Why California Real Estate Prices Are Through the Roof


The general topic is how regulations drive up real estate prices, while the politicians try to extract credit for creating affordable housing while reducing supply and transferring the costs onto developers and other home owners.  The reduced supply drives up prices in cities where these regulations are implemented.  Here is one article by The Independent author, Ben Powell, on Inclusionary Zoning.  In a nutshell, here is what is happening:

Placing price controls on a percentage of new homes has one clear effect: it lowers builders' profits from new developments.  Thus, inclusionary zoning ordinances essentially are a tax on building new homes.  And like any punitive tax, it has a predictable result: it reduces the supply of the commodity in question--in this case, new homes--while raising the price of the non-inclusionary units and the existing stock of housing.  

Powell adds that

In the Bay Area, for example, we found that cities with inclusionary zoning ordinances imposed an effective tax of $44,000 on each new home.  With the median cost of a new home at the time slightly over $500,000, this amounted [approximately] to an 8% increase.  In Los Angeles and Orange counties, we found the effective inclusionary tax was $66,000 per new home--about 12% of the average median new-home price at the time, approximately $550,000. 

So not only did the ordinance raise prices, it also reduced supply.

Inclusionary zoning also decreased the supply of new housing . . . . After adopting inclusionary ordinances, we found that housing production on average decreased [by] more than 30% in the first year in Bay Area cities.  In Los Angeles and Orange counties, housing production decreased 61% over a 7-year period following adoption of the zoning mandates.  

Politicians love this zoning ordinance because it allows them to take credit for the little production that was built.

Politicians like inclusionary zoning because it allows them to champion affordable housing without having to directly raise taxes. But the new houses aren't free.  Someone must pay for them.  That burden is borne by the [the] builders, land-owners, adn other home buyers.

from the Robert Wenzel Show and EconomicPolicyJournal

Director of business and economic studies, research fellow at hoover, Economic Issues.

California real estate!!

Great object lessons here in California as what not to do with regard to real estate.  California really messes things up.

Why are prices so high in California?

SF is the perfect example.
1.  Over the last 5 years, SF added 180,000 private sector jobs, but only 50,000 housing units.  It's a supply and demand issue.  Housing is just not being built at a rate sufficient to keep demand down.

Projections on office buildings there's probably going to be a lot more people coming into town. Business cycle theory.  The outrageous levels here are something to behold.

Regulations keep city from building units.  $750,000k for median.

Rent is $3500.  Strictly driven by low supply.  Scarcity of housing is off limits to new developments. You're taking 75% of the land off the plans for development.  2 million people will be squeezed into 5% of the land.  more and more people into smaller area of land.  Higher density drive prices through the roof.  A master plan for the bay area is called Plan Bay Area, rules and regs on where and how housing and land use and transportation can be used.  Only 5% of land can be used going forward.  Skyrocketing prices.

Another reason is inclusionary zoning.  

Inclusionary zoning or inclusionary housing is an American term that refers to municipal and county planning ordinances that require a given share of new construction to be affordable by people with low to moderate incomes. 

A certain percentage of new housing has to be offered at below market rate, low-income, varies between 10 and 25%.  Forces developers to offer these units at less than market rates so it acts like a tax.  As a tax it cuts into the profits on a development project, so developers choose to build elsewhere, like Nevada and Arizona, and choose not to build in the Bay area.  The effect of this regulation produces fewer residential units constructed.  Fewer units means higher prices on existing units.

What is the effect of inclusionary zoning in the LA and Bay areas? 30% reduction in new housing.  In Orange County there was a 61% drop in new housing.  This will have a huge impact on the market. 17,000 homes that would have been built weren't built because of the inclusionary regs.  Politicians look at the 770 units and brag about their achievement.

These regulations depress the housing stock long term and the result is that we see sky high prices in the Bay area, LA, and Orange County.  No problem for the lower incomes to get property.

The 5% new housing regulation is set to be clustered in predominantly minority neighborhoods.

Who's behind Planned Bay Area?  Lefties, Crony Capitalists, what's going on?  Anti-automobile folks.  Against the cars and the freedoms that that allows, and generally people that are politically connected.  The more you artificially restrict something, the fewer developers will build or get permits to build in that area and the opportunities that go along with that.  County Board of Sups. Drive by construction sites you see the same developers because of crony connections.  Building what people want instead of building what restrictions demand.

