One of the more common e-mails that I get regards middle class families trying to purchase homes in California. To the point, many look at their budgets and sky high home prices and wonder what is going on. Over the last decade if we look at the data, it is clear that living what people would think is a “middle class” lifestyle in California is nearly impossible for those that are middle class. Yet I would also question what they include in this middle class lifestyle (i.e., expensive private schools, SUVs, etc). When we examine certain areas home prices are back to peak levels while household incomes remain stagnant. You have inland regions of California with more affordable housing yet employment sectors that are weak. Someone sent over a recent study examining migration patterns for the state and the results are very telling. Many Californians have left the state to pursue what they feel are better opportunities. Fewer people from other states are also coming over.

The California balance of migration

From the 1960s all the way through the early 1990s, California had a healthy dose of both domestic and foreign migration. In the 1990s the balance shifted heavily to foreign migration and has remained the case ever since:

Source: MIPR

You notice that with the tech boom, domestic migration also increased and many companies were bringing high level talent from abroad. Keep in mind this was pre 9/11 so immigration laws were much more open especially for talented people around the world many flocking into the tech sector. Today, the net population growth through migration is nearly zero. Californians on the other hand have been migrating out on a net basis:

The above examines three states where Californians were moving to. All have much lower home prices. An interesting point to examine is that both Nevada and Arizona with their busted housing markets are seeing very little migration from Californians today. However, Texas is still seeing a good amount of Californians but this number has moved lower. Many are taking their chances elsewhere and it is likely those aspiring to be in the middle class. If you want to own a home in a nice area at a minimum you need a household making $100,000 in California. Even though California has higher incomes, overall the state hasn’t seen dramatic wage growth over the decade:

Nationwide the typical family makes around $50,000 and in California it is roughly $54,000. Yet home prices are much more expensive in the state. I think what you are seeing is really the bifurcation of the state. That is, you have a high income subsection fighting for certain cities (with no new housing development) and a growing number of lower income Californians in areas that are seeing very challenging economic times.

How do you define middle class in California?

I think people have it somewhat twisted in terms of what they consider middle class. In the US, it is very clear. Look at the median household income. That is $50,000. If we go by math, the middle class household income in California is $54,000. But what does that buy you? Say you want a nice home in Pasadena or Irvine, and you are looking at $600,000. The typical US home will cost about $180,000 and it is doable on a $50,000 household income especially with current low rates. This issue isn’t only happening in California but areas like New York City:

So what you have is a group of people being strained by housing costs. This is why in Texas, even though incomes are lower adjusting for cost of living many more people “feel” like they are in the middle class. After all, everything is relative. Psychology studies highlight this phenomenon over and over. This is why that family that now moves into say an elite Pasadena area, will now want to compete with their neighbors by upgrading their car, home renovations, furniture, and also will want to send their kids to the best private schools (and eventually a very expensive university). All of that costs lots of additional money beyond the already expensive mortgage.

Home prices are on the rise for a variety reasons. You have flippers in key markets, foreign money flowing in, and low interest rates. Because of the lower supply of inventory and distressed properties being a smaller section of sales, the median price is up 23 percent in California:

But wait, didn’t you say household incomes are stagnant? Of course. Look at the above chart carefully. What you have is inventory dropping by an amazing 43 percent in the last year. Home sales are up by 10 percent. Interest rates are down to a record low 3.38 percent. All you need is a tiny amount to go in with an FHA insured loan. So those that think they are middle class are simply leveraging up with low interest rates and tiny down payment loans to make up for the lack in income growth. You have Wall Street investors buying up lower priced property inland but also in many higher priced areas. Foreign money is flowing in to select areas of Orange County and Los Angeles.

The total outcome

Over the last decade, the migration numbers are telling:

California has lost about 1.4 million domestic residents to other states. I think many people that make middle class incomes for the country have decided that it is too hard to make a middle class lifestyle in California and have moved out. These kinds of studies are interesting because they show what people are really doing. Many that do stay will either dive in with sizeable leverage or rent. It is a simple choice but what people are feeling is really a squeeze on middle class families in higher priced metro areas. I always point out the multiple lower priced counties but many people have their focus on certain areas. The truth is, those areas are no longer middle class for domestic Californians. They require a high income. And budget cuts are having an impact. And there is a cost when budgets run out of control. A lower price area is San Bernardino County and this is what the city attorney said recently:

“(PE) San Bernardino City Attorney Jim Penman told a town hall meeting that residents should lock their doors and load their guns because the bankrupt city’s police department would be unable to protect them.”

Will prices move higher? According to the CAR they are projecting higher prices into 2013:

Yet where will the household income growth come from? Of course this is coming from tight supply and outside money pushing prices even higher. Much of this is also contingent on mortgage rates staying low. So is the middle class dream an illusion for Californians? Not in all areas, that is for sure. California is a massive state and has many areas that do provide the opportunity for people to purchase reasonably priced real estate. Yet even those areas are being squeezed by investors pushing prices up. Many once perceived middle class areas are simply not middle class anymore. They are now upper-income areas (or suck in middle class families that are now living up to their eyeballs in debt).

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