TO: Interested Parties
FR: Dave Cogdill, President and CEO
RE: California's Housing Crisis
The Affordability Gap: How homeownership is being threatened, and what needs
to be done to mitigate the crisis
Summary
California is facing a housing crisis that has reached alarming proportions: demand is
far outstripping supply, driving prices up and keeping far too many working Californians
from becoming first time homeowners.
Reports recently issued by the nonpartisan Legislative Analyst’s Office and Beacon
Economics - commissioned by Next 10 - consistently identify the lack of supply as the
primary reason that California boasts some of the most expensive housing prices in
the country. Both reports also cite other far reaching impacts that California’s housing
shortage is prompting, including: impeding the state’s ability to retain lower and middleincome wage earners; pushing homeownership out of reach for working families,
making it more difficult for workers to build wealth; and increasing poverty.
Both the LAO and Next 10 recommended that adding significantly more private housing
stock – up to an additional 100,000 units annually -- to what the market is already
providing could meaningfully address the housing affordability problem for many
Californians. Despite these clear and identifiable solutions, it is not at all uncommon for
California policymakers to advance “solutions” that constrain the ability of the market to
increase housing supply and improve housing accessibility to working class, middleincome wage earners.
This memo serves to summarize the causes and consequences of the current home
affordability gap, including:
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Why California’s housing prices continue to be so high
The short and long-term consequences of the housing affordability crises
How policymakers can avoid exacerbating the home affordability crisis
California Housing Affordability Crisis: Lack of Supply, Increasing Costs
In its March 2015 report, California’s High Housing Costs: Causes and Consequences,
the LAO outlines the serious impacts the lack of new housing construction is having on
the state economy and working families-- many of which are felt most acutely in large
coastal urban centers. According to the report, the average cost of a home in California
is $440,000 – two-and-a-half times the average national home price. This is not a recent
phenomenon – the LAO states that housing prices first began escalating between 1970
and 1980 – but it has continued the alarming trend and exhibits no signs of abating any
time soon. The state’s average rent is also outpacing the national average at $1,240 per
month -- 50% higher than the rest of the country. With increasing demand in coastal
communities and not enough housing stock, steep competition increases both purchase
prices and rents and forces people inland to find housing they can afford.
As a result, Californians are forced to spend more of their income on housing. This in
turn reduces family disposable income, creates the potential for longer commutes,
increases poverty rates, and puts greater stress on the delivery of public services.
The bottom line is California needs to build a minimum of 100,000 units a year more
than we are building today to seriously mitigate its housing affordability
problems.[1] Should California continue the trend of supply underperforming in the face
of increasing demand research from both Next 10 and the LAO shows that the
consequences could include:
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The inability for employers to recruit and retain employees
Middle and lower income wage income earners migrating out of California.
The inability for low and middle-income families to attain homeownership as a
means to build wealth
The continuation of overcrowded housing, to the detriment of educational and
behavioral health outcomes
An increase in the poverty index -- according to the LAO, California households
with incomes at the bottom quartile report spending 67% of their income on
housing, 11% more than other such households spend on housing elsewhere in
the country.
Why Supply Is Short and Being Stifled
Both the LAO and Next 10 identify a number of factors for why housing supply is not
keeping pace with demand in California:
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California Environmental Quality Act (CEQA) used to stop development
projects rather than address real environmental concerns;
Costly regulatory mandates
Community opposition and lawsuits
Local finance and land use policies that favor nonresidential development and
work against increasing densities;
The lack of supply and the resulting affordability challenge has a serious impact on
homeownership in the golden State. According to U.S. Census Bureau data, the
national homeownership rate for the 4thquarter of 2015 was 63.8 percent. California’s
rate over the same period stood at a paltry 54.1 percent. Furthermore, analysts expect
California’s homeownership rate to languish below its historical rate of 55 percent for
years to come. Why? A dearth of supply and prices exceeding average incomes. If the
state does not start to address the home affordability issue, California businesses will
face the growing prospect of losing their competitive edge as housing costs and
availability act as an impediment to attracting and retaining workers.
How Policy Makers Can Mitigate The Affordability Gap
Overall, the condition of California’s housing markets can best be described as
fragile. In light of this, California policymakers would be well advised to advance
policies that have a significant impact on increasing the supply of market-rate housing,
controlling costs, reducing regulatory barriers, and allowing the market to respond to
demand.
