Costa Mesa Housing Affordability: What’s Actually Driving Rental Prices in Orange County

Year To Date Activity

Properties Sold (single and multifamily): 15

Sales Volume: $26,499,195

Cumulative Value of Fund Properties Sold: $6,433,500

Homes/Units Managed: 310

Properties Leased: 20

Gross Collected Rent: $3,410,257

Brokerage Listings

Property Management Rental Listings

Somewhat inspired by what I discuss in this month’s rental market section, I wanted to discuss housing affordability. I apologize in advance if I go to deep on policy stuff this month. Affordability should matter to all of us. Even from a very selfish perspective, we want our team members to be able to have the option to live close to their place of work. We want our kids to have the option to be able to live close to us when they grow up.

While I understand, not everyone gets to live on the beach, we can do better than the current status quo. So I want to quickly address some of what works and what doesn't work when it comes to housing affordability.

The table below shows the cities with the biggest rent cuts since 2022.

What do you notice about the cities on the list below? I don't see California on this list, do you?

I gave the following prompt to Gemini, ChatGPT and Claude:

If you were a policy maker who wanted to improve affordability, what could you take away from this chart

They all had very similar takeaways, which I have summarized below.

1. New supply is the single biggest driver of housing affordability (separately, think about what this means for Orange County when the last few masterplans are built out)

2. No heavy handed rent control or other regulations that overly burden property owners

3. Fewer costs that unnecessarily burden developers (inclusionary housing requirements and frivolous impact fees)

We, globally speaking, as a Country, State and a community, need to get back to common sense approaches where we focus on outcomes. We need to demand this from our politicians and from ourselves. Too many of us get caught up in slogans and often don't slow down to understand the real world impact of the very things we are championing. You can not be pro housing and an anti housing provider, ultimately you will hinder new supply.

I've had people who are opposed to my City Council run say that I only care about developers or call me a developer shill. I understand how that lands with some folks, some of Hollywood's greatest movies featured developers as the villain: Chinatown (technically Noah Cross was trying to get water for Orange Groves not buildings, but people classify them as developers), Goonies, and Up just to name a few.

The only movie that really treated developers as the heroes they are:

It's A Wonderful Life.

George Bailey, what a mensch?

If you can't make it, but want to learn more about my campaign, see my website below. If you'd like to volunteer, donate or put a yard sign (when the time is right) in your front yard, you can also let us know 👇.

Campaign Website

Residential Transactional Market: We started the month strong with a handful of closings, mostly carryover from the previous month, and then the market took a very quick, hard turn.

The buyer pool absolutely evaporated. I can’t say for sure what caused it.

Ok, I can. It was the Iran conflict.

The good news is that current events don’t typically kill buyer demand.

As you may remember, in the movie Princess Bride, the Man in Black was mostly dead, slightly alive, and then recovered and saved his beloved Princess Buttercup. Perhaps our transactional market has a happily ever after, too.

Housing demand is largely driven by demographics, household formation, weddings, childbirth and the like. Affordability issues, <ahem> higher interest rates, don’t eliminate demand. They just push it out of reach for some buyers, which creates pent-up demand.

In the last two week or so, however, we’ve seen a meaningful pickup in transactional activity. When big global events hit, people tend to pause for a few weeks. Some stay on the sidelines, but others start to wander back into the marketplace.

Residential Rental Market: Costa Mesa recently floated a rental registry and just cause eviction notice requirement, and it's worth watching regardless of where you own. The intent sounds reasonable on paper. More transparency, more tenant protection. But California's Tenant Protection Act already covers just cause eviction and rent caps statewide. So what does a local overlay actually accomplish besides adding cost and complexity to the people providing the housing? Allegedly data. If the City needs data, CoStar feels like a more straight forward option.

Small property owners get hit the hardest here. These are the property owners who are supplying the bulk of our local rental inventory, and piling on additional compliance doesn't incentivize them to stay in the market, nor does it invite developers to add new supply.

Side note: I find it funny when people think I oppose these types of regulations out of self-interest. If anything, additional regulations are a gift to our management business. I can’t tell you how many clients we picked up after the City created reporting requirements for no-fault evictions. A rental registry would likely encourage a lot of mom-and-pop owners who self-manage to turn over the reins to professionals like us.

What really doesn't get enough airtime is the fiscal side. Rental registries aren't cheap to stand up. Technology platforms, staffing, legal review. And those costs are largely non-recoverable. We've watched other cities launch these programs and blow past their budgets, sometimes significantly. That money comes straight out of the general fund, which means real tradeoffs: deferred road work, stretched public safety resources, delayed community projects. For a city like Costa Mesa, that's not hypothetical. It deserves a harder look before anyone writes that first check.

Mortgage Market/Interest Rates: I don't want to talk about it. We were getting rates below 6% and now we are seeing some stuff in the 7s. Along with our nations foreign policy, rates can turn on a dime. I wouldn't be surprised if we saw significant shifts in either or both (foreign policy OR rates) in the next 30 days.

Macro Observations: Other than all the noise on oil/gas, I seem to be one of the few people who thinks inflation is mostly behind us. Hold on, I get things are expensive. Saying inflation is behind us isn't saying things aren't expensive, it's saying the rate of change of prices has moderated.

Inflation is the general increase in prices for goods and services over time, reducing the purchasing power of money.

Shelter costs, which is based on the dumbest metric of all time, rent and owners' equivalent rent, make up roughly 30 to 40 percent of CPI, and the way they're measured uses backward-looking lease data that lags real-time market conditions by nine to twelve months. Right now, market rents have flattened or declined in many metros (as the rent chart above illustrates), but CPI shelter is still reflecting older, higher lease data. That gap is closing. As new lease data flows into the calculation, shelter inflation will continue to fall, and that mechanically pulls overall inflation lower. Even if nothing else improves, housing alone can drag the number down.

All of that is to say, when/if the Iran conflict finds some resolution, and assuming we don't find some new entanglement, I'm still pretty confident we find ourselves in a lower rate environment. I'm also fully aware that my opinion here might be the result of confirmation bias.

Project Updates: We have several active projects; here is a quick update on a few of them.

Bucknell, Costa Mesa: We finally got permits. We are digging footings and are off to the races.

This project is a gut renovation and an approximately 500 sf addition to accommodate a more modern style primary bedroom.

Unfortunately, we have a few more edits we have to make to our plan and will have to resubmit to revise the permits.

Let's see if I still have a full head of hair when this project is completed.

Lillian, Costa Mesa: As we continue to work towards our permits, we are working on a construction loan with Citizens Private Bank. We are anticipating approximately $2M in proceeds with an interest rate of 6.7%, which is an exceptional rate, especially for a construction loan.

Here is a photorealistic image of the property I made with Gemini. As a rule, we try to only build projects that we ourselves would live in.

If I could afford to, I'd live here.

Pegasus, Newport Beach: We should have permits by the end of the month. I'm frankly shocked we haven't received them. This is a good place to point out, technology isn't always a good thing. The implementation online permitting systems have been pretty terribly received across all municipalities. Newport still does a pretty good job handling the online system, but if we were able to go in with paper plans, like the good old days, we would have had a permit 45 days ago.

Some good news on this project, a recent home sold in the neighborhood that is very supportive of our proforma exit price.

Thanks again for reading, and I would like to thank our agents and property managers who provide valuable insights from their day-to-day in the field. Without them, this email wouldn't be very useful or interesting.

If there is anything you need: vendors, lenders, or others, please let me know. We have an extensive network of the best and brightest in the industry.

I geek off this stuff; if you want to grab a coffee or chat about anything related to real estate, the market, or investing, please do not hesitate to reach out.