California: A Time Machine Excursion

When I arrived in La Ciudad de Los Angeles in 1943, those of us who called coastal California our home considered ourselves among the most fortunate in the world. We enjoyed a superb climate, with warm sunny days the rule, and a winter where the temperature rarely dropped below the 40s. Perhaps even more impressive at the time concerned the smog … essentially unknown.

The reason for this may be a mystery to many of you; World War II mandated gasoline rationing. Unless an auto owner participated in some way in national defense, four gallons per week constituted the limit. As a result, few autos graced the road and little exhaust pollution spewed into the atmosphere. How enjoyable to breathe only fresh air.

Following America’s victory over the Axis powers in 1945, and with California having been discovered by millions of military personnel, its population of 9,344,000 began to grow rapidly. And as thousands of persons arrived, a housing boom took off.

By 1950 the typical tract house of two or three bedrooms became the staple, with its purchase price of about $8,500 nicely in line with the average family income of $3,300. Over the next ten years the FHA loan, with its 3% down payment and 5¼% interest rate, enabled the typical families to become homeowners.

I specifically recall the 2-bedroom Torrance home I purchased in 1956 for $10,395. Its $90 per month payment of principal, interest, taxes and insurance proved made to order for my modest salary.

Another affordable commodity following the arrival of peacetime became schooling. Millions of returning servicemen, many of whom failed to graduate from high school or enroll in college, eagerly resumed their education. The Servicemen’s Readjustment Act of 1944, better known as the G.I. Bill of rights, provided a source of income for them to return to school … and this they did, en masse.

But particularly helpful was the low cost. Both the California Community College and the California State University systems were tuition free. Even the University of California operated on the cheap. And the price of textbooks seemed more than reasonable. If you’d care for a specific example, consider the used copy of my 668-page, 1948 Introduction to Organic Chemistry, from the Los Angeles City College Associated Student Store, with the penciled-in price of $3.60 still visible.

 After a number of years in the Navy, I returned in 1963 and settled with my bride in the Santa Clara County area of northern California. On our combined incomes of $1,000 monthly, we lived quite nicely on $400 while devoting the other $600 to buying inexpensive tract houses as rental properties.

During five years there, before returning to Southern California, we acquired seven profitable rentals as well as a personal residence. Without a doubt, the Golden State proved friendly to investors. The state laws and tax policies were accommodating and the various communities encouraged entrepreneurship. In all, we considered our presence welcome.

As the years passed and our efforts further rewarded, we noted real estate values escalating rapidly. By the late 1970s property taxes caused statewide distress. However, in 1978 an initiative measure, Proposition 13, spearheaded by two remarkable men, Howard Jarvis and Paul Gann, cut those taxes appreciably. Much to the distress of government officials, and the pleasure of the taxpaying public, property taxes have been tolerable ever since.

By the turn of the decade – 1980 – California’s population, since the end of the war, nearly tripled to 24.3 million. With its desirable climate, inviting infrastructure, and booming economy, it became a favored place to reside.

People continued to flood in from other states and other countries, most notably our next door neighbor to the south, Mexico … causing an adversarial economic condition to develop. The foreign entrants, often undocumented, tended to suppress wages, resulting in anti-Hispanic hostilities … continuing to this day.

Over the next several decades, or thereabouts, California matured in several ways. The counties of Santa Clara and the southern portion of San Mateo became known as Silicon Valley as its technological development advances and resultant income led the world.

With the state’s continuing population increase, a good portion of it due to both legal and illegal immigration from all parts of the world, foreign influence became more profound. In particular, Latino acendency began to dominate the Democratic political party as Republican influence lessened. And of particular concern, both legislative action and initiative measures invariably increased political dominance and oversight as special interests consistently overrode citizen desires on whatever the hierarchy chose to endorse and embrace. Quite plainly the state continued, undeniably, to become more and more totalitarian.

Welcome to California in the year of our Lord 2020. With an official count of 39,780,000 residents – plus an unknown number of undocumented inhabitants, most likely in the millions – this certainly makes us the most populous state in the union. We’re also, according to our governor, the 5th wealthiest nation-of-sorts on the face of the globe. However, whether on a citizen-to-citizen basis we’re truly prosperous is an entirely different matter altogether. Despite the claims of our political leaders, implying we rank as the epitome in terms of financial well-being, the facts belie this. As a state, we top the nation in our disparity between the truly affluent and the mass of middle and lower income residents. Adjusted for the cost of living, California’s poverty rate tops that of any other state in the union. And as for our claimed reputation for exemplary racial justice, our Black and Latino populations suffer the brunt of the misery.

The major cause for our poverty and striking inequality is the dual dilemma of low-wage employment for a vast number of workers, coupled with an almost unbelievably high cost of housing. According to the U.S. Census Bureau, the annual median household income in California is $63,783. However, when broken down by economic classes, we get a clearer view of reality. The breakdown: Upper class $190,923; Middle class $77,806; Lower class $24,380.

We must now contrast these with monthly housing costs. Consider the average apartment rental prices in the following cities: Santa Ana $1,982; San Diego $2,237; Los Angeles $2,524; Riverside $1,613; Sacramento $1,469; Oakland $2,930 [Even an Oakland studio is $1,795]. The question I must ask: With an annual income of $24,380, where can you afford to live?

You might note Governor Newsom, in an effort to placate the deprived, pledged to build 3.5 million new homes by 2025. As you’d guess, not much is in the works, nor will anything affordable for the lower and middle income working-class families ever appear.

There’s no avoiding the reality the majority of new single-family and apartment construction will be for the high-end market. With a formidable cost per square foot to build, plus astronomical fees assessed by the counties and cities for each unit they approve, you may be certain lower priced residential units are not economically feasible. This explains why, of the 7,800 new apartment units built in Los Angeles between 2015 and 2017, only about 10 percent were leased in the range of $1,840 per month. The average rent on the remainder exceeded $2,500. It seems abundantly clear only the truly wealthy will be able to afford to live here.

A final comment: I can offer no advice on how California might prosper. For the past quarter century I’ve watched our evolving decrepitude. Our judicial system is unable to process a growing number of felons. The regular use of mind-altering drugs is increasingly condoned. Taxation of the citizen in ever more pernicious ways is now established governmental policy at all levels.

What we’re devolving into is uncertain, but devolving we most certainly are. It’s truly a pity the society where advancement and opportunity once functioned so effectively is now in free fall. Unless we can recover from our current downward spiral, it appears my state is destined to become another corrupt fiefdom, much like the Jim Crow enclaves of a Deep South now long gone.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al can be contacted at al@abjacobs.com