California Companies Look East for Affordable Housing

Joseph Vranich
Principal of Spectrum Location Solutions helps companies plan and select ideal sites for new facilities across the U.S. and internationally.

The other day I received a call from a small business owner in California who wants to relocate his business. He named five states that he’d like me to review with two stipulations: “I’ve got to know how friendly their business climates are, and I want you to look at the cost of housing.”

The next thing he said I’ve heard time and again: “I pay my employees well but many of them can’t afford to buy homes in Los Angeles. I want to know where they can.”

Major corporations in California also are concerned about housing costs and some have publicly admitted they were a factor in their relocation decision.

I’ll share the information source that I find indispensable on the topic, an updated version that was just released, which is the 15th Annual Demographia International Housing Affordability Survey. It reviews factors in eight countries to identify reasonably priced housing for middle-income people.

Congratulations Pittsburgh & Rochester

The report finds that the ten most affordable housing markets in the million-plus population category – all of which happen to be in the United States – are Pittsburgh and Rochester, which are tied for the top spot, followed by Oklahoma City in third place; then Buffalo, Cincinnati, Cleveland and St. Louis, all tied for fourth place; Indianapolis in eighth place; Detroit in ninth place; then Columbus, Grand Rapids and Louisville tied for tenth place. (Twelve metros constitute the top ten markets because of ties).

The five major housing markets with the poorest U.S. housing affordability are in California and Hawaii. San Jose is the least affordable, followed by Los Angeles, San Francisco, Honolulu and San Diego, in that order.

Other metro areas with poor rankings include Miami, Seattle, Riverside-San Bernardino, Sacramento, Denver, New York and Portland, Ore.

Speaking of Seattle, Microsoft, is putting up $500 million to help address the housing problem by funding construction for homes that will be affordable to the company’s non-tech workers, but also for teachers, firefighters and other middle- and low-income residents. Not many companies can afford to launch that type of program.

California’s Dismal Ranking

For my California clients, I rely on the Demographia’s findings to spotlight out-of-state places where middle-income employees can afford to buy homes.

Historically, markets that are heavily regulated have exhibited median house prices that are three times or more that of median household incomes, which brings us to some particulars about the California housing market.

Unaffordability in the region ranging from Oakland through Silicon Valley and San Jose is so severe that even fully employed people can only afford to live in campers and RVs on city streets – no apartments or homes for literally several thousand people.

Demographia’s survey finds that “California is home to the most serious housing affordability crisis in the United States. Prospects for improvement appear to be bleak. Already, the new urban fringe housing, which drives housing affordability, is prohibited or severely limited by state and local [regulatory] policy . . . . California’s housing affordability is unlikely to materially improve.”

I believe it, considering that California’s new Governor, Gavin Newsom, and the super-majority of Democrats that now rule the legislature, show no inclination to soften their super-regulatory predispositions.

“Median Multiple”

The credibility of Demographia’s survey findings is high considering that it’s the most comprehensive international housing affordability survey in the world.

The survey rates middle-income housing affordability using the “Median Multiple,” which is the median house price divided by the median household income. This is the measure I rely upon when I provide reports to clients that evaluate potential locations to place a facility.

Disclosure: I know one of the survey’s authors, Wendell Cox – someone I call my “demographic genius friend.” But for those who want to know who else shares my confidence in his work, consider that his housing affordability studies have been recommended by the World Bank and the United Nations and has been used by the Joint Center for Housing Studies at Harvard University.

Also, the Median Multiple and other price-to-income multiples are used to compare housing affordability between markets by the Organization for Economic Cooperation and Development, the International Monetary Fund, The Economist, and other organizations.

The eight countries reviewed in the report are: Australia, Canada, China (Hong Kong), Ireland, New Zealand, Singapore, United Kingdom and United States.

Costly Housing Drives Companies Away

Another new report, and it happens to be mine, addresses why businesses are leaving California in record numbers. Quality of life for employees is one of the motivating factors. Those who are skeptical haven’t paid attention to the fact that many employers do care about the welfare of their employees. But you don’t have to take my word for it.

For example, constrained housing is concerning to some of California’s largest corporations. Not long ago, a Facebook executive told investors that “Bay Area housing costs need to be addressed if tech firms, such as Facebook, want to remain in Silicon Valley.”

When Toyota moved from Torrance to the Dallas/Fort Worth area, Albert Niemi Jr., dean of the Cox School of Business at Southern Methodist University, said, “It was really about affordable housing. That’s what started the conversation. They had focus groups with their employees. Their people said, ‘We’re willing to move. We just want to live the American Dream.’” Toyota found that housing costs in Los Angeles County are three times per square foot the cost of a house in Dallas-Fort Worth.

The out-of-California report reflects how smaller companies, too, have such concerns.

Guido Baechler, CEO of Singulex Corp, an immunodiagnostics company based in Alameda, said one of the motivations for relocating a hundred jobs to Round Rock, Texas was affordable housing.

Then there is Lawrence Coburn, president of DoubleDutch, a software development company. When selecting Phoenix to expand, he said, “San Francisco is a terrible place for entry-level people” and cited “failing” housing conditions as one factor. DoubleDutch expects to hire hundreds in Phoenix in upcoming years.

Not just companies but individuals are leaving California now and it appears more will do so because of housing. A poll by UC Berkeley’s Institute of Governmental Studies found that about 56 percent of individuals surveyed said that they have considered moving out of state because of rising housing costs and of those about 25 percent specified that the would likely relocate to another state.

Forecast: More Businesses Will Leave California

My new report about the increasing number of companies leaving California addresses why California’s housing prices will continue to rise disproportionally to the rest of the nation. For renters, the state has the most expensive metropolitan counties. Incredibly, California holds seven of the top ten most costly counties in the nation for renters.

More about housing is in the report, Why Companies Leave California, along with the who, what, when, where and why companies are departing the state at an unprecedented rate. Look for more company, exits, too as the legislators introduce hundreds of new bills, virtually none of which will lessen the state’s harsh business climate. In fact, most legislation will make it worse with higher taxes and new regulations.

Joseph Vranich provides location advisory services whose motto is “Helping Businesses Grow in Great Locations.” His company is Spectrum Location Solutions LLC, but he also has been known as the Business Relocation Coach. If you found this posting useful, please forward it to a friend and subscribe to Joe’s blog here.

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