Contributed by: Jeff Meyers, president of Meyers Research and creator of market insight mobile app, “Zonda”
During the past several months we have seen a growing housing shortage in California, which is further evidenced by the real-time data from our market insight iPad app, Zonda.
In the West Coast there continues to be a supply shortage. In California, permits have edged higher but remain 75% below peak levels seen in 1986. This supply constraint has resulted in home prices in the state increasing 12.5% over the last year, well above the annual rate of price appreciation of 5.2% over the last 25 years. Price increases are resulting in lower affordability levels and today only 34.9% of households can afford the median price home. Statewide demand is still outpacing supply. Jobs may have tapered but the statewide growth is 70% above historical averages. Despite slightly slower job growth, permit activity has not kept pace with job growth. The E/P ratio in California is currently sitting at record-high levels at 5.3, indicating demand is outstripping permits issued.
All local markets have their own dynamics. Although California as a whole may be facing a housing shortage, conditions can vary drastically from county to county. Areas like San Mateo County in California tout an E/P ratio of 7.4 because of a strong job market and limited development activity while San Bernardino County’s E/P ratio is only 1.5 because of high unemployment and a housing market that is still struggling to recover.
Strong E/P Ratios Signal Rising Prices. In Los Angeles County, the E/P Ratio stands at a ratio of 5.3 in 2014. In February, detached new home prices are up staggering 30% from a year ago to a new all-time high of $585,000. In Orange County, the E/P ratio is slightly lower at 3.7 and home prices are up 8.2% to $860,000.
E/P ratios can signal turning points in the market as economic conditions improve. Strong E/P ratios (well above a balanced ratio of 1.0) can point to markets ripe for new housing supply as well as hint to where areas can see rapid price appreciation.