The Exodus out of California & it’s Affect on Real Estate Values

Header Image for Article: The Exodus out of California & it’s Affect on Real Estate Values

Middle-class families living in the San Francisco Bay Area could be heading for the exit in droves. High home prices are the biggest culprit along with traffic, taxes and a high cost of living.

A recent survey shows that 1/3rd of the people living in the Bay Area are thinking about moving away in the next few years. Surveyors for the Bay Area Council say that people are fed up with the lack of affordable housing and high prices in general. They are also tired of sitting in traffic.

The survey included responses from 1,000 people from all 101 cities in the nine Bay Area counties. Council president Jim Wunderman says of the survey, that it’s “our canary in the coal mine”. He says, “residents are screaming for solutions”.

Of course, he doesn’t expect that 2 million residents would suddenly up and leave, but losing even a fraction of that amount could have a big affect on the Bay Area. The question is, what kind of effect would it have, and is it part of the normal ebb and flow of market cycles?

The survey shows that 34% of residents are thinking about leaving and that 13% felt strongly about it. Another 54% said they will stay right where they are, so most residents don’t plan on going anywhere.

Those most likely to leave had lower incomes and were paying a larger share of their pay for housing. So as people line up for the exits, there will probably be a disproportionately larger number of middle-to-low income workers leaving the Bay Area.

Hoover Institution research fellow Carson Bruno told the California Political Review that, “While there is a narrative that the rich are fleeing California, the real flight is among the middle-class.”

He says California’s median home value per square foot is higher than Arizona, Texas, Nevada, Oregon and Washington. PLUS California’s energy costs are about 1.5 times higher than competing states, AND California is 6th on a national list for the amount of taxes residents are forced to pay.

UC Riverside School of Business economist Christopher Thornberg says in 2006, about 38% of California middle-class households used more than 30% of their income to pay for rent. As reported in the California Political Review, he says that figure today, is more than 53%. The current national figure is just 31%.

And he says it’s even worse for people who have a mortgage. More than 66% of middle-class California households with a mortgage are struggling to keep up with the bills. That compares to about 40% for the rest of the nation.

Much of the Bay Area’s economic strength is being driven by high tech, but UC Riverside Center for Economics Forecasting and Development says that despite the addition of 2.1 million jobs since 2010, six industries are still below pre-recession levels. Those fields include construction, finance, and manufacturing which all contribute to the middle-class housing and job markets.

What’s the answer? That’s a tough question…

Many people surveyed by the Bay Area Council say affordable housing should be built outside the Bay Area. 60% thought we should have new housing outside the region and 85% say the there should be stronger transportation networks between the Bay Area, Sacramento and the Central Valley.

Wunderman says the perception is that the Bay Area doesn’t have the capacity to add the housing that’s needed. And, he says building outside the Bay Area won’t solve the housing problem “inside” the Bay Area. He says, as working families are priced out of the area and move away, the region will become less diversified, and that will hurt the economy.

He says many of the people surveyed “also” support the idea of more housing in their neighborhoods along with policies that support new construction. 65% says they are in favor of making it easier for people to add second units to their existing homes.

The Bay Area Council says it is currently sponsoring legislation that would make it easier for homeowners to add second units. The Council says if just 10% of the 1.5 million single-family homeowners did just that, we would quickly add an additional 150,000 rental units.

Of course, solutions for Bay Area congestion would need to be addressed as well, especially when there’s talk of adding more housing. 83% of the pollees are frustrated by gridlock traffic already and fear it will never get any better.

Wunderman says: “We’re running out of adjectives to describe how bad Bay Area traffic is and the misery it’s causing.” He says we may never completely solve the problem but that we can put a big dent in it with new technologies like driverless cars, carpooling apps, and intelligent transportation systems. We could also expand ferry service and modernize transit systems like BART and Caltrain. BART is currently undergoing a huge makeover with all new trains and system controls, but connecting the entire Bay Area and adding more stations is what’s really needed.

Millennials who are threatening to move away are also the ones who most strongly embrace alternative transportation. The Bay Area Council says that of all the Bay Area age groups, the Millennials have the lowest number of solo drivers. Only 53% of Millennials choose to drive alone compared to 72% of Gen Xers, 78% of Baby Boomers, and 84% of people 65 years of age and older.

Millennials are more likely to use some form of mass transit, carpool, walk, or ride their bikes. So keeping millennials in the Bay Area with more affordable housing could also have a beneficial impact on transportation problems.

At Real Wealth Network, that’s what motivated us as a group of investors to buy an apartment building next to the Google headquarters in Mountain View. It’s walking and biking distance to those jobs.

Hopefully Bay Area city planners will take all this into account. But as someone who was born and raised in the San Francisco Bay Area, I have reservations. The BART system started when I was in grade school and still does not connect San Jose to San Francisco or to areas like Stockton where people could find affordable housing.

The answer seems so simple, yet when implementing a simple mass transportation system, NIMBY bring things to a halt. “Not in My Back Yard!”.

This is not a new problem, and may just be part of the normal ebb and flow of market cycles. As prices get too high, people tend to move to more affordable places.

Real estate investors can profit by understanding where people are moving, so as to meet rental housing demand in those areas.

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