Cooling down California’s overheated housing market

Home prices are going through the roof, driving them out of reach for young working families. It’s not hard to see why.  Private equity funds have poured into real estate. According to Redfin, in the second quarter of 2021, one of six home purchases nationwide were made by business investors, who dumped a stunning $49 billion into hot markets. According to the Biden administration, “large investor purchases of single-family homes and conversion into rental properties speeds the transition of neighborhoods from homeownership to rental and drives up home prices for lower cost homes.” Wall Street firms are betting on detached homes becoming rental cash cows.

Locally, house flippers are also swooping in to buy homes, extracting a quick profit with superficial improvements.  It’s a booming business — and we all pay the price.  This lucrative practice is making Los Angeles County less inclusive and less affordable. In my neighborhood, a two-bedroom, one-bath 725-square-foot modest home is listed for $798,000.  Just four months ago, it sold for $625,000.  That’s a whopping 28% mark up for replacing the appliances and doing some quick tile, landscaping and paint work. More and more houses on the market betray flipper trademarks: stainless steel in the kitchen, bland décor on the walls and new patio furniture on the back deck to suggest a carefree lifestyle.

Whether it’s corporate giants or savvy entrepreneurs, what’s wrong with making a killing in real estate? Isn’t that the American way? Yes, but buying low and selling high is destroying the American Dream for families who can’t match the inflated prices. At best, it puts money into speculators’ pockets now, while families who put their life savings into their first home will pay higher mortgages and property taxes for the next 30 years. At worst, it forecloses the security of owning your own home for families who instead will live in constant fear of rent hikes or evictions.

By definition, hot markets are unsustainable. Stein’s Law of Economics states: “Things that can’t go on forever, don’t.” It’s only a matter of time, and a question of who gets hurt. But what if there were a way now both to discourage artificial inflation and generate funds for housing low-income families?

The issue came up during a discussion last month by the Pasadena Planning Commission on the city’s draft Housing Element.  Local Housing Elements must be revised every eight years. Commissioner Jason Lyon noted that the proposed plan mentioned “flipping and speculative investment” — but didn’t propose new policies to deal with the impact on affordability.  “We should look at a flipping surcharge,” Lyon suggested. “If you turn a house around in 24 months, there should be a civic surcharge. That’s an easy thing and a fair thing to do — and it could be hefty source of funds for affordable housing.”

It’s one of many innovative alternatives for addressing a growing crisis. Much has been made of stories of Californians fleeing the state, often attributed to rising homelessness, crime and a difficult business climate. Documenting this exodus is hard — after all, the new Census showed that California added nearly 2.3 million people over the last decade. But it produced only 875,000 new housing units, the smallest increase since the Great Depression, when California’s population was less than a fifth the size it is today. No wonder people are leaving for more affordable regions.

In a state where many complain taxes are too high, a tax on speculative house flipping may not fly. But are there any better ways to curb an overheated market — and fund needed housing for low-income workers?

 Rick Cole is the former mayor of Pasadena and former city manager of Azusa, Ventura and Santa Monica. Write him at venturacole@yahoo.com.