Rents and resale prices only rise faster than incomes due to supply shortages during periods when job growth is strong.

It costs too much to live in California because the chronic shortages of housing supply inflates California house prices and rents. Starting in the 1970s with regulations like CEQA, California began to restrict growth. This inhibited builders and developers from bringing new product to market to meet demand in many areas.

When any commodity is in short supply, prices tend to rise; houses are no exception. There are not enough houses to go around, so people substitute down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market.

This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income. There is hope that Governor Brown’s housing affordability proposal could actually succeed, but any meaningful relief will be years away. In the meantime…

Diana Olick, Thursday, 9 Jun 2016 | 11:42 AM ET

Mortgage rates may be hovering near record lows, but it’s not enough to counter the sky-high, and still rising, prices in many of the nation’s largest housing markets. Big-city rents have been soaring, but now the outlying areas where residents flee to find affordability are seeing even bigger rent gains, too. For homebuyers, the picture is not much better. A very tight supply of homes for sale is pushing home values higher and pricing potential buyers out, both first-time and move-up buyers. …

It isn’t just California development restrictions keeping supply off the market. The lingering effects of the housing bubble with lenders’ cloud inventory policies trapped millions of borrowers nationwide in homes they purchased a decade or more ago.

“Saving for a down payment can be difficult for prospective first-time homebuyers given the absence of substantial wage growth in recent years combined with the burden of student loan debt many are struggling under,” said Daren Blomquist, senior vice president at RealtyTrac. “Even just a 3 percent down payment requires 14 percent of annual wages on average across the 513 counties we analyzed, and in 67 counties a 3 percent down payment requires more than one-fifth of annual wages.”

(See: Potential homebuyers can’t save for down payments with high rents)

While down payment assistance can help some, the real relief will only come from more homes for sale, and so far the market isn’t seeing them. Homebuilders are still producing at well-below historical norms, never mind the years of pent-up demand from buyers. Adding to the crunch is a large share of buyers who are still underwater on their mortgages.

(See: Must-sell shadow inventory has morphed into can’t-sell cloud inventory)

Nevada has the highest percentage of so-called underwater homes at 17.5 percent. Florida and Illinois follow. Texas has the highest percentage of homes with positive equity at 98 percent; that is likely because Texas’ housing market did not suffer nearly as badly as the rest of the nation during the housing crash, due to stricter mortgage rules in the state.

To better understand why Texas fared so well, I suggest you read Desire for mortgage equity withdrawal inflated the housing bubble. Texas limited mortgage equity withdrawal, so in the absence of free money, Texans didn’t participate in the housing mania.

So how bad is the problem in Orange and Los Angeles Counties?

The rating for Los Angeles County has been falling all year, mostly because both rent and resale prices are rising at too high a rate. This has a high potential for a correction.

Both rental rates and resale home prices are rising too quickly.

The cost of home ownership has nearly doubled in only four years.

Since both house prices and rents are rising together, it’s unlikely house prices will crash unless rents fall as well — which could easily happen if we tip into recession again.

It’s still a safe time to buy, but caution is warranted.

Orange County is fairing better than Los Angeles County, but both rent growth and resale home price appreciation exceed income growth, just not as badly.

Rent growth exceeds home price appreciation, so ownership is still favorable.

The cost of ownership is up significantly in OC, but not as radically as Los Angeles. It can be argued that LA experienced a deeper decline and was more undervalued than OC.

Since the cost of ownership relative to rent is normal, the rating is still high.

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