Solving California’s Housing Crisis

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California’s Housing Shortage

California faces an unprecedented affordable housing crisis. The nation’s most populous state (and the world’s 5th largest economy) ranks 49th of the 50 states, in housing units per capita. 4 of the 10 American cities with the highest rates of increase in rents over the past five years, are located in the Golden State.

Rental housing is considered “cost burdened” if it costs more than 30% of household income, and “severely cost burdened” if it exceeds 50% of income. In California, over half of all renters fall into at least one of these two categories.

For many, the burden is too much to bear. California has amongst the highest homelessness rates in the entire nation, with the homeless population increasing by 13.7% from 2016 to 2017. Much of this growth appears to be driven by high housing costs.

The housing crisis is noticeably impacting the state’s economic life. In 2018, California posted it’s lowest rate of population growth in recorded history. Between 2007 and 2014, the state lost 625,000 people, mostly those with lower incomes.

Research from the Urban Institute suggests that a lack of reasonably priced housing slows economic growth, as workers are forced to live farther from high-cost job centers (like San Francisco), and jobs (particularly those which pay less) go unfilled, as workers move to less expensive states. This also has a negative environmental impact, as more frequent and longer commutes increases carbon emissions, reducing air quality. Housing costs may also drive reduced rates of family formation, which hobbles future economic growth.

In short, California faces a major affordable housing shortage. Without substantial changes, the state’s long-term future looks considerably dimmer.

All of this raises an important question: Why is housing in California so expensive? At the core, this is an issue of supply and demand. There is a far greater need for reasonably priced housing, than there are affordable housing units.

In order to increase affordability, we need to drastically increase the supply of affordable housing. There are many promising approaches to making this happen. Combining together some of the strategies discussed below, would go a long way towards solving the state’s housing crisis.

SB 50

SB 50 and similar proposals offer a promising start in this regard. SB 50 is a proposal which was introduced in the California State Senate, by State Senator Scott Wiener.

SB 50 seeks to encourage more construction of affordable housing, by allowing for the construction of taller and denser apartment buildings in relatively populated areas, which are located near public transportation. This includes trains, ferries, and bus stops, as well as job centers more generally.

In some cases, the number of parking spaces required would be reduced, or limits on density waived. A portion of the units constructed (around 15% to 25%) would have to be affordable to those with lower incomes (based on local standards).

For housing which is not close to public transportation, and in areas zoned for single family homes, homeowners would be allowed to add additional units (i.e. an extra unit or duplex in a backyard, or otherwise subdividing their home), and rent out to tenants. SB 50 provides exemptions for smaller counties, and lower-income areas (to avoid excessive population growth, and displacement due to development).

In effect, SB 50 would considerably increase the supply of rental housing, especially in high-density urban areas. Over the long run, this seems likely to improve affordability and reduce costs.

SB 50 did not make it to a full legislative vote in 2019. The bill faced fierce opposition from some powerful opponents, including the City Council of Los Angeles (whose members argued that the bill did not go far enough in providing for affordable housing), homeowners concerned about neighborhood preservation and local control, and affordable housing groups, who worry that SB 50 will accelerate gentrification. Proponents of SB 50, however, push back that the bill offers strong tenant protections, and keeps in place most local control on development, except for increasing density near transit stops.

Transit Oriented Communities (TOC)

Both the city and county of Los Angeles have implemented some interesting changes at the local level, which might offer a model for the rest of the state. At the city level, Los Angeles implemented the Transit Oriented Communities (TOC) program. This program was put in place thanks to the passage of Measure JJJ by voters in 2016. It shares some similarities with SB 50.

TOC allows housing developers to build denser (i.e. larger) developments, with fewer parking spots, in neighborhoods close to public transportation. In exchange for being allowed to build more units, developers must also set aside a certain portion of the units for individuals and families with low incomes — thus creating more affordable housing.

While Los Angeles continues to face a massive housing shortage, the TOC program seems to have sparked a building boom, and will add quite a few affordable rental units to the market. Some observers have raised concerns that rent-regulated buildings are being demolished to create new housing, although TOC proponents counter that a larger volume of new affordable housing stock is being created by this legislation.

