San Diego’s expensive housing market is often touted as one of the key impediments to economic growth, and many, including myself, have called for building more affordable housing.
The lack of affordability is a barrier to home-ownership, higher mortgage payments make it harder to make ends meet and the vulnerable are trapped into risky financial schemes.
But, perhaps the fact that San Diego is the No. 1 place for start-ups has something to do with our expensive housing market?
An analysis by the Federal Reserve Bank of San Francisco links increases in house prices with growth in start-ups. It argues that lower home equity constrains the availability of start-up funds:
“Lower house prices reduce homeowners’ equity and wealth, which can restrict an important source of funding that entrepreneurs typically access to start new businesses. In fact, the U.S. Census Bureau’s Survey of Business Owners shows that about seven out of ten businesses used personal or family assets for start-up funding. In turn, home equity constitutes 20–25% of households’ total assets on average.”
Smaller and younger firms are especially sensitive to housing market cycles, and even if they do not directly draw upon home equity, their proprietor’s ability to take risks and get credit is influenced by their personal finances. The collapse in housing prices during the Great Recession therefore disproportionately impacted small and young businesses. In fact, housing prices alone may account for as much as 90 percent of the decline in the relative performance of young firms in California.
One way to compare home equity is the Loan-to-Value (LTV) ratio for homes with mortgages. In recent years, Zillow paired the actual current outstanding mortgage balance for homeowners with the home value estimates for homes in its database. At a 100 percent LTV, the property is fully leveraged by its outstanding mortgage, so a higher LTV means that the property is underwater (the borrower owes more than what the property is worth), and a lower LTV means that the property is equity-rich (the borrower owes less than what the property is worth).
For existing homeowners with mortgages they can afford, increasing homes prices build equity. A comparison of the Zillow data from two quarters before and after the 2013 spike in home prices shows that San Diego homeowners gained considerable home equity during this period. The share of homeowners with mortgages that had an LTV below 60 percent rose from 36 percent to 47 percent, while those that were underwater with LTV below 140 percent fell from 11 percent to 4 percent.
There are some limitations to this data. First, it would be better to use the actual home equity values for San Diego, rather than LTV as a proxy, if the data is available for homes without mortgages. Second, the data are aggregated for the county, and the share of homeowners with LTV below 60 percent varies greatly – from 79 percent in Coronado, to 24 percent in some neighborhoods in Chula Vista. Third, the data do not capture the distribution of equity between different types and values of homes. And fourth, RealtyTrac and Zillow started their data collection on home equity in 2011 and 2012 respectively, so we cannot make a historical comparison for prior years.
At a metropolitan level, a pattern can be observed in California cities that are rich in home equity, such as San Francisco and San Jose, are also great places for start-ups. The recent spike in home prices in San Diego may also be contributing to a faster growth in start-ups.
Startups are the flagships of economic recoveries. Although the share of employment by startups is about 2 percent, they accounted for 71 percent of net growth in employment in the San Diego region in 2011. These startups consist predominantly of small businesses, with about half having less than 10 employees, and about 90 percent having less than 50 employees. A national data analysis by the U.S. Census Bureau also suggests that there is higher worker churning and lower earnings per worker in these firms.
The oversized role of startups in the aftermath of the Great Recession appears to be aided by higher housing prices. So maybe, in terms of job creation, there is a silver lining to San Diego’s obscene housing prices.
Murtaza Baxamusa is an adjunct lecturer at the University of Southern California’s Sol Price School of Public Policy