In Search Of The California "Desirability Premium"

Housing is more expensive in more "desirable" areas -- that's a bit of a tautology, of course, since we don't have a way of measuring how desirable an area is, and having high paying jobs will certainly attract more people, in which case they will be willing to bid up the cost of housing in order to access that labor market.

But in more desirable areas, are owners willing to pay a greater proportion of their income on housing? Let's take a look:

Source: American Community Survey 2005-2007 3-Year Estimate

Our universe consists of all census "places" -- cities or townships -- in California.  The x-axis shows the per-capita income for each place, while the Y-axis measures the median percentage of income that mortgage holders are willing to pay. "Mortgage costs" here also include other ownership costs such as property taxes and utilities.

FYI, owners are willing to devote a median value of 31% of their household income for mortgage costs in San Francisco, 35% in Oakland, 34% in Los Angeles, 29% in Vacaville, 44% in Beverly Hills, and 40% in Lennox. In general, the graph suggests a slight downtrend, in that owners in wealthier areas are willing to devote a slightly smaller share of their income for mortgage costs, however the R^2 value does not give a lot of confidence.

But ownership rates vary -- in San Francisco, only about 1/3 of the housing stock is owner occupied, whereas the state average is much higher. Let's look at the relationship between ownership rates and mortgage burdens:

Source: American Community Survey 2005-2007 3 Year Estimate

Here there is some evidence that ownership burdens increase somewhat as ownership rates fall -- by 0.65% for every 10% decline in ownership rate -- but again the R^2 doesn't give confidence and the drop is slight.

Perhaps it's more a question of inequality -- in areas with high income inequality, owners might be willing to pay a premium to showcase their status:

Source: American Community Survey 2005-2007 3 Year Estimate

In this case, there is an extremely weak correlation that suggests that the greater the inequality, the less owners are willing to pay, proportionately -- but the relationship is weak.

So it turns out that the "desirability premium" is very hard to find when looking at data. Generally speaking, areas with higher household incomes command higher house prices, but not as a percentage of income.  There is evidence that as incomes increase, people are willing to spend less, proportionate to their income, on monthly mortgage costs.