Orange County is one of the highest-priced housing markets in the U.S. The average home price is a record $657,500, and the average rent is $1,946 per month. Here is a look at why housing costs so much in the area.
The economy may be growing, but many Orange County residents are feeling the squeeze of ever-increasing housing costs. The average home price is $657,500, breaking the record set in 2007 before the Great Recession. Rents are increasing nearly 5% each year and nearing $2,000 per month for an average home or apartment rental.
While Orange County may have the reputation for being an affluent county, statistics show that many people are struggling with the high costs. In 2015, only 22% of county residents could afford a median-price single-family home in the area. For the state as a whole, only 34% could pay for a home. Long-time county residents are often in a position in which they could not afford their own homes if they were in the market today.
Drivers of Orange County’s High Prices
So why is it so expensive here? True, Orange County has a low unemployment rate (only 3.6% in May 2016) and residents enjoy beaches, theme parks and world-class shopping destinations. Still, does that mean we deserve to pay a small fortune to live here?
A number of factors play into the high prices. Orange County has largely been developed, which limits the number of new construction projects. At the same time, many people want to live in the area because of jobs and other factors, so there is a strong demand with limited supply.
“California has very restrictive supply constraints, which limit the availability of for-rent and for-sale housing,” says Michael LaCour-Little, director of Mihaylo’s Real Estate and Land Use Institute (RELUI).
Other possible factors often discussed by local residents include the size of the real estate industry in the region, with many homeowners and landlords viewing their properties as investments, and international investors becoming a major force in the U.S. housing market, buying $102.6 billion in residential property nationwide over the past year. Many pay cash or make large down payments that limit the ability of traditional buyers to enter the market.
Why Can’t Millennials Afford to Live Here?
Millennials have it particularly hard. With fewer years of work experience, it can be especially difficult for younger people to afford housing. Orange County ranks as the fifth least-affordable housing market for millennials in the U.S., with the average mortgage comprising 57.4% of the average young homebuyer’s gross income, which of course is an unrealistic figure. The picture is a bit better in the Inland Empire, where the average mortgage would consume only 36.1% of the average young buyer’s income.
But even prices in the Inland Empire are rising fast: The median home price is $282,539 and rents are rising too. The glut of foreclosures below $100,000 that drew busloads of investors to inland cities at the beginning of the decade is long gone.
This means that millennials are having to improvise when it comes to housing and the stigma of not having your own place is fading fast.
“Millennials are living at home longer and there are many informal housing arrangements, such as garages being converted to studio apartments, particularly in desirable areas,” says LaCour-Little.
A National Look
While Southern California might be a leader in high home prices, the nation as a whole is also witnessing rising costs. Prices have jumped 17% over the past three years, though with great variation between individual markets. For example, in Las Vegas, average prices remain 40% below their pre-recession peak, but in the San Francisco Bay Area, housing costs are at record levels.
A Look to the Future
With home prices matching their highest levels, it is tempting to expect another housing market crash. However, the situation has changed markedly in the past decade, because the creative financing that led to the economic meltdown isn’t prevalent today. Exceptionally low interest rates have permitted buyers to purchase homes they couldn’t otherwise afford.
Still, the lack of affordability for millennials will likely be a big deal in the long run, since today’s young people will soon comprise the majority of buyers and renters. This could eventually be a drag, not only on millennials’ personal finances, but also on the real estate market itself.
LaCour-Little believes increasing the supply of housing is the only solution to ever-rising prices. “There are efforts to build new rental housing,” he says. “The stock market suggests that companies specializing in apartments won’t do as well as in the past,” which could be a further obstacle to having more rental properties available in the Orange County area.
He says many economists believe that the nation’s homeownership rate may fall to as low as 55% in coming years, largely due to affordability issues, which is a significant decrease from the current 63.5% of Americans who are homeowners.
Mihaylo’s Real Estate Program
Mihaylo College offers undergraduate and graduate programs in real estate. The Real Estate and Land Use Institute (RELUI) also hosts training and networking opportunities for current and aspiring professionals in the industry. Students interested in real estate might also want to join the Real Estate Association, a club hosting regular events, including speakers and even market research opportunities.