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San Diego's High-Price Housing Strains Economic Capacity


Thursday, April 16, 2015

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   According to Institute analysis of household spending data, San Diegans spent more of their household incomes on shelter than residents of any other major metro region. Although income before taxes in San Diego is 19 percent higher than average for the U.S., annual expenditures on shelter is 57 percent higher. This stark difference is evidence for just how “house poor” San Diegans are.
   Moreover, the region is failing to address this problem by increasing supply. Indeed, according to NUSIPR, the region would have needed to permit approximately 12,800 housing units last year to keep pace with population increases. Instead, new housing construction checked in at a tepid 6,871 units. The result is San Diego families are doubling up, delaying purchases, and moving farther and farther away from job centers as a way of mitigating higher shelter costs in the urbanized core of the region.
   “Rising housing prices are further straining the region’s already pressured household budgets,” according to NUSIPR economist, Kelly Cunningham. “Housing costs are a key impediment to regional growth and greater economic prosperity.”
   San Diego remains among the nation’s 14 least affordable housing markets in California; only the New York metro area (ranked 8th) was outside the state. Among the nation’s 25 least affordable markets, 18 are in California.
   The percentage of households in San Diego able to afford a median priced home sold during the 4th quarter of 2014 was only 25.3 percent. This was 10th lowest among the 226 metro areas measured across the nation.
   San Diego’s low affordability ranking results from the combination of relatively high home prices against slightly above middle household incomes. While the median price of homes sold was 14th highest in the nation, San Diego’s median household income of $72,700 was only 54th.
   Another noteworthy trend revealed by the data is San Diego’s recent median household income during 2013 and 2014 ($73,000) was less than medians reported from 2009 to 2012 ($74,900-$75,900). Reduced income at the same time housing prices are rising obviously compounds unaffordability.
   Since bottoming in 2012, home prices surged by an average of 13 to 1 compared to income. Without incomes rising hopeful buyers are not able to save for down payment and take advantage of historically low mortgage rates. Of course the higher the price of the home, the greater amount needed for down payment and to meet monthly mortgage payments.
   Another noteworthy comparison illustrating San Diego’s affordability challenges is revealed in the ratio of home price against median household income. Whereas home values across the U.S. are generally two to three times annual median household income, in San Diego the ratio historically was around 4.0 times income. The ratio briefly spiked to 8.0 for San Diego in the previous housing bubble before falling below 4.0 a few times from 2009 to 2012. The ratio neared 6.0 again as of the end of 2014, exceeded only by the “bubble” years from 2003 to 2007. For some consolation in comparison, other major California metro areas show even more such “froth” over the post-recession rebound.
   With San Diegans needing to spend more on shelter, there is less available to spend on other items. This is particularly evident in discretionary categories of spending. San Diego households spend less on cars and other vehicles, health care, education, food (particularly consumed at home), entertainment (such as on Charger football games), and cash contributions (including charitable donations).
   San Diego is likely to continue see high housing prices for the foreseeable future and rising home prices will further exacerbate affordability challenges with significant economic consequences. With relatively higher share of income spent on shelter, less is available for and compensated by lower spending on other consumer goods and services.
   This serves as a barrier to the region’s economic performance. With higher home prices, “leakage” of local income flows out of the region to pay for financing costs on relatively larger mortgages and rental rates paid toward institutional owners based elsewhere. A more healthy/less distorted housing market, in contrast, would leave households with more discretionary income to spend on other local services and goods, reducing the rate of leakage, and improving the region’s overall economic performance.
   For further details on San Diego’s recent housing price dynamics and economic implications, the National University System Institute for Policy Research report in the April 2015 edition of the San Diego Economic Ledger.