CommentsCORRUPTION WATCH-What is the impact on the overall LA economy when Angelenos have to pay thousands extra per month for mortgages or rent?
Money spent on mortgage and rent cannot be spent on anything else. Those payments are gone from the local economy. In other words, disposable income significantly drops. Rent and mortgages on homes and condos quickly work their way up to Wall Street so all that money is lost to the local economy.
If the rent is paid to an individual human being, then he or she may spend a lot of the rent for non-rent items such as movies or clothes. If, however, the landlord is paying an exorbitant mortgage, he or she is a conduit for that rent money to move away from Los Angeles to Wall Street. Once the rent money gets there, it is absorbed into the financial markets and shared by only a few thousand on Wall Street as opposed to being spent locally to the benefit of the millions of Angelenos.
Likewise, excessively high mortgages forever remove disposable income from the Los Angeles economy. This loss of spendable cash drags down LA business, lowering wages and employment. In addition, it deters new businesses from opening in LA and thwarts the expansion of current businesses.
High Rents/Mortgage Kill the Multiplier Effect
As people know, when a dollar is spent on consumer goods, it benefits the local economy as the store owner makes more sales. As he makes more sales, he hires more people and buys more product which financially benefits his suppliers who in turn hire more people. This is the Multiplier Effect as every dollar spent at a local business results in more sales and that results in more spending by whoever receives the money. In fancier economic terms, the average citizen’s Marginal Propensity to Consume, i.e. tendency to spend one’s income, is high, while Wall Street’s Marginal Propensity to Consume in Los Angeles is zero.
Whenever people read about the increase in housing prices, they should realize that harm is being done not only to people who have trouble finding housing but to everyone else in the entire City who is harmed by the drain on the economy. Exorbitant housing costs is a prime way for the wealth of the average citizen to be transferred to the Wall Street One Percenters.
In areas like Texas where mortgages and rents are half to a third lower than in LA but where wages are as high or higher than in LA, consumers have several thousands more dollars per family to spend. In other words, these other areas are a good place to open a new business, while LA is a bad place to do that.
The Wealth Differential between LA and Elsewhere
The families that are impacted the most by paying exorbitant rents and mortgages are the younger families who have recently entered the home market. If a family leaves LA and moves to Texas, it can expect lower living costs and equal or higher income. Thus, it makes more sense to start a business in Texas than here. The red tape at LA City Hall is not the determining factor. If one could cut LA bureaucracy and LA taxes to zero, we would still be a poor place to start a business.
Here’s a comparison of home costs to annual income for selected areas:
City House Cost / Income Ratio
Los Angeles $600,000 /$55,909 = 10.7
Austin $410,000 /55,218 = 7.4
Charleston, SC $271,000 /52,971 = 5.2
Denver $308,000 /$71,146 = 4.3
Nashville $226,000 /$57,985 = 3.9
Dallas $405,000 /$61,644 = 6.6
Los Angeles is becoming a double whammy for the young family. Average income in other parts of the country can be significantly higher than in Los Angeles, while their living costs are significantly lower.
Weather and Inertia – LA’s Two Friends
Other than the weather, the major factor which retains people in Los Angeles is inertia. If you bought your home in the hills 30 years ago and your kids are through college, why relocate? So what if LA’s traffic congestion has become the worse in the world? Retirees don’t have to fight as much rush hour congestion.
Inertia does not apply to the young couple who is just starting a family. If they understand anything about economics, they soon realize that the deck is stacked against them in Los Angeles. Whether they rent or somehow manage to buy a home, a huge portion of their disposable income is going to Wall Street rather than benefitting their family.
Corruptionism Destroys
At the heart of LA’s runaway housing prices is the corruption at City Hall where every councilmember is forced to vote Yes for every single densification project that another councilmember places on the City Council agenda. This means any developer can up-zone any piece of property with unanimous city council approval just by being nice to the mayor and the councilmember where he wants to up-zone.
Thus, all residential property is priced according to its much higher Development Value and not at its lower Living Space Value. While that price differential has real value for a developer who can turn a profit, it is a waste of a family’s assets. They cannot make money just by living in a home. Even escalating equity is illusory wealth which will be wiped out in the next crash. Sorry, Virginia, there is no Santa Claus, but real estate crashes are real.
The Folly of Densification
Densification temporarily increases the price of land in a chosen area. As the Post WW II experiences with housing projects in St. Louis, e.g. Pruit-Igo, Chicago, e.g. Cabrini-Green, and the densification of the South Bronx showed, forced densification soon results in slums. After Urban Renewal had decimated the South Bronx, for example, it was beset by fires. Some demographers pointed out that the mysterious Bronx fires seemed to hit just in advance of insurance companies refusing to renew fire insurance policies on the deteriorating housing. One way or another, the laws of economics prevail. Since the city cannot force people to live in certain places, they move away from high cost low income situations. Building owners get their cash out of their buildings one way or another.
While the City is presently shoveling tax dollars into the pockets of the developers of mixed-use projects, City Hall does not care about the longer term impact on LA’s economy. Each developer is out to get his bundle of tax subsidies from City Hall with no concern about what will happen five to ten years from now, when no repairs are being made, slums emerge and/or landlords go bankrupt. The South Bronx was created by the same forces that are at play in LA.
Subsidizing crammed in apartments in Hollywood and DTLA will never satisfy the Family Millennials’ demand for detached homes with yards and space for a pool. Their increasing demand for homes of their own is being satisfied. The draw back for LA is that they are finding satisfaction in Dallas, Denver and Dixie. The City Hall corruption which single mindedly focuses on densification in order to make a few land owners vastly wealthy is undermining the rest of Los Angeles’ economy. Those who know the history of such economic folly also see LA’s future.
(Richard Lee Abrams is a Los Angeles attorney and a CityWatch contributor. He can be reached at: [email protected]. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.
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