Decreased income mobility casts a shadow on home sales

Homeownership thrives on the American Dream. The belief is no matter where you start out in life, if you work hard and persevere you will have the opportunity to become a homeowner. But what happens when that dream fades into memory for all but the most wealthy?

The state of homeownership

Lost jobs and inability to make mortgage payments cut a significant dent in both the homeowner and potential homebuyer populations following the 2008 recession. Our economy is slowly regaining strength, with a full (pre-population gain) jobs recovery finally arriving at the end of 2014.

However, even with an initial jobs recovery, a full recovery of income is widely skewed across the earning spectrum. Individuals with larger paychecks have recovered and increased their incomes more quickly than, say, workers reliant on an hourly wage. For instance, hourly wage growth stayed flat in California from 2008 to 2014, at which time the minimum wage finally rose to $9 from $8 per hour, an increase of 12.5% after six years of nothing.

This is problematic, as California home prices vary by much more than 12.5% over six years. In fact, prices have risen an average of 9% over the past year alone, as of January 2015.

Editor’s note — It’s unrealistic to expect a minimum wage worker to qualify to become a homeowner. However, movement in the minimum wage (or lack thereof) is indicative of a larger economic cycle that has the potential to contribute to a healthy housing market.

Slow wage increases make it difficult to keep up with swiftly rising home prices. So — how did home prices manage to rise so fast without the support of incomes? Well, the recent boost in home prices coincided with the 2012-2013 jump in cash-heavy investors, widely known as speculators. The speculator presence has since subsided, and price increases have fallen back (from year-over-year growth exceeding 50% in low-tier sales in 2013, to today’s 9% year-over-year growth).

Meanwhile, owner-occupant homebuyers have had a hard time keeping up due to their generally slow wage increases. Home sales volume was depressed throughout 2014, and will continue to drag as we make our way through 2015.

Demand is particularly scarce in places dependent on low-tier sales. For instance, take a look at Southern California’s latest home sales report from DataQuick, which states sales volume was down from a year earlier by:

• 10% in Riverside and San Bernardino (with per capita income that’s 31% lower than the state average); compared to
• 4% in nearby Los Angeles and 4.5% in San Diego (with per capita income that’s much closer to average, at 4% below and 6% above the state average, respectively).

The home sales volume recovery varies across the state, but so has the recovery for incomes. Thus, inland regions like Riverside and San Bernardino are less equipped to support their local housing markets now that speculators have left it to the owner-occupants.

Homeownership follows the money

So, where has home sales volume regained momentum in recent years?

It shouldn’t surprise you to hear that San Francisco home sales volume has recovered quickly, rising from the depths of the 2008 recession way back in 2012. The homeownership rate there was 54% in 2014.

At the other end of the state, the Los Angeles area is still experiencing flat-to-down annual sales volume in 2015, as discussed above. Further, the average homeownership rate in Los Angeles is four percentage points lower than San Francisco’s, at 50% in 2014.

Of course, there are many, many factors that go into a region’s home sales performance. Foremost among these are jobs. Best is a high number of quality jobs, meaning jobs that pay well enough to allow homebuyers to save up for down payments. Individuals can’t do much to spur high-paying job growth in our neighborhoods. So what can be done?

A long-term problem needs a long-term solution

The problem of low wages is one that stretches across generations. This interactive map from the New York Times shows the income mobility gap between metropolitan areas. The odds of climbing into the top 20% of income earners when starting from the bottom 20% are:

• 9% in San Jose
• 4% in Bakersfield
• 2% in San Francisco
• 4% in San Diego
• 10% in Sacramento
• 6% in the Los Angeles area (including the Inland Empire); and
• 3% in Fresno.

On average, a child whose parents earn in the bottom 10% in California will grow up to earn in the 40^th percentile. On a nationwide scale, this is pretty good. The worst odds for low-income children are in the Southeast and parts of the Midwest, while certain Great Plains states have the best odds, with those born into the bottom 10% averaging out around the 50^th percentile later in life.

The report identifies a commonality between areas with low income mobility scores: economic segregation.

For instance, the Los Angeles area is so defined by its large suburban sprawl that high income families seldom brush shoulders with low income families. This means children of low income households have fewer opportunities to receive the services that are available to high income families, like good school systems.

Economic segregation is fixable. One thing a resident can do is advocate for zoning regulations that accommodate more housing in desirable areas. This keeps rents from accelerating beyond the reach of reasonable income earners. A prime example of what happens when zoning is not changed to meet rising demand is found in San Francisco, where rents have risen beyond the reach of most low income families. These families have been forced out of the city to the suburbs. Unless zoning changes are made there, there will soon be few low or middle income households left, bad news for sales volume.

On the other side of the country, New York City is also well known for its ridiculous price-per-square-foot ratios. Lucky for New York, the new mayor has decided to make his mark on the landscape by making major zoning changes that allow:

• builders to build taller buildings; and
• fewer parking requirements for senior and low-income housing.

These may seem like easy fixes — and that’s because they are. Meeting demand for real estate really can be as simple as changing a few outdated regulations.

However, like homeownership, zoning regulations also follow the money. This means those who can qualify to buy or rent in highly desirable areas like New York or San Francisco have the power when it comes to changing their local zoning. Unsurprisingly, most people don’t relish the thought of more neighbors, which is why zoning is often slow to change.

An agent’s stake

Why should real estate agents care about income mobility and zoning?

177,000 active agents and 103,000 active brokers are licensed in California as of the end of 2014. If the number of homebuyers diminishes, there won’t be enough sales to support the full population of real estate professionals attempting to make a living. When incomes across a large portion of the population stagnate, home sales volume remains stunted. This has been the case since 2007 for most of the state.

Further, the benefits of looser zoning abound, including:

• reduced crime in mixed-use zones;
• increased home sales volume;
• improvement in the construction sector; and
• getting the opportunity to live closer to where you work.

All of these things stimulate local economies, creating more stable housing markets. What real estate agent or broker wouldn’t want that?