You’re not just a real estate professional; you’re a California real estate professional. Doing business in the Golden State offers you a unique set of positive challenges—and lucrative rewards. Read on for more on where our state is heading and how you can reap the benefits.
Peering into the future
As a California real estate professional, you’re looking to the future and wondering: what’s my business going to look like in five, ten, twenty years? What’s California going to be like then?
A common concern of residents is that our state is too expensive. With high income taxes, high home prices and even high gas prices, it costs a lot to live here. Real estate agents have expressed concern about wealthy individuals leaving the state, and migration slowing.
These concerns are all valid — but not ruinous. To glimpse our state’s future, take a closer look at:
- tax rates;
- migratory patterns; and
Politics—non-partisan and loving it
California is a big state, geographically and otherwise. California has the largest gross domestic product (GDP) of any state in the nation. In fact, it has the 8th largest GDP in the world as of 2013 and a whopping 14% of the nation’s mortgaged properties are found here in California.
It’s not surprising then that from Orange County to San Francisco, California’s politics run the range from far right to left. However, unlike our federal government (and most states), California’s state government manages to get things done. How do we do it?
Non-partisan districts, initially proposed by former Governor Schwarzenegger, mean more moderate legislators. In turn, proposed laws are more moderate and progress is more politically accessible.
Along those lines, California has some of the top research universities in the world, including:
- University of California (UC) Berkeley, which contributes to the success of Silicon Valley; and
- UC Riverside and UC Davis have transformed California’s agricultural industry (over 80,500 farms contributed $45 billion to the economy in 2012, according to the California Department of Food and Agriculture).
All these perks need funding. This money comes from — you guessed it — taxes.
Are the taxes worth it?
No one enjoys paying taxes. But find comfort in the fact that in paying taxes, you are taking part in a system which provides needed services. The goal of our tax system is to shift wealth concentrated in top earners, and redistribute it so all Californians are able to benefit — in the form of clean parks and smooth roads. The redistribution of wealth is necessary to the stable and healthy economy of any democracy.
Still, does California overtax?
California’s tax rates are among the highest in the nation, with:
- the highest base sales tax of any state, at 7.5%;
- the highest gasoline tax in the nation at 72 cents per gallon;
- the highest state income tax for high-earners, with a cap of 13.3% as of 2013; and
- high property tax rates, ranked 15th in the nation for property tax rates as of 2012.
Some are worried that California’s high tax rates will push out the wealthiest earners. This concern about tax flight is largely based on high profile statements (remember Phil Mickelson’s threat to leave California last year? Spoiler: he still lives near San Diego). Anecdotes aside, the data clearly shows California’s taxes have little effect on actual migration out of the state.
Florida, with a similarly pleasant climate, has no income taxes. Their population has decreased since the 2008 recession, while California’s has continued to grow at a 1% annual pace. It’s no coincidence that 29% of their mortgaged homes are underwater as of Q3 2013, which is high compared to California’s 13%.
The quantity and quality of employment
Direct tax revenue comes from two main sources. Money gained from:
- income (from a job); and
- capital gains (from the sale of an asset, such as property).
Income from jobs supports our state’s public services. More important, jobs data are the greatest leading indicator of trends in home sales volume and prices.
2014 finds us in the middle of what has been a drawn out jobs recovery. Other states are recovering at a much quicker pace and some have already fully recovered (i.e. Texas, which exceeded pre-recession employment levels back in 2012). As of December 2013, California is 466,600 jobs (or 3%) below December 2007 peak employment. At the current rate of job additions (234,000 new jobs added year-over-year in December 2013), the full recovery of jobs lost is expected in 2016 at the earliest.
What does our drawn-out jobs recovery mean for housing? Primarily, the support needed from end user homebuyers is still lacking. The unbelievable jump in home prices during 2013, soaring 30-40% in the short span of a year in many parts of the state, was due entirely to speculator over-activity. At the same time, home sales volume remained flat and weak. Thus, home prices in 2014 are expected to trend downward.
Not until jobs recover in 2016 will home prices begin a more stable ascent. California’s lack of liberal residential zoning destabilizes home price and inflate bubbles.
We look to the thriving tech industry in the Bay Area to herald this recovery. Unlike most states, California workers are on the whole highly educated and thus better paid. In fact, California will have the highest minimum wage in the country when it’s increased to $9.00/hour in July 2014.
However, California is regularly ranked low on tax and business cost indexes, meaning large manufacturers or plants tend to stay out of California if they can help it. For instance, in 2012 Campbell Soup closed their plant in Sacramento, transferring those operations to other states (like Texas and Ohio). However, the jobs lost to those other states were low-paying, low-skilled jobs.