Pro-density, anti-car people are useful stooges for cronies who have the access for buildings.

The Tenderloin with druggies and homeless a block from the Hilton Hotel.  How do they keep that from being developed?  Boarded up buildings sit for decades and never get developed has to do with the permitting, regulatory process.  It's the incumbent versus the outsider.  If you own a home, commercial building, or hotel, you don't want to see competitors building.

Local neighborhood associations prevent construction and building.  Its driven by commercial enterprise who don't want competition.  This stuff can get blocked for decades.  It's not uncommon. Takes so much time to get anything done to build homes and housing.  5 or 6 years to get a permit to build a unit.  Environmental review, permitting, commissions, city council, sign-offs, all of this creates so much delay, while more and more people move into the area.  And forces more and more people out.  Roads get congested, and you get gridlock.

Tax as requirement for low income people.  What it costs builders per unit.  For the Bay Area where this inclusionary requirements is $44000 per unit to subsidize the below market unit.  In LA and Orange counties it's $66,000.  The developers calculate that in their costs.  It limits their amount of construction.  30% drop of construction in the Bay area.  61% in LA.  This is the result of the tax. Las Vegas is booming with new homes in the north and west side.  Other parts of the US we don't see this slow down.  Other states don't have this impediment.  People want to live here.  Only solution is to build more.

Water regulations impact the building of units.  If you can control water, you can control housing.  Water is being used as a weapon to prohibit construction in California.  Developers have to prove that they have water sources for the people in those units.  If you want to build more than 2500 you have to prove that you c.  Have to prove you have a 20 year supply of water.  Not a bad idea. Problem is that water is so regulated it impacts what can be developed.  Won't be sufficient water, so they scale back the project from 500 units to 300 units.  If water was freed up in California with all of the impediments in trade from historical water rights.  Archaic water system.  Needed in urban areas and home constructions.  Restrictions on development ties into artificial impediments on the federal, state levels that prevent water trading. Australia is the modern way to trade water.  They move water around very efficiently on an online trading platform.

Waters prices to reflect it's true scarcity and it moves where it is most needed.  Production doesn't happen here.

Commercial office space goes up more than housing because it doesn't use any where near the water of a residential zone.  Restrictions on commercial landscape watering.  New commercial site requires native species that don't require as much water.  Developers have gotten into commercial building in California than they have in residential.  Show me the water laws cuts into the number of homes built around the state or they downsize the units.  Efficient water trade would improve things.

Mayor Lee of SF is in camp with inclusionary zoning.  They can claim credit for anything that's built. They're ruining the market for housing in the city.  Jerry Brown was anti-inclusionary zoning in SF.  He was really good on this issue as mayor.  But as he left, the situation has deteriorated.  Politicians love it because they get credit for what does get built.

If you became the czar for california real estate.

1.  Get rid of the inclusionary zoning mandates.
2.
3.  OPen up a lot of the land, reserve space open it up.  Privatize it.  Don't let the city get a hold of it.  Unleash open space and let that be developed.  Autonomous vehicle we are on the cusp of radical transportation.

60% of the highway at any given time is empty because of the distance between cars.

Can put a lot more traffic through the pipeline.  He thinks it's exciting.  Safer, effectively, efficiently.  Andrew Galambos, Government

A traffic jam is a collision between free enterprise and socialism.  Free enterprise produces automobiles faster than socialism can build roads and road capacity.                   --Andrew Galambos

California Dreaming, Lawrence McQuillan.

How to Value a Real Estate Investment Property

Start here.

1.  Large.  Large properties tend to have more income-generating opportunities than small properties.

A property's operating expenses include:
1)  Insurance.
2)  Management fees.
3)  Maintenance fees.
4)  Utility costs.

Operating Costs do not include taxes and interest payments.  

From a quantitative perspective, investing in real estate is somewhat like investing in stocks. In order to profit in real estate investments, investors must determine the value of the properties they buy and make educated guesses about how much profit these investments will generate, whether through property appreciation, rental income or a combination of both.

Equity valuation is typically conducted through two basic methodologies: absolute value and relative value. The same is true for property assessment. Discounting future net operating income (NOI) by the appropriate discount rate for real estate is similar to discounted cash flow (DCF) valuations for stock, while integrating the gross income multiplier model in real estate is comparable to relative value valuations with stocks. Here we'll take a look at how to valuate a real estate property using these methods.

