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How California home prices got sky-high

In this Nov. 4, 2010 photo, signs are posted for an open house on the front lawn of a home for sale in Los Angeles. Sales of previously owned homes slipped slightly in October as the housing market struggled in the face of high unemployment and tight credit. (AP Photo/Richard Vogel)
Richard Vogel/AP
First-time homebuyers are finding it tough to break into LA's overheating real estate market.

In California, where the average home price is roughly two-and-a-half times the national average, buying your first home is more than a little daunting.

Just ask Michael Soussa. The 31-year-old, who works in engineering sales, grimaced his way through an open house in Eagle Rock. The three-bedroom house had all the hallmarks of an on-trend flip: dark hardwood, Edison bulb light fixtures, subway tile in the kitchen.

But the $649,000 price tag — $549 per square foot — was “ridiculous,” he said.

"For a single guy, 31, who makes good money, it's very difficult to buy a home," Soussa said.

With home prices in much of L.A. at pre-recession levels, or exceeding them, first-time buyers are struggling to break into the market.

To be considered, buyers must often put down big down payments or even full cash offers. They have to agree to the seller's terms, such as a long —  or short — escrow period.  And there’s no forgetting the “love letter,” a personal appeal written to the sellers. Real estate broker Carol Huston recalled the buyer who sent a photo of herself with a pet frog to the sellers.

“She said that she loves this house for her and her frog,” Huston said. “But you know, it worked! They thought it was so charming.”

Drayson Helberg, a 29-year-old art director, has only been house-hunting for a few months, but he knows the drill.

“The decent properties are swooped up almost instantly. And the list price is never the actual price,” Helberg said. Multiple bidders drive up the home value. “What are you going to do? That’s the game out here.”

But it wasn’t always this way. Decades ago, California home prices were more in line with the rest of the country.

Supply and demand

At the turn of the 20th century, California’s population really took off. Americans moved west for  the good weather, the beach and the jobs. By the 1950s, California had more than 10 million residents. In Los Angeles, wide swaths of single-family homes were getting built.  

Brian Uhler of the state’s Legislative Analyst’s Office said these sprawling developments took up much of the buildable land, giving L.A. its signature suburban look.

“That means there isn’t much buildable land left that isn’t re-developing some old building or re-developing an old lot,” he said.  

Uhler said the best way to create more housing at this point is by building more multi-family buildings, like condominium and apartment complexes. But tall apartment buildings don’t go over well with neighbors who have grown up accustomed to the suburban California look, and fear blocked views and more traffic.

Uhler said in the 1970s, homeowners began to demand — and get — more restrictions on development.

“Things like, only a certain number of units can be built in our city in a given year, or that zoning changes can only occur if the voters approve it,” Uhler said.

And at the state level, lawmakers passed the California Environmental Quality Act, also known as CEQA, in 1970. It aimed to measure the environmental impact of building projects — and hold developers accountable. But developers contend CEQA is being used to delay or stop projects from being built. Whether CEQA should be revised remains a constant source of debate.

"Not in my backyard"

Development slowed even while California’s population kept growing. By 1980, home prices had risen 80 percent higher than the rest of the country, according to the state Legislative Analyst's Office. Compounding the problem, wages have not kept up with home prices, both for renters and home owners. 

In Los Angeles, Mayor Eric Garcetti has set a goal of building 100,000 new housing units by 2021. But developments continue to run into resistance by neighborhood activists who say city officials are letting builders put up projects with little regard for neighborhood character or sustainability. A campaign led by the AIDS Healthcare Foundation based in Hollywood wants voters to put a two-year moratorium on large-scale developments

Matt Epstein closely watches the real estate market as a broker for Berkshire Hathaway in Los Angeles and the 21-year vice president of one of the city’s largest homeowner associations in Sherman Oaks, with over 2,000 members.

“I don’t think there’s a solution in terms of supply and demand,” Epstein said.

He agrees there needs to be more housing. But, he said, the city's aging infrastructure — crumbling sidewalks, bursting water mains — isn’t equipped to support more people.

His homeowner group is currently fighting a planned development with 300 apartments because members think it will worsen traffic and air quality,  increase crime and lower property values.

Epstein said when homeowners oppose projects like this, it's not simply because of a ‘not-in-my-backyard' mindset.

“Fix the backyard first, and then let’s talk about having more guests over,” Epstein said.

Bidding wars

The developments that do get built take years to get through the red tape. In the meantime, more people need homes. The population of Los Angeles topped 4 million for the first time last year.  Historically-low interest rates are motivating more people to buy. But inventory is low, as baby boomers stay in their homes longer.

That creates fierce competition among first-time homebuyers.

Dale Jordan, a ballet dancer and new mom, has made at least nine bids on homes since January. She’s originally from the village of Stonybrook in eastern Long Island, where the median price of a home is half the price of homes she's looking at in Los Angeles.

“The amount of cash you’re paying, you can buy two or three houses,” Jordan said.

So she's had to re-adjust her expectations. She offered cash on a house in Glassell Park last month.

But it wasn't enough. Her broker said there were more than 60 bids. The house sold $725,000 — $150,000 over the initial asking price.