On the other hand, productivity and quality of life indexes consistently rank California high. This high quality of living tends to attract high-paying jobs.
States with biotech subsidies (again, bolstered by taxes), like California, see strong employment benefits in other job sectors. The National Bureau of Economic Research finds that biotech subsidies create a 16% increase in construction jobs, 7% increase in retail and an 8% rise in real estate professionals. They also attract highly-skilled workers who receive more pay.
Thus, highly-skilled laborers are more likely to move to California than the low-skilled. Moreover, each job produced here carries more monetary value than jobs produced in cheap-labor states with vast amounts of flat prairie lands.
Highly paid individuals translate to higher home prices for California and a more consistent housing market than one ruled by speculators.
Our diverse population
Along with a highly educated workforce, California has the highest number of international immigrants arriving each year.
Immigration means new ideas, progress and fresh perspectives (and to digress, a more diverse selection of foods). This also translates to new home sales and rental turnover.
California’s population grew at a rate of 0.9% in 2013, above the nation’s growth rate of 0.7%. The highest one-year growth rates in our largest counties were in Santa Clara and Alameda counties at 1.6%, with Contra Costa not far behind. The Bay Area’s high-paying tech industry is our largest center for potential growth. In contrast, Fresno County (with a per capita income roughly half that of Santa Clara, Alameda and Contra Costa), grew by 0.5% in the same period.
On the opposite end of the scale sits emigration – the number of individuals leaving California each year. We’d like to say good riddance to those ex-Californians, but with them goes current and future homeowners and renters. As we wave goodbye to them (45,000 in 2013 alone), we can’t help but wonder: if we lose enough of them, will the housing market grind to a halt?
To answer that question, we look to a state that continues to gather immigrants by the droves: Texas.
Comparing the Golden State with the Lone Star State
Texas gained 210,000 domestic immigrants in 2012 – much more than our 45,000 loss. So what does Texas have that we don’t?
Journalists and economists like to compare California with Texas, as they share characteristics (warm climate, large population, large GDPs) but are incredibly different, with important long-term distinctions.
The biggest difference? Cost of living.
Housing costs are exponentially higher here, with a median home price of $421,600 in California, far above the Texas median of $126,400. Thus, of all those ex-Californians, low-income residents are the most likely to relocate to Texas.
But do you really want California to be a low-income state? Along with higher housing costs, we also have a higher average income, 20% higher than Texas. Low-income residents are also more likely to stay in the same low-income bracket in Texas, according to a recent Economist article. Californians have a better chance of being upwardly mobile. Of course, this doesn’t make up for a median housing cost three times higher than Texas.
Our high housing cost is primarily due to overly-strict zoning regulations.
How can California be better?
Well, it depends on who you ask.
Some will tell you that reducing taxes is the best option. However, as discussed above, state taxes pay for things like public services, state parks, our world-class higher education system, safe roads, and other things that make California great. Reducing taxes is sure to have the opposite effect of what we desire – a more attractive state for high-skilled workers and their employers.
Ask a forward-thinking individual and they will tell you: curb zoning restrictions to reduce our high cost of living.
Strict zoning laws cause housing shortages in the most desirable areas, places people want to work and live. On the other hand, zoning that adapts to the will of the majority of residents (not the vocal few whose chant is not in my backyard — NIMBYs) makes California a more attractive place to live. Looser zoning makes it financially feasible for households to relocate to desirable locations, like city-centers, to cut out pollutant and wasteful commutes.
Further, encouraging room for growth through progressive zoning widens a city’s tax base. In turn, the city is likely to see better public services and fewer tax hikes in the future, a virtuous cycle for population growth.
The right place at the right time
Let’s go back to the original question. What’s California going to be like in the next decade or two? Most importantly, will it be good news for the housing market?
California is a progressive state with all the right things going for it: a concentration of high-paying jobs, the best universities and a pleasant climate. It will continue to attract the world’s best and brightest, and our housing market will feel the benefits by finding a more stable base to build upon. First the job market needs to recover, and then the housing recovery will follow.
But to fully realize the strength of California’s urban centers, we need to break our pattern of restrictive zoning. Our moderate legislators may be convinced to loosen zoning laws for the better as they have done in the past (such as approving granny flats for SFRs, potentially doubling the use of a parcel of real estate). Agents can help this process by contacting their city council members now or using their influence to put individuals with progressive zoning agendas on commissions and in office come the next election.
The next peak in home sales and pricing is expected in 2018-2020. First-time homebuyers will be entering the market while Baby Boomers retire, creating a demand frenzy. In the meantime, look to the cities for increased demand and expect to see a rise in highly-educated homebuyers.