“What will happen in California when home prices are out of reach from the growing pool of low income workers and everyone has a new car on low interest financing?”
The true and accurate, though seemingly sarcastic answer is, they move to Lancaster, default on their mortgage and go bankrupt. The fact is, to be a low income wage earner in Southern California, (and that means really under $40,000) you either pay rent and share a home with a spouse or a roommate, or you move East.
However, to answer your question fairly, one must realize that northern California has an economy that is primarily driven by high tech, finance and transport. Southern California, (almost an entirely different state in some ways) has been driven by the Internet boom/high tech, entertainment and transport.
The northern California economy is subject to a much greater boom/bust cycle, due to the buying cycle of industry when it comes to their need for durable goods such as computers and software. The finance sector is subject to, but not determined by the high tech, and transport is actually based on importation rates of the country as a whole for their manufacturing needs. So the northern economy is a bit more indicative of the nature of the country as a whole, acting more like the crest of the wave.
The southern California economy on the other hand is a freaking nightmare to predict or follow. It’s because we have so many stimuli that are not quantifiable like if a studio is in production on many projects that produces many middle class jobs, which fuels the economy around here. On the other hand, a strike by the actors, (a notoriously impoverished class in general) will lead to a drop in middle class jobs, but make finding a job as a waiter/temp office worker or sales job, incredibly difficult. When the Internet bubble burst, web designers who were making $80,000 to $120,000 a year, suddenly found their skills were worth between $20 to $30 an hour, (which roughly translates into $40,000 to $60,000 a year).
You would think that such a drop in “rich folks” would have stopped the real estate juggernaut, but it didn’t. Thanks to the low interest rates, many people were/are living on their equity lines, and credit cards. Which might be why southern California has been the leading producers of Chapter 7 bankruptcies in the recent past.
But what happens when the national economy goes south? The studios start to churn out more and larger pictures, because people want to escape their reality and forget their troubles. Which becomes the next great driving force in our economy. Thus in southern California, we tend to have a strong counterbalance to the recession troubles that occur in the rest of the country. There’s a reason why you can’t find homes on the westside side of Los Angeles for under $600,000 that a growing family would want to live in. And by that I mean, you won’t find a two-bedroom and one-bath home in my city for less than $500,000. Three beds and two baths start at around $750,000.
Currently, a two-bedroom, one-bath home will sell for around $650,000 to $700,000. That is steep for someone who wants to build a family, and it is not big enough, so they will have to add on or move up quickly. But that sets a floor for the pricing of the neighborhood. That’s why it is so hard right now for people to get into the game.
There’s a school of thought — that the prices here must at least level off. I would love to believe that, but we have 10,000 people moving to California each month. The outlying areas are growing at phenomenal rates. Riverside and San Bernardino are great places to invest in land and apartments. The reason why is because the home values on the westside are increasing and, like a rock in a pond, the values just ripple outward until you hit the vast void of desert where only lizards and cacti grow.
The economy of southern California is a weird horse to ride. When the dot bomb happened, many of those people just switched from the Internet to the movies. The future of the movie industry is more and more digital. We make movies today with fewer and fewer “real” special effects — ones that are physical and use the computer to put in more and more “fake” special effects. Lord of the Rings, Pirates of the Caribbean and the soon to be released Haunted Mansion, are the future.
How that effects the economy is this: Whereas you used to have a company of 200 making props for a big budget movie, today you need 20 making props and 100 good programmers and a bank of computers. Tomorrow it will be 20 good programmers and a few computers, and a decade from now the computer room at Sony Pictures Imageworks, which now houses hundreds of machines and takes up thousands of square feet of office space, will be the size of a broom closet.
There is a direct correlation between productivity increase and economic growth, surely the increase in productivity is a major factor in the growth of the Southern California economy, but one must also realize that it is a major factor in the loss of jobs. We can do more with less. That’s good for a company, bad for an employee. What’s good for a company is good for its stockholders, but not necessarily its workers.
But that increase in productivity means that other jobs will be created for the highly skilled and well trained. The low income, unskilled workers have a choice — they can learn skills, or they can move East. The southern California economy as a whole is moving into the arena of the literate and the skilled. We are a society of people who are finding new uses for technology and consequently creating new jobs, as we make redundant the old ones.
Take a look at the current strike here by the grocery workers. They are striking because they want to have company paid healthcare. The company is paying them $17 to $20 an hour for a job that pretty much entails the passing of groceries across a window that reads a bar-code, and putting them in a bag. If you can move an item three feet, and figure out how to make change you can do this job. This is not a skilled job. It may have been at one time, but it’s not today. From the company’s perspective there is no reason to pay someone skilled labor wages for unskilled work. The cashiers are going to have find new jobs sooner or later. And it’s looking like sooner is the more likely choice. This is a job that a freshman in college should have, not a person with a family and a mortgage. There was a time for it, but that time has passed.
It seems at first blush that the gap between rich and poor seems to be widening, but is it really? It used to be that only the rich could afford to have a cell phone. Now 12-year-olds have them to keep in touch with each other. Welfare moms have cell phones and the Internet. There is an air of absurdity about this. The rich used to be the only ones who could afford computers, now you can buy a laptop from Dell, for $700. What that means is more people are able to access the web and its wealth of knowledge. Do they do more with that knowledge? Some do, most don’t. Those that don’t will have to move East.
Take a trip through a Costco and you will see a temple to consumerism on the one hand, and an increase in the quality of life that is available to all on the other. If you were to enter most homes these days, the creature comforts that are de rigeur, used to be reserved for the rich. Low income does not mean what it used to anymore.
I realize that I seem to have taken a 180 somewhere along the way, and that is part of the problem, or maybe that is the answer. Our quality of life is up in many areas, but are our desires. I want to live better and so does everyone else. When there is only a limited amount of homes in Santa Monica, the prices will have to go up, if more people want to live here. And since they aren’t making any more land, I’d say that values have only one place to go, up. (David Pisarra is a partner in the Santa Monica law firm of Pisarra & Grist, he welcomes questions, and (310) 664-9969 or e-mailed at).
Originally published in the Santa Monica Daily Press print edition on November 18, 2003. Read the original PDF.