La La La La La La

I just spent a few days in Los Angeles. It’s been a year since the Covid restrictions went into place and I just needed to get out of the house and do something different for a change. I was born in LA, still have people there, and it’s a tolerable drive from my place in San Francisco. As I made my rounds the LA trip provided a few anecdotal examples of real estate dynamics, at least among my friends in their particular circumstances. Your milage may vary.

These are the days of touchless sidewalk Covid take-away meals. After a year of semi-isolation there’s a peculiar joy in socially distancing on the pavement with nuns in full habit, tattooed hipsters, and Russian matrons in velour track suits. Humanity on display. The new normal involves arriving at a friend’s house with food and dining al fresco on back patios with furtive unmaskings to nibble the pastrami and fries.

This particular property is a duplex in Eagle Rock. The two homes are entirely separate and don’t touch at all, but they share a small city lot. The two 1940s two bedroom homes are each about 1,000 square feet (93 square meters) and according to public records were purchased in 2018 for $830,000. Today, just two years later, the property is valued at $1,300,000 based on comparable nearby sales.

The friend who owns the place has had a precarious relationship with real estate over the years. He bought a modest fixer upper in a less desirable neighborhood in 2007 at the height of the bubble and somehow managed to hold on to the place by his cuticles as the market crashed the following year.

By 2018 values had more than bounced back, he was ready to move on, and he refinanced the old place in order to buy the duplex. He now rents the first house, lives in one of the twin units, and rents the other. His current burn rate is about $7,200 a month which he can manage so long as he still has a job and his tenants pay their rent each month. It’s tight. If he can hold on for the next decade he’ll be in a good spot in middle age. But if anything goes sideways he’s back to eating ramen. That’s tolerable when you’re in your twenties or thirties, but it gets real tiresome by your fifties.

A quick interweb search told me one couple I visited in Silver Lake bought their 1920s era cottage for $198,000 in 1998. Two beds, one bath, 960 square feet (89 square meters,) and a wee little patch of urban garden. My friends have lovingly maintained the property to a good standard, but it’s the same house it was 22 years ago in every respect that matters.

No one’s heart was ever stirred by statistics. And numbers can be twisted in all sorts of ways to prove whichever point the presenter wishes to demonstrate. But I ran some figures through an inflation calculator just for giggles. That $198,000 should have resulted in a house that’s worth $319,000 today. That’s not a small amount of money, but it puts the property within reach of tolerably middle class people. Then I checked recent sales of comparable homes in their immediate neighborhood. Similar bungalows have gone for north of $1,100,000 in the last couple of months.

Out of curiosity I checked the median household income in Los Angeles in 1998. $49,000. That typically involved two people working outside the home. Then I checked to see what that inflation adjusted income would be today. $80,000 based on the official government inflation statistics (such as they are.) But the median household income in Los Angeles today is actually $68,000. So home values rose considerably higher than inflation while incomes fell. This is the Big Squeeze.

Other friends bought their 1940s two bedroom, one bath 898 square foot (83 square meters) post war tract home in Van Nuys for $173,000 in 2002. Today it’s worth $524,000. They’ve clearly spent time and money keeping the place to a high standard and their effort shows. But it’s still the same place it was 18 years ago as far as the basic structure is concerned. Van Nuys might have become a trendy hotspot like Silver Lake or Eagle Rock. But it didn’t. Instead it remains what it always has been, a solid bulwark of the fair-to-middling classes. Yet property values in Van Nuys jumped by $100,000 in the last year.

From the elevated deck in the back garden there’s a view of how the precariat is adjusting to the present conditions. Where does the working class live when the entry level home is north of half a million dollars? One option is the American khrushchyovka, sometimes called the Texas Doughnut.

These five story apartment blocks, as seen in the distance, do a lot of the heavy lifting. Some specialize in young singles and childless couples. Others are designed and marketed with the elderly in mind. People can and do raise children in them, often because it’s the only semi-affordable option.

And then there’s the other housing arrangement that doesn’t get much press. It’s the sub rosa ad hoc backyard affairs that spring up quietly without mention to the authorities. The garden shed with an extension cord and garden hose. That’s genuinely affordable market rate housing. If these de facto accessory dwelling units were built with permits, inspections, code compliance, impact fees, and all the rest they would not be affordable to either the tenants or the property owners.

They work precisely because they’re substandard. If the authorities ever decided to crack down on these places, which they easily could, there are a lot of rich families on the West Side that would go into crisis mode as their maids, gardeners, pool boys, package delivery ladies, and Uber drivers suddenly went into free fall. This is LA’s hidden favela. Take away the italicized Latin euphemisms and the city stops functioning.

During my visit I stayed at a friend’s place in Lincoln Heights near downtown. He's an architect of the kind who works on really big splashy projects around the world for prominent firms. Some of you would probably recognize buildings he's worked on. He bought his house at a foreclosure auction at the bottom of the market for $180,000 in the aftermath of the 2008 crash. It’s a 1920s era faux Spanish casita that was hot glued to the side of a steep hill. Two bedrooms, one bath, 900 square feet (84 square meters.)

From the right angle it looks a bit like a Greek villa, but you have to squint a lot. Back then Lincoln Heights was considered a rough neighborhood, especially by people who had never stepped foot anywhere near it. It’s still verboten to a lot of middle class white people who wouldn’t dream of living there - including my friend’s ex wife. A slightly smaller house right next door just sold for $860,000 last month.

I have a weird theory. I don’t think homes are more expensive because of supply and demand. I don’t think it’s exclusively because of restrictive zoning regulations and building codes. I don’t think it’s about suburban sprawl or urban crowding. There’s definitely aspects of all that with plenty of blame to go around. But I’m beginning to think the value of homes isn’t rising so much as the worth of the dollar is rapidly declining. You get the same old house, but you need a whole lot more dollars to pay for it. Just a random thought…