California Real Estate – New Zoning Rules to Make Homes Affordable

The battle for turf and territory is on. It’s Texas versus California, our two most populous states in a contest that impacts real estate nationwide.

California’s population losses in the last census have translated into one less congressional representative, while Texas gained two. A number of leading corporations have left the state, heading to Texas in some cases. Do such trends suggest that California’s glory days are behind it — and with less prestige and celebrity that shaky real estate values loom ahead?

In 2020, according to the National Association of Realtors (NAR), California lost 242,313 people while Texas gained 162,299 — second among the winning states, behind only Florida with 174,645 new residents.

However, raw population numbers do not tell the whole story. To get a better idea of what’s going on — and why — we need to look at several other measures.

Silicon Valley & Affordability

One central reason both people and companies are on the move is housing. Even a great salary and lots of perks may not be enough to offset soaring real estate prices in high-cost areas.

Redfin CEO Glenn Kelman explained this very well in 2017 when he told CNBC that “the technology companies, the Wall Street companies, they’re chasing the talent, [and] the talent is chasing affordable housing.”

“Google,” said Kelman, “employs more engineers outside of Silicon Valley than it does in Silicon Valley, and if Google can’t afford Silicon Valley, then no one can.”

Kelman’s words have been translated into action. Marque names are on the move.

In 2020, Silicon Valley pioneer Hewlett Packard shifted its headquarters to Houston, while Oracle moved its headquarters to Austin. Elon Musk just announced that Tesla will move its headquarters to Austin, where it’s also building another massive production factory.

In California, said Musk, “it’s tough for people to afford houses and a lot of people have to come in from far away.”

He added that there’s a “limit to how big you can scale in the Bay Area. So here in Austin, our factory’s like 5 minutes from the airport, 15 minutes from downtown.”

Home Prices

In the second quarter, according to NAR, there were substantial differences between home prices in major metro areas in California and Texas.

While the big metro areas in California and Texas all showed huge percentage jumps during the past year, there’s an affordability divide. In rough terms, buy a typical San Jose home for $1.7 million with 5% down and you need $85,000 up front plus closing costs. At 3% interest, the monthly payment for principal and interest is $6,809. That’s almost $82,000 a year. Taxes and insurance are extra.

Update 2023: See current market trends in CA, such as the latest San Diego market trends report in our Market Reports.

Meanwhile, in Austin, the 5% down payment for the typical home is $25,755. Closing costs are extra. At 3%, a $489,350 mortgage requires $2,063 a month for principal and interest. Taxes and insurance are additional.

While California home prices are substantially higher than Texas residences, property taxes are actually lower. According to the Stanford Institute for Economic Policy Research (SIEPR), California’s Proposition 13 limits property tax increases to no more than 2% a year. The result is that the typical 2019 property tax was $1,840 in California and $2,098 in Texas.

The Institute also mentions other taxes. For instance, the typical state income tax in California is $2,533 per capita, or $10,132 for a family of four. In Texas it’s zero.

State taxes in high-cost jurisdictions have become less tolerable as a result of 2017 changes to the federal tax rules, changes that effectively eliminated the ability of most homeowners to itemize property taxes as well as state and local income taxes.

“In 2017 and before,” said SIEPR, “California’s 13.3% top marginal tax rate was effectively 8% for high-income taxpayers (due to the earlier deductibility of state income taxes) but this changed immediately to 13.3% in 2018.” (parenthesis theirs)

And what about corporate taxes? Corporate taxes in Texas are zero versus 8.84% for California, an important difference for multi-billion-dollar corporations.

Does California Still Matter?

“California is hardly down and out,” said Rick Sharga, Executive Vice President with RealtyTrac, “More than one in ten Americans live in the state, it has a massive internal market, and by population it’s still the largest state in the Union.”

That’s not all.

“California’s GDP last year was $3.2T, representing 14.6% of the total U.S. economy,” according to Bull Oak Capital. “California’s economy is so big that if it were a country, it would be the 5th largest economy in the world, more productive than India and the United Kingdom.”

What California and Texas really illustrate is that the old economic models are now in flux. Corporations are more mobile and selected employees have new choices.

Still, the Kelman formula — corporations compete for top talent, talent wants affordable housing, so corporations will locate where the housing is attractive — remains in effect.

To cut housing costs and increase inventory, California has just passed SB9 and SB10, legislation that will significantly change long-time zoning rules.

According to The Economist, SB9 “ends single-family zoning in the state. This means Californians will now be able to convert their houses into up to four units, depending on the size of their plot. California isn’t the first place to eliminate single-family zoning. Minneapolis and Oregon did so in 2019. As for SB10, that will make it easier for cities to build up to ten apartments on land currently set aside for single-family homes near busy public-transport corridors.”

For property owners and real estate investors, such legislative revisions create significant new opportunities in the massive California market, revisions other states and federal policies will surely adopt.