The Southern California housing shortage has been making headlines for years. And despite the 2020 recession, fueled by the COVID-19 pandemic, there is still a high demand for housing throughout the Southland.
At Gatsby Investment, we keep a close eye on the ever-evolving Southern California real estate market to find the best possible investment opportunities, maximize returns on those investments, and keep our investors well informed every step of the way. Furthermore, we monitor housing need trends in real-time as part of our internal strategic planning and corporate initiatives.
And with the housing shortage in California, investors have an opportunity to enjoy substantial yields by investing in Southland real estate. In fact, accredited investors can enjoy all the financial benefits of real estate flips in this hot market without any of the hassles of personally buying or managing the project.
Let’s take a deep dive into the current state of the California housing crisis. We’ll explore the driving forces behind the Southern California housing shortage, examine the Los Angeles metro market in particular, and uncover the unique investment opportunities available to those who want to make the most of these extreme housing market conditions.
What causes a housing shortage?
A housing shortage is a classic case of supply and demand. There is too low a supply of housing inventory to meet the demand for homes in a given location.
But the two factors (supply and demand) can be driven by several more nuanced factors. For example, demand can be driven up by:
- Employment opportunities. Solid employment prospects bring people to the area, thereby increasing demand.
- Weather conditions. Comfortable year-round weather is often preferred to extreme heat and cold.
- Taxation. Lower local taxes (like property taxes and sales taxes) entice buyers to move into a specific area.
- Affordability. All other factors being equal, people prefer to live in areas affordable enough to offer a good quality of life on an average salary.
On the supply side, the following factors can decrease or stagnate supply:
- Geographic barriers. Uneven terrain and bodies of water limit where homes can be built, which naturally limits the supply of homes.
- Slow construction. If construction cannot keep pace with buyer demand, you’ll see a shortage.
- Low population density. The fewer homes-per-square-mile are built, the lower the supply.
- Unfavorable government regulations. Zoning regulations that limit housing, excessive permit processing times, and wait times for available inspectors can all impede the supply of new homes and limit housing inventory.
With all these factors in mind, let’s take a closer look at the Southern California area in particular to see what is driving this lack of supply.
Driving forces behind the Southern California housing shortage
Despite the headlines claiming that people are leaving California in droves for states like Texas, Arizona, and Florida, the population of California has exploded since the turn of the millennium and is expected to continue growing.
In 2000, the population of California was nearing 35 million residents. Just 20 years later, the state is sitting at around 40 million. And the California Department of Finance predicts that the population of California will continue to grow from today’s 40 million residents to nearly 45 million residents by 2050.
Today, nearly 18 million people reside in the greater Los Angeles combined statistical area (CSA) which includes Los Angeles, Ventura, Orange, San Bernardino, and Riverside counties. The population increases of the last several decades continue to drive the housing market.
But we all know that Southern California is anything but affordable. So why such a high demand for such an expensive area?
From January 2010 to January 2020, the California labor force grew from around 18.25 million to over 19.5 million. Then the COVID-19 pandemic shook employment markets worldwide, costing hundreds of thousands of Californians their jobs. The California labor force dropped to just 18.5 million during the first wave of the pandemic. The leisure and hospitality industry bore the brunt of the losses, with the labor force down over 30 percent in the summer of 2020 compared with the summer of 2019.
The good news is that the employment market is rebounding, and is back up over 19 million as of November 2020.
Consider the many large employers in Southern California, including:
- The school districts, universities, and colleges located throughout the Southland
- The health community, including Cedars-Sinai and Kaiser Permanente in LA
- The entertainment industry, including Sony and Twentieth Century Fox
- The large airports like LAX and the Ontario International Airport
- Big tech companies
- The military presence in San Diego County, including the 32nd St Naval Station, Edwards Airforce Base, and Camp Pendleton
It’s hard to beat Southern California weather, even with the different weather conditions across different counties. Where else in the world can you ski and surf in the same day?
Weather varies widely in the Southland, depending on whether you’re in the cooler coastal communities (like those in Orange, Los Angeles, San Diego, and Ventura Counties) hot high-desert of the Inland Empire (in Riverside and San Bernardino Counties). Coast or desert, temperatures rarely dip below freezing even in the dead of winter. Of course if you enjoy a little winter weather, the mountains have their own climates with local ranges like the San Gabriel Mountains and the Sierra Nevada Mountains regularly getting snow.
And the sunshine! Most cities in the Southland see the sun (whether fully sunny or partially sunny) around 270 days each year, with downtown LA enjoying 292 sunny days.
Property tax caps
Property taxes can be high in Southern California simply because property values are high. But the tax percentages are actually comfortably low. The effective property tax rate in California is just 0.7 percent For context, the US average is 1.05 percent, and Illinois is way up at 1.95 percent.