TUTORIAL: How To Buy Your First Home

Comparable Equity Valuations

Absolute valuations models determine the present value of future incoming cash flows in order to obtain the intrinsic value of a share; the most common methods are dividend discount models and discounted cash flow techniques. On the other hand, relative value methods suggest that two comparable securities should be similarly priced according to their earnings. Ratios such as price-to-earnings and price-to-sales are compared to other intra-industry companies to determine whether a stock is under or over-valued. As in equity valuation, real estate valuation analysis should implement both procedures in order to determine a range of possible values.

Calculating a Real Estate Property's Net Operating Income

Where:

NOI - net operating income

R: Required rate of return on real estate assets

G: Growth rate of NOI

R: Capitalization rate (r-g)

The net operating income reflects the earnings that the property will generate after factoring in operating expenses but before the deduction of taxes and interest payments. Prior to deducting expenses, the total revenue gained from the investment must be determined. Expected rental revenue can initially be forecasted based on comparable properties in the area. By doing the proper market research, an investor can determine what prices tenants are being charged in the area and assume that similar per-square-foot rents can be applied to this property. Forecasted increases in rents are accounted for in the growth rate within the formula.

Since high vacancy rates are a potential threat to real estate investment returns, either a sensitivity analysis or realistic conservative estimates should be used to determine the forgone income if the asset is not utilized at full capacity.

Operating expenses include those that are directly incurred through the day-to-day operations of the building such as property insurance, management fees, maintenance fees and utility costs. Note that depreciation is not included in the total expense calculation. The net operating income of a real estate property is similar to the EBITDA of a corporation.

Determining the appropriate discount rate is somewhat more complicated than calculating the WACC of a firm. Although there are different ways to obtain the capitalization rate, a common approach is the build-up method. Starting with the interest rate, add the appropriate liquidity premium, recapture premium and risk premium. The liquidity premium arises due to theilliquid nature of real estate, the recapture premium accounts for net land appreciation, while the risk premium reveals the overall risk exposure of the real estate market.

Discounting the net operating income from a real estate investment by the market capitalization rate is analogous to discounting a future dividend stream by the appropriate required rate of return, adjusted for dividend growth. Equity investors familiar with dividend growth models should immediately see the resemblance. (The DDM is one of the most foundational of financial theories, but it's only as good as its assumptions. Check out Digging Into The Dividend Discount Model.)

Finding a Property's Income-Generating Capacity

The gross income multiplier approach is a relative valuation method that is based on the underlying assumption that properties in the same area will be valued proportionally to the gross income that they help generate. As the name implies, gross income is the total income before the deduction of any operating expenses. However, vacancy rates must be forecasted in order to obtain an accurate gross income estimate.

For example, if a real estate investor purchases a 100,000 square foot building, based on comparable property data he may determine that the average gross monthly income per square foot in the neighborhood is $10. Although the investor may initially assume that the gross annual income is $12 million ($10*12 months*100,000 sq. feet), there are likely to be some vacant units in the building at any given time. Assuming that there is a 10% vacancy rate, the gross annual income would be $10.8 million ($12m *90%). A similar approach is applied to the net operating income approach as well.

The next step in assessing the value of the real estate property is to determine the gross income multiplier. This can be achieved if one has access to historical sales data. Looking at the sales price of comparable properties and dividing that value by the gross annual income that they generated will produce the average multiplier for the region.

This type of valuation approach is similar to using comparable transactions or multiples to value a stock. Many analysts will forecast the earnings of a company and multiply the EPS figure by the P/E ratio of the industry. Real estate valuation can be conducted through similar measures. (Learn how to put one of the top equity analysis tools to work for you. Check out Peer Comparison Uncovers Undervalued Stocks.)

Roadblocks to Real Estate Valuation

Both of these real estate valuation methods seem relatively simple. However, in practice, determining the value of an income-generating property using these calculations is fairly complicated. First of all, obtaining the required information regarding all of the formula inputs such as net operating income, the premiums included in the capitalization rate and comparable sales data may prove to be extremely time consuming and challenging. Secondly, these valuation models do not properly factor in possible major changes in the real estate market such as a credit crisis or real estate boom. As a result, further analysis must be conducted to forecast and factor in the possible impact of changing economic variables.

