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Tuesday, August 22, 2017

California's Housing Crisis: How Did We Get Here and How Do We Get Out?

California is in a housing crisis. According to State Housing Officials, we need to build about 180,000 unit each year to keep up with demand, but we are building less than 80,000 annually on average (See Sacramento Bee Article on this). Median home prices and rents are far above what a household earning median income can afford in most parts of the State. Homelessness continues to be a major problem.

How did we get here? To answer that question, it can be helpful to look at the three major elements of home building: land availability and price; land use regulation; and construction cost. In all three areas, we are fighting an uphill battle. The steepness of that hill has been created by choice, and by market forces outside of our control.

The price of land is driven by availability and demand. California land that is available for residential use has been limited by geographical features, such as sea and mountain, and by environmental and land use restrictions. At the same time, demand continues to be strong, and only grows stronger as supply shrinks. California is an attractive place to live and work, and while it is prohibitively expensive for many, it is in high demand by those that can afford it, and that money drives up land prices.

Land Use Regulation
While land is limited, there are ways to maximize the use of land for greater efficiency by building more densely in locations proximate to transit and other services, while minimizing wasted space used for parking or lawns. While some progress has been made in terms of city planning processes in this area, decisions at the State and local levels have further exacerbated the land shortage. There is little financial or political incentive for localities to encourage or accommodate housing development. Instead, the State's tax system provides a disincentive. Most significantly, Proposition 13 limits revenue from residential properties, and forces localities to rely on commercial development to pay for their services. Further, the State has not implemented any effectual sticks or carrots that would make it attractive for localities to facilitate housing development. Instead, localities feel compelled to address local economic and NIMBY concerns over and above housing construction. Residential project opponents also use the State's California Environmental Quality Act (CEQA) to stymie housing proposals. Limited residential property tax revenue has also caused localities to increase impact fees on residential development, which presents another regulatory barrier to housing construction. The LA Times did a nice in-depth article on this topic.

Construction Cost
California has a high cost of living, which translates to high labor costs. In addition, California has a labor shortage. Many construction workers left the industry during the recession. Furthermore, government prevailing wage and labor requirements, and unions, drive up cost. In response to economic and political pressures, localities have implemented regulations that also add to housing cost, including impact fees, lengthy entitlement review processes, extensive design review requirements, and strict building code standards. The State has further driven up cost with its own strict building code standards, and implementation of CEQA. Given these high costs, extensive public subsidies are required to make housing affordable to lower income households who are critical to the California economy. However, State subsidies have been cut dramatically since the recession.

So, high demand + limited supply + regulation that further reduces supply and increases cost + high construction cost - public subsidies = housing crisis.

Because there are a wide range of factors impacting housing availability and cost, there is no silver bullet that will solve the housing shortage. However, we can make progress by addressing its causes. Below is a summary of State legislation that is attempting to do that. Effectively addressing the crisis will require regulatory reform in a wide variety of areas, including tax, land use, building code, environmental, and labor law, as well as increased funding for affordable housing.

Legislation Addressing Local Regulations
  • Senate Bills 35 and 540 require streamlined approval processes for affordable housing development.
  • Senate Bills 166 and 167 would require land be set aside for affordable housing and strengthen State law prohibiting cities from denying low-income housing projects.
  • Assembly Bills 72 and 1397 would require jurisdictions to property zone for affordable housing.
  • Assembly Bills 2502 and 1505 would allow local government to require a portion of new market-rate development be set aside as affordable.
  • Assembly Bill 73 would provide incentives for affordable and higher-density housing in city centers and near transit.
  • Assembly Bill 352 would require cities to permit development of smaller units.
  • Assembly Bill 1585 would establish a statewide appeals board for developers whose low-income housing was rejected.

Legislation Addressing Funding
  • Senate Bill 2 would create a permanent source of funding for affordable housing through a $75-$225 fee on real estate transactions other than home purchases. This would generate about $250 million per year.
  • Senate Bill 3 would put a $3 billion housing bond on the November 2018 ballot.
  • Assembly Bill 71 would end State mortgage interest tax deductions on second homes and direct those funds, estimated at about $300 million per year, to the State's affordable housing tax credit program.
  • Assembly Constitutional Amendment 4 would lower the voter threshold to raise taxes or pass a bond to fund low-income housing from a two-thirds supermajority to 55%.


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