Daily Archives: February 27, 2014

People Move to Suburbs Because They’re Cheap, Volume 1

As part of trying to keep track of larger trends, I’m following the suburban development homes being offered by the major builders. Partly, this is because others (like Curbed) are already keeping good tabs on development in LA County. But also, urban redevelopment projects tend to be more unique, depending on the specific developer goals, location, land costs, difficulty of permitting, and so on. In the suburbs, we can look at projects in different communities by the same developer, which makes it easier to compare costs across communities, or we can look at projects in the same community by different developers, which makes it easier to compare developers.

In this post, I’m going to take a quick look at some different developments by D.R. Horton, which as of late February has 33 developments in some stage of progress in LA, Orange, San Bernardino, Riverside, and Imperial Counties. Of these, 19 were in Riverside County, highlighting the uneven nature of the recovery. Note, D.R. Horton doesn’t put prices for all models on their website, so I’m making some reasonable assumptions indicated by with a ~, e.g. assuming that “high 200s” is about $290,000.

Now, you can get different customizations and finishes, but the big home builders are basically working off a few common plans they’ve developed. Peruse D.R. Horton and you’ll see a 2,798 SF option pop up regularly, priced as follows:

  • Indio (Mountain Estates): ~$315,000
  • Murrieta (Iris): ~$385,000
  • Temecula (Morgan Heights): ~$500,000
  • Eastvale (Noble): $550,400

Those are all in Riverside County.

Nothing too surprising here. Temecula is closer to San Diego County than Murrieta. Eastvale is one of the closest Riverside County cities to Orange County. Indio is the suburban fringe of the Coachella Valley. In other words, location matters, just like you’d expect.

There’s a common thread of urbanist thought that goes something like “operating a car costs about $8,000/yr, so you can afford to pay more for housing if you live in a place where you don’t need a car”. This has been extended to suggest that banks should consider household transportation costs when deciding if they should make loans, i.e. if household needs one less car, they can afford a larger loan. And indeed, the difference between Murrieta and Temecula at current 30-year fixed rates (4.35%) is about $6,950 per year – about the same as the cost of operating a car.

So let’s say that living in Temecula instead of Murrieta would let one person in the family bike to work instead of drive, allowing the family to get rid of a car. Why wouldn’t a bank give the family a larger mortgage to buy the same house in that case?

Because it’s a 30-year loan, and few people work in the same place for 30 years. If the person working in Temecula in the family living in Temecula loses his/her job and finds a new one in Menifee, now the family needs another car. Or, if the person loses his/her job and can’t find a new one, there’s no way for the family to quickly reduce its fixed expenses. If the person working in Temecula in the family living Murrieta loses his/her job and can’t find a new one, the family could reduce fixed expenses pretty quickly by selling a car. Simply put, it would be crazy for a bank to make a 30-year loan that depends on transportation costs being stable.

To finally reach my point, the real tradeoff that you make when you decide to live closer to the city is housing size: you accept a smaller dwelling in order to be closer. For example, you could get a 2,414 SF house in Fontana for around $390,000, or you could get an 1,851 SF townhouse in Rancho Cucamonga for about the same price. Of course, this pattern is distorted by zoning and other things like Prop 13, which encourages communities to try to drive up housing prices.

If you look at things on a per SF basis, prices increase as you move towards the more desirable areas, and there will be thresholds at which more expensive types of construction become feasible. While prowling around Save Marinwood and Quiet and Safe San Rafael, I found a presentation by John Burns that gives relative costs of construction: about $60/SF for SFR, about $90/SF for garden apartments, and about $200/SF for podium construction.

D.R. Horton’s most affordable properties, in Adelanto and Imperial, are selling for about $100/SF, around 165% of construction costs. Assuming that zoning allows for it, and market conditions and regulation don’t favor buying over renting, that means garden apartments become economic when prices hit about $150/SF, and podiums when prices hit about $330/SF.

The threshold for garden apartments is pretty low; based on D.R. Horton’s SFR pricing, they already make sense in places like Fontana and Murrieta. Podium construction has a higher threshold; Santa Clarita is getting close, but only LA and Orange County pencil out. Note that this is a gross simplification. Small (1-2 person) households often don’t want dwellings as large as SFRs. In a place like Adelanto, a lot of single people could be accommodated in things like garage apartments, let rooms, and so on, if permitted. At small dwelling unit sizes, prices don’t scale linearly because of fixed costs like bathrooms and kitchens, which are more expensive per SF than bedrooms or living rooms.

However crude it is, this analysis is consistent with the expectation that there is a logical progression of densities as you approach more desirable areas: SFRs to garden apartments to podiums.

I should point out that by this logic, high-rise construction doesn’t make sense until prices go above about $500-$600/SF – a level that only some places in LA have reached. Not to beat a dead horse, but I feel compelled to again emphasize that the debate is not about the aesthetics of mid-rise versus high-rise construction. It is affordability versus unaffordability. If your vision is high-rises instead of mid-rises, your vision is an unaffordable Los Angeles. There’s no two ways about it.