Because the property markets are less liquid than the stock market, sometimes it is difficult to obtain the necessary information to make a fully informed investment decision. That said, due to the large capital investment typically required to purchase a large development, this complicated analysis can produce a large payoff if it leads to the discovery of an undervalued property (similar to equity investing). Thus, taking the time to research the required inputs is well worth the time and energy.

The Bottom Line

Real estate valuation is often based on similar strategies to equity analysis. Other methods, in addition to the discounted net operating income and gross income multiplier approach, are also frequently used. Some industry experts, for example, have an active working knowledge of city migration and development patterns. As a result, they are able to determine which local areas are most likely to experience the fastest rate of appreciation. Whichever approach one decides to use, the most important indicator of its success is how well it is researched. (Learn how to filter out the noise of the market place in order to find a solid way of determine a company's value. See Equity Valuation In Good Times And Bad.)

Read more: How To Value A Real Estate Investment Property | Investopedia http://www.investopedia.com/articles/mortgages-real-estate/11/valuing-real-estate.asp#ixzz4GlcUeWIK
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You'll need a mortgage rate calculator.  Start here.

By Ryan Barnes 

Release Date:	Fourth week of the month
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month\'s closings
Released By:	National Association of Realtors
Latest Release:	http://www.realtor.org/research.nsf/pages/EHSdata

Background
The Existing Home Sales Report is a monthly release covering the number of existing homes that were closed during the survey month along with average sales prices by geographic region. The "closed" distinction is important because most closing periods are anywhere from six to eight weeks, so values listed are likely to relate to sales made about two months prior. The data is collected and released by the National Association of Realtors.

There are three important metrics in this report; in addition to the aggregate number of existing homes sold and median selling prices, inventory levels are provided through the "months supply" figure, a number that represents the length of time in months required to burn through all of the existing inventory measured during the period. 

Data is provided raw and with seasonal adjustments. This is because weather is a big factor in determining month-to-month demand. As with the Housing Starts Report, the data is also broken down by geographic region (Northeast, Midwest, South and West). Price data will show percentage changes from the year-over-year period and the prior month.

What it Means for Investors
Whereas the Housing Starts release deals with construction levels and is therefore a supply-oriented housing indicator, existing sales are much more about aggregate demand among consumers. While not included in the Conference Board's U.S. Leading Index, existing home sales are considered a leading indicator as well because higher levels are typically reached when the economy is coming out of a recession. The inventory metric also points to how much slack exists in the housing market, as a high reading in the month supply figure means that prices could fall as inventory is worked down to more normalized levels. (For more insight, see What are leading, lagging and coincident indicators? What are they for?)

Besides business cycle considerations, prevailing mortgage rates are the biggest factors to consider when evaluating the sales levels. All else being equal, as rates rise, sales will fall as consumers wait for a more opportune time to purchase a home. If home sales are strong, other consumer industries may see an uptick in sales, such as home improvement retailers and retail mortgage lenders.





Because of the lag between when a sale is made and when closing occurs, the report is not as timely as the Housing Starts Report, but the sample size is larger and less likely to have large revisions. Also, condominium sales are included in this report, but not in the starts report.
Strengths:

• Large sample size
• Together with housing starts provides a clear picture of the strength of the housing market. 
• A key leading indicator and predicator of future consumer purchases such as home furnishings and insurance services.
• Shows the level of demand within housing market.
• Released before the New Home Sales Report in the given month
• Includes condo sales, which are not included in the Housing Starts Report

Weaknesses:

• No detailed information on types of homes, just median sales prices.
• Subject to large bouts of seasonality

The Closing LineThe Existing Home Sales Report can be a good leading indicator during times of concern over the housing market in general, and is best used in conjunction with the Housing Starts report 

Read more: Economic Indicators: Existing Home Sales | Investopedia http://www.investopedia.com/university/releases/existinghomesales.asp#ixzz4GlYt4Bf0
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Economic Indicators: How Many Are There?  A lot.

You can find many of them here.

