Published: May 27, 2014 Updated: May 29, 2014 12:00 p.m.
While Orange County homes are selling at prices that have yet to exceed their pre-bubble-bursting peaks by most measurements, the relative cost of a local home has never been higher – according to one of my favorite affordability benchmarks.
I’ve long tracked the relationship of Orange County home pricing to nationwide values as my “Orange Premium.” It measures, in essence, how much extra we pay to live in relative paradise.
My math is simple: Compare the National Association of Realtors’ median selling price of single-family residences in Orange County and the U.S. In the first quarter, the local median price tag was $669,800, up 12 percent in a year, vs. $191,600 for the nation, up 9 percent in a year.
My trusty spreadsheet tells me that this “Orange Premium” was at 3.50 for the start of 2014. That is, you could get one Orange County home for 31/2 homes at the national median price.
(Curious note: At this moment, the national price happens to be the same cost as a Las Vegas single-family residence – if you need a better mental image of the comparable properties.)
How high is this premium? The first quarter’s “Orange Premium” topped last year’s cyclical peak of 3.4 U.S.-homes-to-one-here ratio in the first quarter, and the old record peak of 3.41 in 2004.
If so many folks speak of California economic challenges, why is this premium surging?
One key factor is Orange County’s faster-than-elsewhere home-price recovery. Since the “Orange Premium” hit its most recent bottom – at 2.99 homes-to-one in 2012’s fourth quarter – Orange County home prices are up 38 percent through 2014’s first quarter. Nationally, price gains are just 18 percent over the same period.
That rebound left Orange County prices only 6 percent below the 2007 peak. National pricing is still 14 percent below its 2006 peak.
This price gap isn’t just fodder for real estate pros or statistical junkies. High housing costs are a major challenge to the local economy – hurting our chances to attract and retain employees and employers, and concentrating the finances of Orange County residents on house payments and diverting it from the rest of the economy.
But the fat home-price premium is also the byproduct of the area’s economic oomph. The region’s long history of job growth has brought more house shoppers to Orange County. Coupled with laggardly homebuilding, which limits the supply of housing to buy, that pushed home prices skyward.
In the last three decades, Orange County job-growth pace has outpaced the nation by 30 percent – a 1.7 percent average annual growth rate vs. 1.3 percent. That’s a noteworthy and long-running edge, especially in an area with limited raw land suitable for cheaper housing and where developers, as well as city leaders, seem to prefer building pricier homes to residences that mainstream shoppers could afford.
PRICEY BY ANY MATH
The local housing crunch isn’t only found in my mathematics. Other, more complex measurements of housing affordability also show just how costly local real estate can be.
Take the Housing Opportunity Index from the National Association of Home Builders and Wells Fargo. This metric juggles local pricing patterns, income levels and mortgage rates.
It shows Orange County was the second least-affordable major market in the nation in the first quarter – only 19 percent of the local homes sold were “affordable” to the median-income household, lowest level since 2008. The only place that was less affordable? San Francisco.
Orange County fares no better with a National Association of Realtors’ calculation of the qualifying income needed to buy the median-price local single-family residence. By this math, an Orange County shopper with 20 percent down in the first quarter needed $130,000 household income to buy. Only three U.S. markets – Silicon Valley, the Bay Area and Honolulu – had heavier salary demands.
One quirk inside these affordability indexes is that most people don’t earn the median salary. Online property tracker Trulia broke the homebuying income challenge into some key educational categories.
So while just 24 percent of homes listed for sale in Orange County in May were “affordable” to the median-income household – third-lowest in the nation – that affordability fell to 9 percent for local folks with at most a high school degree, and rose to 59 percent for Orange County residents with graduate degrees.
And apartment tracker Green Street Advisors says the typical house payment required to buy an Orange County home is twice the local rent – well above the national average of 1.3 times and the highest mortgage-to-rent ratio among 30 major U.S. markets.
Let’s be honest, though. No matter how you do the math, it’s fair to say that Orange County has long had a home-affordability problem.
In 1982, the first year of my Orange Premium database, local house prices ran nearly double that of national costs. Cry, or laugh – that was when the Orange County median home sold for $129,641!
The Orange Premium exploded to 2.7 in 1989 – amid the region’s late 1980s real estate boom – but then cooled off in the ugly 1990s California housing slump.
The premium bottomed at 1.84 in 1996, perhaps the last whiff of local affordability.
Unfortunately, no major affordability index has a long history on Orange County. The NAHB/Wells index dissects Los Angeles house prices back to 1992, and that metric shows regional affordability in the mid-1990s rising almost to the national levels, as Los Angeles home prices fell while incomes soared in a fast-paced regional business climate.
As the new century neared, though, the local housing market recovered with gusto – and higher prices made my Orange Premium and other affordability measures turn painfully unaffordable. Orange County’s median home price soared 232 percent in the decade ending in 2006. U.S. prices jumped, too, but just by 92 percent.
The local price boom around the turn of the century wasn’t just a byproduct of that era’s generous mortgage standards. Orange County’s economy was cooking – growing its workforce by 28 percent in the decade ending in 2006 vs. 14 percent job growth nationwide.
When the easy lending ended, the housing-dependent economy – and housing itself – turned sour. Curiously, the downturn hit hard all corners of the nation, so Orange County affordability barely improved. Local pricing was off 31 percent in the four years after 2006. Nationally, it was a 28 percent dip.
The affordability question doesn’t just rest on prices. House shoppers complain about what you get for Orange County’s stretched housing dollars.
That disparity is captured by a study from Trulia, showing that Orange County homes for sale in May that were “affordable” to the median-income household (24 percent of all listings) had a median size of 1,100 square feet. Compare that to the most “affordable” market – Akron, Ohio – where 86 percent of homes listed were “affordable” at a median size of 1,300 square feet.
NO EASY CURE
Orange County’s surprisingly vigorous housing rebound highlights some of the challenges the region faces when anyone from government leaders to real estate insiders try to tackle the affordability issue.
Let’s pray we don’t get the pure economics fix again – a dramatic decline in housing prices. Let me warn you that the last two similar surges in my Orange Premium – in the late 1980s and again in the middle of last decade – did not end well.
Constructing enough new homes to dramatically lower overall prices isn’t realistic, even over the medium range. Building far more affordable housing is possible, but tell me this: Which community in this NIMBY-thinking world would encourage that kind of massive development?
Incomes won’t jump broadly enough, either. Orange County’s job growth is creating a split class of residents – well-paid folks who can somehow afford today’s house prices and lesser-paid workers who don’t even dream of homeownership.
And a rush of investors and out-of-towners to Orange County further clouds affordability.
Folks looking for rental properties to own like the fact that Orange County has some of the nation’s highest rents – at $1,639 a month, the nation’s eighth-highest, according to rent tracker Reis Inc. – and a healthy appetite for single-family homes to lease. This buying is another strain on the for-sale supply.
Plus, house shoppers from other parts of the globe are attracted to Orange County’s economy, climate and diverse population, and don’t see our housing prices as high compared with other major world cities. For example, Los Angeles was only the 27th-most-expensive place to live out of 131 major cities ranked worldwide by The Economist magazine.
The bottom line is that no matter how you measure the price gap, you will pay way more to live in Orange County vs. many other places. A hearty chunk of that extra cost is for good reasons (lifestyle, opportunity, etc.) And some of the expense reflects basic economics (heavy demand, limited supply.)
That’s why an Orange Premium exists – as very tangible validation that Orange County is a well-above-average place to be.