bedroom apartment. Those numbers are expected to grow as low-income renters search for a shrinking number of apartments.

That’s a sharp turnabout from a few years ago, when landlords struggled to fill their buildings during the recession. They accepted more low-income families, aided by government vouchers under the Housing and Urban Development Department’s Section 8 subsidy program. It allows families to pay 30% of their income on rent, with HUD picking up the difference.

But with the economy percolating, vacancy rates are falling and landlords are filling their buildings with higher-income renters, who are paying rates that the government and the poor cannot compete with.

“I would not be surprised if 25% of the owners in the Section 8 program opt out,” said Tom Bannon, executive vice president of the California Apartment Assn.

In 1990, the last time the Los Angeles Housing Authority had openings for subsidized housing, 82,000 families filled out applications. Next month, an estimated 200,000 families are expected to apply, said Steve Renahan, director of Section 8 housing for the authority.

The agency estimates it can accommodate--at most--up to 4,000 families, or about 2%. “I think that documents there is an affordable-housing crisis in L.A.,” Renahan said.

Hoping for a Better Future

The demand also is strong in Orange County, where a 33,000-unit shortfall exists, said Dan Miller, interim head of the county’s housing program. At its current funding level, it would take the agency more than 50 years to meet demand. “If we can help finance 500 units per year, we’re doing pretty well,” he said.

The Passanantis, meanwhile, still are waiting to hear if their number will be called. They began at No. 78 and have advanced, but don’t know whether the lot and home design they want will be available by the time their number comes up.

Maria Nochez is waiting, too, but the resolution she prays for may never arrive. Her dreams of owning a home have succumbed to the reality that she cannot pay higher rent.

Her family’s tight quarters are a constant reminder of their hand-to-mouth existence. A small dining table obstructs the pathway to the bedroom. Shelves of toiletries are stacked in the living room. The bathroom, the only place where someone can be alone, is where they change clothes. But with only one toilet serving five users, such isolation is fleeting.

Her prayer in Sunday Mass each week is that her children will avoid the street’s temptations, earn a good wage and follow in the footsteps of her oldest son, who will be attending junior college this fall.

Most of all, she prays that her children will one day own the roof over their heads.

“Sometimes I feel very sad,” Nochez said, bowing her head as tears streamed down her cheeks. “I want my sons and daughter to have a better life. I have given them the best I can.”

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Upper-End Activity

Builders increasingly have focused on constructing larger, more expensive homes, which analysts say has had the effect of pushing all home prices higher.

Los Angeles County

1987

$200,000 and up: 39.4%

$100,000--$199,999: 54.2%

Under $100,000: 6.4%

*

1997

$200,000 and up: 63.3%

$100,000--$199,999: 33.9%

Under $100,000: 2.8%

*

Orange County

1987

Under $100,000-: 3.7%

$100,000 to $199,999: 58.9%

$200,000 and up: 37.4%

*

1997

Under $100,000-: 0.8%

$100,000 to $199,999: 20.5%

$200,000 and up: 78.7%

Source: Construction Industry Research Board

Converging Forces

The booming job market and a historically low rate of housing construction are combining to drive Southland home prices higher.

New home construction isn’t keeping pace . . .

New Orange County housing permits: 11,000*

New L.A. County housing permits: 10,500*

*estimates

Source: Construction Industry Research Board

*

. . .with the booming job market, leading to. . .

Orange County job growth: 51,200*

L.A. County job growth: 101,400*

*estimates

Source: Employment Development Department

*

. . .rising home prices.

Orange County median housing price: $223,000*

L.A. County median home price: $182,000*

*estimates

Source: Axciom/Dataquick Information Systems

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Special Report in Business

* THE HOUSING CRUNCH

Rising prices are pushing home buyers into bone-dry valleys and wind-swept desert areas in search of affordable new housing. D1

* FOREIGN-BORN BUYERS

New studies show that one in every five home buyers in Southern California is foreign-born. And that ratio is expected to rise. D1

* JAMES FLANIGAN

There is a shadow on Southern California’s future because many communities are unwilling and most communities are unable to allow homes to be built. D1