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New USC Forecast: Southern California Rents To Remain Unaffordable

Despite a growing economy and decreasing unemployment in Southern California, housing is expected to remain unaffordable for median- and low-income earners. That’s the verdict of the 2018 University of Southern California (USC) Casden Real Estate Economics Forecast.

Produced in partnership with Beacon Economics, an independent research and consulting firm, the Casden forecast is an annual analysis of trends in Southern California’s multi-family residential real estate market. Researchers examined five regions of Southern California – the counties of Los Angeles, Ventura, Orange and San Diego, plus the Inland Empire – to ascertain the state of housing affordability. In the context of this study, housing affordability is defined as rent that is no more than 30% of a renter’s income.

In the forecast’s own terms, the state of housing affordability in Southern California is “depressing.”

The Future Of Housing Affordability By County

By 2020, Casden forecasts that average monthly rents will increase from their 2018 levels by $52 in Orange County, $78 in the Inland Empire, $91 in Los Angeles County, $107 in Ventura County and $209 in San Diego County.

Los Angeles County, Casden reported, is the only Southern California region with more renters than homeowners, with 54.3% of residents renting in 2017. This year, the average rent in the county reached a record high of $2,267 per month, a 1.1% increase from 2017. That average rent is forecast to increase to $2,358 per month by 2020.

Homeownership rates in Orange County have historically been higher than in nearby counties, Casden reported. The pace of construction there, however, is slowing. “With population growth and income gains continuing, the market will continue to be tight and rents will trend upward,” the report stated. Average rents are set to increase from $2,035 per month in 2018 to $2,087 per month in 2020.

Average monthly rent and rent growth in the Inland Empire are among the lowest of all Southern California counties, the report noted. That trend, combined with lack of affordability in the counties of Orange and Los Angeles, is expected to attract both buyers and renters to Riverside and San Bernardino. Average monthly rents are expected to climb from $1,457 in 2018 to $1,535 by 2020.

The smallest of all Southern California counties, Casden notes that Ventura’s labor force has declined each year since 2012. Average monthly rents are expected to rise from $1,983 (2018) to $2,090 (2020).

“San Diego County can expect continuous economic and population growth over the foreseeable future,” and its economy’s leading sectors will continue to draw in a variety of workers, the Casden report stated. The region’s attractiveness to older members of the population will also put pressure on both renter and owner-occupied markets. Average monthly rents are expected to increase from $1,978 in 2018 to $2,187 in 2020.

The Current State Of Housing Affordability 

This year, the forecast authors used a new assessment model to determine housing affordability in Southern California.

Instead of a direct analysis of what Southern Californians are earning versus what they are paying in rent, the study categorized every unit by its monthly rental rate and every renter by monthly income. In other words, the rent paid by the 25th percentile of income earners was measured against the rental unit in the 25th cost percentile of available housing. The same was done with median incomes and higher incomes.

Casden found that income earners in the 25th, median and 75th income percentiles could not afford rent, even when they were matched up to housing in corresponding cost percentiles.

The study also looked beyond county borders to include the entire Southern California region as a relevant market area. “Basically, you’re choosing your house as if your location doesn’t matter,” Professor Richard K. Green, director of the USC Lusk Center and co-author of the study, told the Business Journal.

For example, someone working in San Diego, for the purpose of the study, would consider Ventura County (nearly 200 miles away) a viable housing market due to the lower cost of living. It is an “absurd scenario,” Green said, but it illustrates a critical point. “Under those circumstances, the best possible circumstances, do you have an affordability problem? And the answer is yes, you still do.”

For Californians in the 25th percentile of income, or the lowest quarter of income earners in the state, the study found no region in Southern California where rent was affordable. This was the case for all age groups, from renters under the age of 25 to those older than 65. Every renter in the 25th percentile paid well above 40% of their income in rent. Those in Los Angeles County were the worst off, paying nearly 60%.

For median income earners, the forecast authors noted that “things hardly get better.” Median income households paid more than 40% of their income on rent for median-priced rental units. This was true across educational attainment levels and occupations. The only exceptions were those employed in the fields of science, computer mathematics and architectural engineering.

In each county, wages have not increased to match rising rents, Green said. “It’s actually kind of maddening,” he continued. “There’s an easy answer to the labor shortage, which is [to] pay people more money. The market has been astonishingly slow to adjust to that.”

Another factor influencing housing affordability is the imbalance of high-skilled labor by region, Green said. He delineated Orange County, San Diego County and the portion of Los Angeles “west of the 605,” as areas with concentrations of high-skilled laborers, which he defined as workers with technical expertise or college educations. Historically, when high-skilled workers move nearer to other high-skilled workers, he explained, wages are driven up. For low-skilled workers, wages also rise, but not as much.

“At the same time, everybody’s competing in the same housing market,” Green said. As a result, the prices of homes rise for everyone despite the impact on wages not being uniform, he explained.

For those at the top 20%, incomes tend to rise more than the cost of housing, Green said. “But for low-skilled people, the increase in housing cost is not enough to keep up with the increased wages.”

One interesting finding, Green said, was that economic growth in Southern California appears to be shifting east. “You’ve seen enormous gains in employment in Riverside County,” he said. “If you look at Riverside County [and] San Bernardino County, compared to L.A. County, [there] is much stronger job growth in those places.”

The study noted that the Inland Empire’s economy has been the fastest growing in Southern California for several years. Total nonfarm jobs grew by 3.4% year-over-year in July 2018, more than California’s overall growth rate of 2% during the same period.

Jobs, incomes and population have all shown steady increases in the Inland Empire, and that has driven new construction. More than 20% of the region’s housing stock was built after 2000, the study reported, making it the newest housing stock in Southern California. “We’re seeing surprisingly strong rental pressures in the Inland Empire right now,” Green said. “Much more so than in Orange and Los Angeles Counties.”

For many years, Green said, the Empire has functioned as a “bedroom community” for people who worked in L.A. and Orange Counties. Its comparatively lower rents were worth the long commutes. As the economy has grown, more residents are staying in the area to work, Green explained.

Yet, despite having the lowest rents in Southern California, the share of rent-burdened households in the Inland Empire was 58.8% in 2017. The study notes this the highest rent burden across all Southern California metro areas.

California Needs To Build Its Way Out Of Its Housing Crisis

There are several factors that contribute to California’s current housing affordability crisis, Green said, but one way to improve it is by building more housing. While California is the most populous state in the country, he added, it isn’t utilizing its space to the fullest. Unfortunately, he added, cities like Los Angeles have “broken zoning.”

By his estimation, L.A. is now zoned to hold about 4.3 million people. “L.A. [currently] has about four million people,” he said. “So we’ve basically zoned our way to running out of land. This isn’t a natural phenomenon.” By global standards, Green continued, Los Angeles has a metropolitan area on par with Sao Paulo or Mexico City, and those cities hold many more people than L.A. is currently zoned for.

“We need to build a lot of houses,” Green said. That is one major factor that could ease rent burdens across Southern California, he believes – more so than rent stabilization.

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