4.6 million of the Los Angeles metro area’s population of 8 million lives below an adequate standard of living, according to a recent report by the Economic Policy Center. In other words, over 57% of Angelinos do not make enough money to get by without outside assistance.
This study is more nuanced than other measures like poverty or affordability since it is extremely localized. An “adequate standard of living” is determined by family size and for the unique costs of everyday living expenses particular to an area.
For example, the minimum income needed for a family of four (two parents and two dependent children) to maintain an adequate standard of living in Los Angeles is $6,217 per month. This translates to $74,605 each year, significantly higher than the national average and that of many locations in California.
If a family makes any less than $74,605 annually, it is likely they need to rely on help from family or government subsidies, like food stamps or Section 8 housing. Around $75,000 a year may seem like a lot when compared to the official poverty line ($23,550 for a family of the same size), but it adds up quickly in a high-cost area like Los Angeles.
Take a look at the monthly budget of a typical Angelino:
- $1,421 spent on housing costs;
- $754 on food;
- $953 on child care;
- $577 on transportation;
- $1,573 on health care;
- $557 on other necessities; and
- $382 on taxes.
What does this mean for Los Angeles’ housing market?
First, the housing expenses calculated by the Economic Policy Center are based on the Department of Housing and Urban Development’s (HUD’s) fair market rents. These are calculated based on real rents for dwellings at the region’s 40th percentile (so, 10% below average).
These calculations assume a single person is living in a studio apartment, a two adult household is in a one-bedroom apartment, and a two adult household with one or two children — like in our example — is in a two-bedroom apartment.
This is to say, if you’re an average four-person household looking to rent your shelter, $1,421 on rent in Los Angeles is a steal. Most families with multiple children are looking for three-bedroom apartments or single family homes. Further, if you’re hoping to get into a neighborhood with good schools, you’re going to encounter much higher rents to pay for this privilege. Thus, what the Economic Policy Center determines as adequate housing is truly nothing more — the housing is generically adequate.
Los Angeles’ biggest obstacle in reducing the number of families living below an adequate standard of living is its geography. Los Angeles owns its suburban sprawl like no other major metropolitan area, resulting in isolated pockets of low-income and high-income households that rarely meet. For example, the top 5% of income earners in Los Angeles make 12 times as much income than is earned by the bottom 20% (the national average is nine times).
This condition is not unique to Los Angeles. It’s even worse up north in San Francisco, where the top 5% earn 17 times more than the bottom 20%, according to the Brookings Institution.
What happens when the gulf widens between rich and poor? More people are sifted from a previous middle class existence to a sub-adequate standard of living, joining the majority of Angelinos already struggling to make ends meet. These families will rarely become homebuyers (or sellers for that matter), meaning your reliable client base will slowly dwindle along with home sales volume in the area. Los Angeles County already has one of the lowest homeownership rates in the state, at 49.3% in Q4 2014.
There is a solution, but it requires change. It requires zoning to accommodate demand, allowing rents to drift down to a reasonable level in the most desirable areas where quality jobs and good schools are located. It also requires curbing speculator activity by instituting regulations to reduce short-term flippers and hit-and-run investors. This will bring more stability to the housing market, specifically fewer bubbles and corresponding bursts. These volatile market aberrations discourage potential homebuyers from entering the market, and further punish homeowners by plunging them into negative equity when the bubble invariably pops.