Public policies that can bridge the affordability gap include:
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Policies that allow dense development in coastal cities.
Policies that allow the expansion of new market rate housing to alleviate
competition, slowing escalating housing prices, and – according to the LAO – will
indirectly provide more, older housing stock for lower-income households.
Policies that recognize the limited role affordable housing government programs
play and pairing the increase of private housing stock with targeted government
programs.
Maintaining California’s highly successful school facilities funding
program. Failure to protect this program will lead to significant price increases
for new homebuyers and/or make new projects infeasible – further exacerbating
the growing housing crisis.
Public policies that can exacerbate the affordability gap
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Mandated Residential Prevailing Wage on Privately Funded Residential
Projects - that would have devastating social and economic impacts for all
Californians. In a recent report by the California Business Roundtable's Center
for Jobs & the Economy, it found mandated prevailing wage would result in:
o 372,700 fewer construction jobs
o Higher Housing costs of $79,000 per unit, Multi-family $86,000 per unit
and rent increases of $460 per unit.
o Dramatically increases the number of Californians living in poverty by
another 481,000 - California already has the highest poverty rate in the
Nation.
o $34.2 billion reduction in total California GDP
o $16.2 Billion in lost revenues to State and Local Governments
o Results in longer commutes and further drive Californians from major job
centers as they seek housing they can afford
o And, several other major points that should cause serious concerns for
key decision makers.
Inclusionary zoning: In its February 2016 report, Perspectives on Helping LowIncome Californians Afford Housing, the LAO noted that inclusionary housing
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price-controls is not the solution to the housing crisis. Affordable housing
programs only serve a small fraction of Californians, and it is cost prohibitive –
tens of billions in annual expenditures - to scale these programs to the massive
size it would require. Instead, targeted affordable housing programs should be
complementary to increased private housing.
Overly burdensome and costly environmental mandates – such as SB 32
– that a study by the former Department of Finance Director and LAO chief
economist [2] showed would have significant consequences on the current
housing crisis, including:
o Raising the cost of a median priced home by over 12 percent
o Pricing approximately 683,000 households being priced out of the real
estate market
o Reducing annual single-family housing production by 10,450 units
o An annual loss of $9.7 billion in gross state product and about 95,000 jobs
in the California economy
o Increasing the number of people living below the poverty line by 436,000,
due mainly to the negative effects of further housing shortages on shelter
costs and household budgets.
Policies that implement costly mandates, price controls and/or
construction taxes on new, market-rate housing. Unfortunately, these policy
solutions are merely ‘quick fixes’ that will only make the production of market rate
housing even more challenging. Conflicts (litigation) will increase, costs will rise,
disposable income for working class families will be impacted and housing supply
will be artificially restricted so it can't keep pace with demand.
Reports:
Legislative Analyst’s Office: High Housing Costs: Causes and Consequences; March
17, 2015
Legislative Analyst’s Office: Perspectives on Helping Low-Income Californians Afford
Housing; February 9, 2016
Next 10: Current State of the Housing Market; March 3, 2016
California Center for Jobs & the Economy - Regulation & Housing: Effects on Housing
Supply, Costs & Poverty Study: Mandated Prevailing Wage
Additional Background Articles and detailed housing facts:
The Los Angeles Times: California doesn’t have enough housing, and lawmakers
aren’t doing anything about it
http://www.latimes.com/politics/la-pol-sac-california-high-housing-prices-20160414story.html
Real Clear Markets: NIMBY-ism, and the California housing shortage
http://www.realclearmarkets.com/articles/2016/03/24/nimbyism_and_the_california_housing_shortage_102078.html
San Diego Union Tribune Editorial: How California should fight poverty: add
housing stock
http://www.sandiegouniontribune.com/news/2016/mar/06/housing-costs-too-highcalifornia/
Los Angeles Daily News Op-ed: The costs of not building housing: Toni Atkins
http://www.dailynews.com/opinion/20150522/the-costs-of-not-building-housing-toniatkins
WSJ: California’s Housing Costs Hurt Economy, Increase Poverty, Report Finds
http://www.wsj.com/articles/californias-housing-costs-hurt-economy-increase-poverty-reportfinds-1426623141