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.

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One thought on “People Move to Suburbs Because They’re Cheap, Volume 1

  1. NewsView

    There’s an article from NPR that received some criticism for comparing median LA county wages to average LA rents for a 1-bedroom apartment, which they concluded would require an income of $33 per hour or about $70K per year (incidentally, an LA Weekly article finds that the income level to afford an area house is $100K so it would appear the cost-benefit gap to renting vs. owning is narrowing).

    In response to the piece, there were LA-area residents who expressed skepticism, pointing out that they are paying a lot less for an apartment. But in my experience, the article is more spot on in 2016 than it was when it was written — just from this time last year to the present, you will be hard-pressed to find any legitimate rental listings in the $1300 or less category on Craig’s list — even if you’re searching through the likes of Compton.

    If you search Realtor.com or similar, rental costs that are below average tend to apply to studios, not the one-bedroom apartment cited in the NPR radio piece. (I kid you not, I even saw a 230 sq foot apartment on “Skid Row” on the Hotpads website for $720 per month — a cost that could get you into a two-bedroom North OC apartment in a safe area in the 1990s!) There are places to be found in the sub-$1300 price range, usually in rough neighborhoods and/or areas with inadequate parking, but studies show that if you’re going to have a roommate or spouse a “livable” amount of space — the bare minimum square footage necessary not to induce a constant state of stress from being crowded in too closely — is about 830 sq foot for two people. Most of the older multifamily dwellings in downtown LA are not up to current earthquake safety codes (the LA Times recently publicized a massive list of LA-area buildings that are in need of retrofitting), offer no means to park conveniently or safely, are just 300-600 sq. foot spaces, and offer no disability access features.

    There were a number of people who pointed out that duh, you’re going to need a roommate or a working spouse to rent an apartment. It’s sad to me, however, that that expectation is so much taken for granted that it is no longer even questioned. In reality, there are MANY single parents out there for whom a $1700 1-bedroom LA apartment would not suffice. I have seen double bunk beds on some ads, crammed alongside a queen bed in a studio apartment — there’s no privacy for the adults, even, in such cost-saving efforts. I once met a single mom who was sharing her apartment’s only bedroom with her preteen son, with room enough only for ONE bed.

    It’s really a sad, sad situation but, as usual, there’s no leadership in the SoCal area or even at the State level to address the housing crisis, which consists of the current bidding war in OC and an escalating rental squeeze everywhere else. I would caution, in closing, that moving into an apartment, let alone taking on housing payment, that RELIES on the assumption of an uninterrupted dual income is a recipe for financial disaster. It may now be normal to need a two-income household to “invest” in a house — or to obtain the necessary space for a growing family — but if two full-time income earners are what it requires just to rent a cramped apartment, we should shudder at the trend (because it implies, among other things, that even apartment dwellers are so tapped out that they’re likely not saving or investing adequately for the future, let alone an unforeseen layoff or illness). Overcrowded living conditions, whether in apartments or single-family homes, are likely to become the next fallout in the UNaffordability crisis facing SoCal residents. The insanity has to stop! The challenge, I think, is rallying enough indignation to warrant a protest movement in the SoCal area. But that’s another thing that economic squeezes tends to kill — enough free time to do much else but work.

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