Thinking About Housing Affordability

San Diego real estate is pretty expensive – the median home price in September 2015 was $460,000.  There are many places where real estate is more expensive – New York and San Francisco are prominent examples. Close to San Diego, in September 2015 neighboring Orange County had a median price of $615,000 (33.7% higher) and Los Angeles had a median price of $490,000 (6.5% higher).  The cost of housing in San Diego is a common topic of conversation.  I’ve been thinking about housing affordability and just wanted to jot down my thoughts on the basic causes as I think and read more about the subject.

There are two primary factors at play in pricing an item – supply and demand.  For housing this basically means:

1. Supply – number of housing units
2. Demand – number of people (and dollars they have)

To lower the price / value for housing either supply needs to increase or demand (population and dollars) needs to decrease.  There are a variety of ways to impact either of these

Increase supply

• Increase number of units – build more housing (homes, condos, apartments, etc.)
• Increase number of people per unit – Increasing the amount of persons per unit (more per room or more per total unit) makes more units available
• Small units – Replace large units with smaller units to increase overall supply.  Example would be to replace one 3 bedroom home with 4 townhomes.
• Build higher – At surface level, the square footage can be used only once.  Building upwards allows the same amount of land to support more units.
• Build farther out (sprawl) – Expand the footprint of the developed area of the town / county to increase the amount of units.
• Convert land to residential use – Repurpose commercial land, roadways, agricultural land, etc. to residential use.  Increasing the land available for residential use supports creation of more units.
• Add units not on land – Utilize water (bay, ocean) to add housing units.

Decrease demand

• Decrease desirability – Reduction in safety, outdoor amenities, pollution levels, etc. decreases demand as people will be less likely to elect to live in unsafe or undesirable location.
• Decrease purchasing power – A downturn in the economy or weakness in job market will reduce the amount of money available for property purchases or rent, bringing down the price level.
• Decrease population – Probably not feasible in a variety of ways but could indirectly be impacted by stopping creation of new units (which would counteract impact by reducing supply)
• Increase other costs – An increase in the cost of other items – electricity, food, taxes, etc. – would leave less money available for housing, potentially reducing demand
• Reduce buyer pool – Limit pool of parties that can purchase property.  Could add surcharges or taxes to non-owner occupied properties or potentially exclude buyers unless they plan to occupy.

I’ll likely add to this but before getting into the more intricate issues involved with housing and property cost I wanted to lay out thoughts on the underlying basics.  Have some thoughts to add? I’d love to hear them.