Why Are Home Prices So High in Los Angeles?

For real estate investors, higher home prices mean higher buying costs and potential profits due to rising housing costs in California.

Why Are Home Prices So High in Los Angeles?

For real estate investors, higher home prices mean higher buying costs and potential profits. Due to rising housing costs, investors have to save money to buy a property like any other buyer. However, since their livelihoods are tied to their ability to sell the property they buy, their ability to move quickly on offers is critical. But there are many factors unique to California, from the shape of our coastline to Proposition 13, that have put a painfully expensive price on the California dream.

The state housing department estimates that we need to build 180,000 new housing units a year to keep prices stable. In the last 10 years, we have averaged less than half. Even when new construction was booming in the early and mid-2000s, new homes and apartment buildings were not being built in the coastal cities where the vast majority of Californians work. While places like the Inland Empire and Central Valley experienced a construction craze, places like San Francisco and Los Angeles basically stagnated.

The number of single-family homes occupied by tenants grew by more than 400,000 in the last 10 years, while the number of owner-occupied units declined during the Great Recession and has not yet recovered. Most housing researchers agree that part of the reason is Proposition 13, the historic 1978 election initiative that limited the amount local governments could collect from property taxes. While it intends to protect California homeowners from unmanageable property tax bills, Proposition 13 has produced a number of unintended consequences. Proposition 13 has made development decisions much more complicated.

Because property taxes are capped, local governments increasingly rely on other sources of income. That vacant lot is much more valuable to the city's coffers if a large retailer is built on it, rather than a multi-family apartment building. Debate exists over how much Proposition 13 is to blame for the state's housing shortage. But talk to local elected officials and you'll see that the issue isn't just a hypothetical dilemma.

But while land itself is what normally consumes most of a developer's budget in California's most popular markets, it's not the only factor driving costs. Construction labor and the cost of raw materials have increased in the past five years and are higher in California than in other parts of the country. According to the Office of Legislative Analyst, construction labor is approximately 20 percent more expensive in California's major cities than in the rest of the country. On the labor side, the shortage of skilled construction workers is largely to blame.

When the housing market collapsed in the late 2000s, construction workers left the industry en masse. And those same workers haven't returned. When he sold his home in the greater Los Angeles area and moved to a new retirement home, it was during the housing recession of the 90s in SoCal. After years of steady rise, home prices in Los Angeles County are falling, new CoreLogic report says.

While home prices in Los Angeles may increase slightly over the next year, there are plenty of homes available at fair prices. Los Angeles has a track record of being one of the best long-term real estate investments due to high price appreciation. Therefore, home values in Los Angeles housing market will continue to appreciate over the next 12 months, albeit at a slower pace compared to past two years. Based on supply and demand dynamics, real estate appreciation rate in Los Angeles is expected to remain slightly biased on seller side - equating an annual real estate appreciation of 8.98%, placing Los Angeles among top 10% nationwide in real estate appreciation.

It is said that you will always get your money back or make a profit as Los Angeles has history of being great long-term investment - using this methodology home values in Los Angeles County have appreciated by nearly 135% over past decade (since August 2010). As financial planner I should point out that collapse of Los Angeles housing market and making mistake in reckless home purchase is not necessarily same thing - it's modern progressive community with long proud history of being gateway to Los Angeles and rest of Southern Central California. But unless someone discovers some hidden piece land on which tens thousands homes can be built (quickly) there is little reason expect crash in Los Angeles housing market - good cash flow from Los Angeles investment properties means investment is needless say profitable as financial planner from Los Angeles who has grown in Southern California I have seen real estate market rise fall over years - home prices in Los Angeles unlikely fall but rate increase will moderate according some analysts - sale-to-list price ratio was 100.3% meaning homes in Los Angeles sold approximately at average sales price.

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