If you’re thinking, wait, my property taxes in Southern California are more like 1.25 percent, not .7 percent, you’re not wrong. Most Southland counties currently charge somewhere between 1.1 percent and 1.3 percent of the assessed value. But remember, Californians enjoy property tax caps thanks to 1978’s Prop 13. Prop 13 limits the assessed value increases to 2 percent per year. So most Californians are being taxed based on assessed values that are actually far lower than their current market values.
This property tax cap keeps California property taxes affordable even as property values skyrocket.
Nestled between mountain ranges and the ocean, Los Angeles is particularly susceptible to geographic barriers. Although the city has spilled north into the San Fernando Valley (more commonly called simply “The Valley”), as well as east into the San Gabriel Valley and Pomona Valley, there is simply no expansion available to the West as development has already extended fully to the coastline.
Slow construction has been an issue state-wide for years. So much so, that in October 2019, Governor Newsom signed a bill to stop California communities from delaying the construction of new housing developments.
After figurative explosions in residential construction in the 1980s and another burst of residential construction in the late 90s and early 2000s, new construction in California had barely been slowly creeping up since the end of the Great Recession.
The economic uncertainty brought about by the 2020 COVID-19 outbreak further slowed construction, resulting in a 7% drop in single-family projects and a 20% drop in multi-family starts.
Low population density
Despite the large population of Southern California and the high demand for housing, population density is extremely low compared to other major metro areas (although it is high compared to the US average, given the amount of rural space across the country).
Take a look at the population densities of six Southland counties:
- Los Angeles County: 2,503 people per square mile
- Orange County: 4,042 people per square mile
- San Diego County: 795 people per square mile
- Ventura County: 463 people per square mile
- Riverside County: 336 people per square mile
- San Bernardino County: 108 people per square mile
Now compare these figures to other US metros.
- New York County, New York: 72,494 people per square mile
- Suffolk County (Boston), Massachusetts: 13,636 people per square mile
- Washington D.C.: 11,302 people per square mile
- San Francisco County, California: 18,939 people per square mile
- Cook County (Chicago), Illinois: 5,511 people per square mile
In fact, even Texas has cities with a higher population density than Southern California. Dallas County boasts 2,977 people per square mile. Harris County (home to Houston) is at 2,691 people, and even Travis County (home to Austin) is at 1,240.
This low population density in Southern California is contributing to the lower supply levels.
Is there a housing shortage in Los Angeles?
Los Angeles has been heavily impacted by the same factors that drove the area-wide housing crisis. Increased demand because of employment opportunities, weather conditions, and reasonable property taxes plus limited supply due to geographic barriers, slow construction, and comparatively low population density have all conspired to result in a Los Angeles housing shortage.
In addition to these region-wide factors, LA has a unique driving factor contributing to the LA housing crisis: the Dream Factor.
People from all over the world flock to LA in the hopes of pursuing their dreams of becoming a star. Actors, musicians, dancers...performers of all types come to the heart of the entertainment industry. And while only a few make their dreams a reality, they all need housing while pursuing those dreams. Even those who don’t make it big often stay in LA so long that it becomes home, even as they decide to pursue other paths.
Hard data regarding the LA housing crisis
Despite sensationalized headlines proclaiming an exodus from Southern California to states like Arizona, Nevada, and Texas, hard data on the LA real estate market from the local Multiple Listing Service (MLS) indicates an even stronger seller’s market in 2020 than we saw in 2019, providing further evidence of a Los Angeles housing shortage.
For example, there were actually fewer homes listed for sale in Los Angeles County in 2020 than in 2019 (16,027 in October 2020 compared to 20,629 in October of 2019). And the volume of homes sold actually increased by about 10 percent year-over-year (4,292 sold in October 2019 compared to 4,740 sold in October 2020).
Additionally, LA homes are selling faster in 2020 than in 2019. In October 2019, the average listing sat on the market for 47 days. By October 2020, the average days-on-market figure was down to just 25 days.
Another important indicator of a real estate market is the “months’ supply of inventory,” which is a calculation of the amount of time it would take to sell all active listings on the market at the current pace if no new listings were added. The months’ supply of inventory has decreased from 4.8 months in October 2019 to just 3.4 months in October 2020, showing just how little inventory is available in LA County.
This lack of homes available for sale, along with the increased buyer demand, has predictably resulted in major gains in property values. In October 2019, the average median price was just $680,000, but by October 2020, this figure had jumped an impressive 20.6 percent to $820,000.
Signs of investment opportunities in the Southern California housing market
In 2021, we’re seeing several signs that the Southland housing market is full of investment opportunities.
The housing shortage itself
The housing shortage itself presents an investment opportunity. As we’ve seen, the high demand and low supply have resulted in increased home values across the Southland. Rapid growth in property values presents an excellent opportunity for the fix-and-flip investment model. Rather than counting on slow and steady appreciation, flippers can take advantage of quick gains without the headache of maintaining a property for years or even decades.
The age of existing inventory
According to the Southern California Association of Government (SCGA), around 60 percent of the 3.5 million housing units located in Los Angeles County are more than 50 years old. And 15 percent are more than 80 years old. These aging properties present an opportunity for fixing-and-flipping or even complete tear-downs and rebuilds.
