New supply in Irvine blunts rent increases while the rest of Orange County experiences rapid rent growth.

It’s no secret that we lack sufficient housing to meet demand in Orange County. The lack of supply causes people to put ever-larger percentages of their income toward housing, bidding up rent. At the low end of the housing ladder, it forces families to double and triple up in poor quality housing. Many people leave the area for lack of housing.

While there are signs that politicians may finally move to do something about the problem (See: Governor Brown’s housing affordability proposal could actually succeed), any real relief will be years and years away. In the meantime, rents keep going up faster than incomes, and everyone suffers as a result.

By MARILYN KALFUS, June 11, 2016

Housing affordability in Orange County continues to pinch renters, a new report by real estate website Trulia says. The analysis shows a decline in affordability of more than 10 percentage points. Slightly more than half – 53.6 percent – of houses and apartments for rent in the county were considered affordable as of April, down from 64.3 percent in April 2015. Orange County placed No. 2 for its shrinking affordability in the 25 rental markets around the nation that Trulia analyzed.

With rents rising by more than 6% per year, incomes simply don’t keep up. Since we have more job growth and population growth than housing growth, fewer housing units are available to the many people demanding them. This causes rents to rise as people substitute downward in quality to obtain housing. This diminishes everyone’s standard of living because they either must accept lower quality housing or spend more of their income in order to keep what they already have.

The Oakland-Hayward-Berkeley market took the No. 1 spot, with the steepest affordability plunge, at nearly 20 percentage points. There, 46.2 percent of rentals were affordable, compared to 66 percent last April. In Los Angeles, just 32.1 percent of rentals were affordable, a slight drop from 33.8 percent last year.Riverside-San Bernardino was among the most affordable areas, at 91.7 percent. That changed just a smidge from 92.6 in April 2015. Rents have been going up in Southern California for the past six years, fueled by low vacancy and job growth, as well as a 15 percent increase in rental households over a decade ending in 2014.

Notice that the reasons given for increasing rents were not related to rising incomes.

Despite the near-peak pricing in Irvine, since mortgage rates are so low, the cost of ownership relative to rent is very favorable to owning. My monthly reports bumped Irvine up from an 8 to a 9 over the last three months.

Like most other communities across Orange County, Irvine hit the ceiling of affordability three years ago. Since then the rate of increase in both resale prices and rents moderated, mostly because Irvine is one of the few communities in Orange County where new supply of both new homes and new apartments prevents prices from rising too rapidly. That’s how housing markets are supposed to work.

The high prices are affordable as long as mortgage rates remain near record lows. Rising mortgage rates, should that happen, will cause affordability in Irvine and all of Coastal California to crumble.

Dodd-Frank effectively banned unstable mortgage affordability products, and it mandated that lenders must verify that borrowers can actually repay the loan. Without these toxic mortgages, the cost of ownership can’t rise above the limitations of income, and since income and rent are closely linked, rental rates become a close comparable to the cost of ownership. These limitations are also why the housing market will face stiff headwinds if mortgage rates were to rise.

The most overvalued Irvine Villages are also ones experiencing the most resistance to continuing price increases — as they should. Turtle Rock and Turtle Ridge are too expensive relative to rental parity, and Oak Creek and Westpark are too elevated relative to historic norms.

Irvine house prices are notoriously volatile, but over the last three years, the market has enjoyed a brief period of calm with price growth at a sustainable rate — assuming mortgage rates remain low.

What sets Irvine apart from other Orange County cities is the influx of new supply to meet increasing demand. The Irvine Company built a tremendous number of apartments over the last several years, and other developers also built there. This new construction absorbed the excess demand while allowing rents to still rise slowly. In the apartment sector, much of the increase in rental rates is due to many new high-end apartments raising the average rather than any major increase in rents at individual complexes.

As long as the job market remains strong and supply is added to meet the new demand, expect rents to continue rising at a measured pace.

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