Economic Indicators: Overview

Economic Indicators: Beige Book

Economic Indicators: Business Outlook Survey

Economic Indicators: Consumer Confidence Index (CCI)

Economic Indicators: Consumer Credit Report

Economic Indicators: Consumer Price Index (CPI)

Economic Indicators: Durable Goods Report

Economic Indicators: Employee Cost Index (ECI)

Economic Indicators: Employee Situation Report

Economic Indicators: Existing Home Sales

Economic Indicators: Factory Orders Report

Economic Indicators: Gross Domestic Product (GDP)

Economic Indicators: Housing Starts

Economic Indicators: Industrial Production

Economic Indicators: Jobless Claims Report

Economic Indicators: Money Supply

Economic Indicators: Mutual Fund Flows

Economic Indicators: Non-Manufacturing Report

Economic Indicators: Personal Income and Outlays

Economic Indicators: Producer Price Index (PPI)

Economic Indicators: Productivity Report

Economic Indicators: Purchasing Managers Index (PMI)

Economic Indicators: Retail Sales Report

Economic Indicators: Trade Balance Report

Economic Indicators: Wholesale Trade Report

Read more: Economic Indicators: Existing Home Sales | Investopedia http://www.investopedia.com/university/releases/existinghomesales.asp#ixzz4GlXtjnSU
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from Gary North

The delinquency rate on commercial and industrial loans is rising.

https://fred.stlouisfed.org/series/DRBLACBS

The slope of the line is significant. Compare it with the slope of the line before other recessions.

Bankers have a way out: switch money to excess reserves at the FED. But this pays only 0.5%. The banks need a higher rate of return to keep their doors open.

They are trapped by low rates on Treasury debt. They can go with 30-year T-bonds, but there are not enough of them out there to let the industry keep paying depositors.

This is another warning of the coming of negative interest on deposits.

Banks are facing the same squeeze that the insurance industry is facing. They need income. When delinquency rates rise, they need even more income. But where can they get it? They can seek out new borrowers. But these will have to be borrowers who did not qualify for loans before. They will be higher-risk borrowers. Yet the banks are facing rising delinquency rates from the "good" borrowers who did qualify.

As the chart shows, there is no way out for the banks. In all previous cases of delinquency rates rising at this rate, there has been a recession.

The recovery is weak. Excess reserves are high. This holds down price inflation, but it also holds down economic growth. Economic growth is under 1% per annum. What happens if it turns negative? Delinquency rates will rise. This is a classic vicious circle.

Real Estate Buyers: What Type Are You?

Married with Kids

Single Female
Single Male
Unmarried Couple
First-time Buyers
Repeat Buyers
Buyers Purchasing Multi-Generational Housing
Buyers Purchasing Senior or Active Adult Community Housing

Find out what kind of buyer you are here.  

On a discussion of whether to buy a home to be in a good school district, see this:

I would wager that all things being equal, if the neighborhood is the same with the only difference being a "better" school district, the only significant factor to most tenants is the monthly rental cost. They are tenants for a reason for the most part, excluding folks like executives on a relo package waiting a year to find the right house to buy. Long term tenants will NOT pay higher rents JUST to get their kids in a better school. The day to day expenses are more of a concern. Same house, same neighborhood, cheaper rent, but mediocre school = tenant signing the lease.

Another commenter:

"I do not rent to students, but benefit from their demand."AMEN!  

Have you thought about buying to rent in towns with major established hospitals?

That said, Avoid young nurses and doctors just as much as Students!  

Adding . . .  

Why not a town with both a university and a hospital?

 Depending on one's age, it's important to avoid towns so small that the nearest hospital is an hour way. One solution would be small-to-medium sized towns with a university that includes a medical school (that runs a hospital).  Also, try to find a college town where new graduates want to continue living there.  A small, but significant number of them will state successful businesses that give the place more stability.  

 So there's that.  

from Investopedia

Prospective buyers have an edge in a down market, but this doesn't mean they are guaranteed to make money on the properties they buy.  When real estate sales are slow and there is a glut of homes for sale, buyers have an opportunity to pick up a house on the cheap.  The operative word here is opportunity.  There are times when you should pounce and times when you should show restraint and avoid an impulse buy. Knowing the difference could save you thousands of dollars.  

This was helpful . . . 

Before you even start considering locations, you need to figure out why you're investing and what your objective is. Some markets are great for appreciation but not so great for cash flow. Others produce great cash flow but appreciate at about the same rate as the end of the last ice age. Deciding which is most important to you is the starting point. You'll also want to identify some basic criteria. Some investors will only buy homes of a particular age. If you won't buy a home more than 20 years old then you probably want to avoid Pottsville, PA where the median age of a home is the oldest in the nation. Once you've defined your goals, then you're ready to start figuring out what cities or areas will fit those goals. It's a big country so where do you start?