And this applies to both single-family homes and multi-family units. The 3.5 million housing units are comprised of:
- 1.7 million single-family detached homes
- 1.2 million multi-family properties of five or more units
- And 300,000 multi-family properties of between two and four units
The increase in building permits issued
SCGA also reported substantial increases in Los Angeles County building permits in recent years, which means more development opportunities for investors in the area.
In 2018, LA County approved nearly 23,000 permits for residential units, 17,000 of which were for multi-family construction. This far exceeds the average 18,000 residential building permits approved annually, and it is fairly close to the peak issuance of the last 20 years (27,000 permits granted in 2004).
Legal and regulatory changes
As mentioned, the California state government is taking measures to improve housing levels.
In 2019, Governor Newsom signed 18 bills to boost housing production state-wide. These included several legal and regulatory changes that will allow for the development of more housing units. Here are a few of the most notable changes, as far as real estate investors are concerned:
- SB 330: to “accelerate housing production in California by streamlining permitting and approval processes, ensuring no net loss in zoning capacity and limiting fees after projects are approved.”
- AB 1485: to “build on existing environmental streamlining law and encourage moderate-income housing production.”
- SB 6: “requires the state to create a public inventory of local sites suitable for residential development, along with state surplus lands.”
- AB 68: “makes major changes to facilitate the development of more ADUs [accessory dwelling units, commonly called guest houses or in-law quarters] and address barriers to building. The bill reduces barriers to ADU approval and construction, which will increase production of these low-cost, energy-efficient units and add to California’s affordable housing supply.”
Furthermore, incremental policy changes have effectively abolished single-family zoning in California, priming residential areas for the development of multi-family accommodations.
How investors can make the most of the Southern California housing shortage
With property values rising so quickly, fix-and-flips are a solid way to make a profit comparatively quickly and easily. But many investors simply don’t have the time, experience, skill, knowledge, or connections to ensure a successful flip. And with the prohibitively high upfront expense of purchasing a property and financing a complete rehab, many investors are missing out on the exceptional real estate investment opportunities currently available.
That’s why you need a real estate investment company. Speaking more specifically, you need a real estate company that specializes in crowdfunding fix-and-flip projects. The right real estate investment company can pool money from multiple investors, purchase prime Southland real estate, manage the rehab with a professional design team (whether it's a comparatively simple renovation project or a complete tear-down), and handle the sale of the property.
All you have to do is invest from the comfort of your home, and collect your share of the profits when the renovated property sells. That’s what happens when you invest with Gatsby Investment.
Why investors should choose Gatsby Investment
Gatsby Investment is an innovative real estate investment company with a proven track record of successful real estate projects in Southern California. We specialize in:
- Home flips (taking advantage of the aging inventory and demand for single-family homes under $1 million)
- Multi-family developments (taking advantage of the increased zoning for multi-family and the overall need for the additional housing provided by multi-family buildings)
- Luxury homes (building luxury homes to meet the demand for homes up to $15 million in prestigious neighborhoods like Bel Air and the Hollywood Hills)
With Gatsby Investment, you enjoy:
- Competitive returns
- The flexibility to choose from short-term or long-term investments
- Investment opportunities with minimum investments as low as $15,000
- Portfolio diversity since your investment funds can be distributed among multiple projects
- The stable legal structure of a Delaware Trust
- A secure online system that allows you to monitor project progress online
- A team of real estate experts who handle every aspect of your real estate deal
- Transparency in financial data
But it’s not all about the investors. In addition to serving our investors, Gatsby Investment is helping to ease the California housing crisis.
How the Gatsby investment model helps with the California housing crisis
Gatsby Investment isn’t interested in exploiting the crisis. Rather, we want to be a part of the solution by providing housing to meet the current demand. Here’s how the Gatsby investment model is helping to ease the housing shortage:
Increasing Needed Inventory
As a leading independent builder in the region, Gatsby is developing new housing that meets the growing demand. In fact, we monitor population trends to make sure we’re meeting the needs of the population. For example, if we see home occupancy increasing over the course of a few years from an average of two people to four or more, we will focus on building more single-family properties for families rather than building multi-family properties, which primarily accommodate individuals or couples.
The Gatsby design team specializes in revitalizing homes while maintaining the unique charm of each neighborhood. Interestingly, this diligent approach to development often leads to additional revitalization projects in the immediate area of our projects, effectively revitalizing entire neighborhoods.
When you’re ready to make an impact on the housing shortage in Southern California, while also enjoying high potential returns on your investment, invest with Gatsby.
How to start investing with Gatsby Investment
Investing in Southern California housing couldn’t be easier! You can view investment opportunities on the Gatsby Investment website even without an account. Once you're ready to invest, simply create an account, get verified as an accredited investor, and choose your investment projects. Now is the time to invest in Southern California real estate. Sign-up with Gatsby Investment today!