Financial risk is high in these California metros

How comfortable should you feel with your financial situation going into 2024?

Living in California, you’re more likely to categorize your personal balance sheet — asset values and debts — as presenting a bottom-line financial risk rather than a top-line financially safe outlook.

Financial safety — and the inverse, financial risk — is measured in impersonal numeric terms for each metro’s:

• share of households spending 35% or more of their income on housing;
• share of homeowners with underwater mortgages;
• foreclosure rate;
• average debt-to-income (DTI) ratio;
• unemployment and underemployment rates;
• share of population uninsured ;
• average credit score;
• poverty rate;
• fraud and identity theft complaints per capita;
• share of households which are unbanked;
• employment growth;
• share of households with savings and retirement plans; and
• personal bankruptcy filings per capita, according to a 2023 report by WalletHub.

In terms of financial safety, most California metros rank low. Out of the 182 major metros examined across the U.S. for financial safety:

• San Francisco squeezed into the top quarter of all metros, receiving a relatively high score of 44^th place;
• San Jose was in the top third;
• San Diego was just above halfway point, with a relatively average score;
• Sacramento fell just below the halfway point;
• Orange County, Fresno, Bakersfield and Riverside all received poor scores, landing near the bottom quarter of U.S. metros; and
• Los Angeles ranked near the bottom of all metros.

Related, the same study ranked metros by safety from natural disasters — unsurprisingly, California fell to the bottom in this category, too.

In sum, California renters and homeowners under present living standards are more likely to be at risk than having safety in their financial prospects.

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The Golden State is the risky state

With the highest gross domestic product (GDP) of any state and a strong jobs market to boot, that alone gives California’s major metros a major boost in terms of financial safety.

So why did most of our metros end up so low in the rankings?

It all comes down to the exorbitant cost of housing and its pervasive spillover, adding expense and deprivation into all aspects of life.

As such, the majority of California households are housing cost burdened, spending more than 30% of their income on housing costs, plus the forced expense of commuting due to being “zoned out” to live where they work. The coastal middle class do not want workers around, except during the daylight hours.

For example, the median annual household income in Los Angeles is $69,800, according to the U.S. Census. At the recommended 30% maximum share of income spent on housing needed to accommodate a durable standard of living, this (imaginary) median income household ought to spend no more than $2,094 each month on rent. However, the (non-existent) median apartment rental is a much higher $2,742 each month (with an average square footage of just 788 sq ft), according to Rent Cafe.

In order to qualify for a puny median rental in Los Angeles at 30% of their income, the median income tenant needs to earn an additional $7,776 each year. Unionization is working to bring that one to fruition.

To make up the money difference, renters consolidate, moving in with roommates or remaining in intergenerational households — astutely brought on to reduce and redistribute — financial risk.

The result is reduced turnover — in real estate terms, fewer fees to go around. And for most households, a reduced standard of living since, directly and indirectly, housing as experienced today eats up an excessive portion of gross income.

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The solution to the extreme cost of California housing and the significant expenses of commuting from misplaced housing is simple: more housing where people work. This is not a home on the prairie where mustangs hang out to play.

We know these to be facts, and California’s legislative bodies work with the same set of facts. The past several years has seen a flurry of new laws aimed to clear out disruption from the path to greater multi-family construction. The special focus in 2022-2023 was to enable and encourage homeowners — and local politicians — to add accessory dwelling units (ADUs).

Without sufficient housing in the areas where jobs — and demand for housing — are plentiful, the quality of life for all residents will continue to deteriorate, as:

• levels of homelessness rise;
• buy-to-let landlords speculate to pull juicy rental income; and
• community investment by homeowners flatlines and declines for lack of discretionary income for households to enjoy life and greater financial safety.

Watch for more legislative enactments, financial incentives, and state enforcement to increase the housing stock by accommodating the construction of housing in the years to come. We got to today’s shortage of housing in all the right places in the 15 years of recovery since 2008. However, we will likely take less time to reverse these trends and cure the shortage and misallocation of wealth in California’s housing stock.

In the short term, the current housing downturn we are experiencing in 2023 will see builders hesitant to bet on developments as the economy — the at risk part — edges into recession.

Thus, residential construction starts will be held back from reaching their full potential until the recovery from what is on track to be the 2024 recession. With a dose of patience, expect the recovery to pick up steam around 2027.

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