Accessory Dwelling Units (ADU)

Los Angeles County implemented the Accessory Dwelling Unit (ADU) program, which allows the construction of a separate unit, complete with a kitchen and bathroom, on the same lot as a single family home. This unit could be rented out. While the ADU program is still relatively new, Los Angeles County has offered incentives and pilot programs for homeowners to participate, as a means of reducing homelessness in the region.

Implementing the ADU program across the state (as proposed by SB 50), could have a substantial impact. There are many single family lots that offer enough lot space for an additional unit or two. Given home prices in California, many homeowners might like the idea of having an extra unit or two on their property, which generates rent, and thus offsets home ownership costs.

What’s more, large professional landlords (often Wall Street firms) who own and rent out thousands of single family homes across the state, could build additional ADU units, in a relatively short amount of time, and at a lower cost. This would further expand the supply of affordable housing.

Government Financing Of Affordable Housing

Another option is for the government to simplify funding and financing of affordable housing. This approach became quite popular in Los Angeles (and elsewhere) in the 1980’s (and before), when the city partnered with developers, and offered low-interest loans and zoning exceptions, in exchange for developing units which were affordable for those of limited means.

The challenge with this approach is that since there is an expiration date on how long housing must remain affordable (usually 30 or 55 years), once such protections expire, units return to market rents, and tenants must pay increased more (or move out). In areas with rapid gentrification, landlords have little incentive to continue participating in the program.

One solution might be to have government agencies act as equity partners with private developers. Rather than solely funding developments with low interest loans, government agencies might put up some of the costs used to acquire land & develop a project — along with private developers.

In exchange, they would own an interest in the project, and thus have the ability to push for policies which benefit the public. This allows an agency to have a greater say in whether and when a development’s affordability status is changed. Of course, such projects would have to offer some meaningful profit for private developers, or few would participate.

Tax Incentives

Currently, the California Tax Credit Allocation Committee administers both federal and state tax credits for low income housing. California could expand state tax credits, to include projects which are not exclusively low income housing, but contain a large affordable component (such as under the TOC program, or some future version of SB 50). Offering tax incentives increases the return for investors, on projects with an affordable component. This makes them more likely to be completed.

Tax incentives could have quite a substantial impact on the ADU program. Larger real estate investors are likely to develop ADU’s on the many single family homes which they own.

However, a large portion of the investors in ADU projects will be individual homeowners. Allowing them to recieve tax incentives, for building affordable ADU housing, is likely to have a real impact on such construction. Many people who are grappling with California’s high living costs, would welcome the opportunity to earn rental income, while receiving favorable tax treatment.

What A Comprehensive Housing Strategy Might Look Like

A smart housing strategy will combine the programs discussed above, to encourage large-scale development of more affordable housing units. Some variant of SB 50 must be passed, to encourage the development of denser housing, with an affordable component, near public transportation hubs. The rapid adoption of the very similar TOC program by housing developers in Los Angeles, suggests that this program has potential on a statewide basis.

This approach will not only reduce housing costs, but if done at a large scale, also offset traffic congestion, which reduces productivity. This would be a welcome development for Los Angeles, which was recently ranked as the most congested cities in the world, as well as San Francisco, the fifth most congested city.

Of course, building larger apartment complexes in main thoroughfares, is not be the only way to provide affordable housing. SB 50 (like the ADU program) allows homeowners in heavily residential areas to construct additional units, without further government review. Given that in much of the state, half to three quarters of all developable land is zoned for single family residences, allowing for the construction of a few more units, on sites where single family homes are located, will be key to any affordable housing strategy.

In 1798, Daniel Webster observed that “…Power to tax involves, necessarily, the power to destroy.” The reverse also seems to hold true. Tax incentives, if applied smartly, can encourage desired behaviors. So it is with affordable housing. Allowing tax credits for properties which contain some affordable component, or which are participants in some sort of ADU program, will only incentivize such construction in the future. For individual homeowners, or large institutional landlords who purchase single family homes, tax incentives might be a particularly powerful incentive to build additional units on a single family property.

Lastly, the government can play a financing role, by partnering with private developers, either as a lender, or by funding equity in projects with a strong affordable housing component. Such an undertaking must be managed prudently, given that taxpayer dollars are at stake. At the same time, if it isn’t profitable for developers to build affordably, then such projects will not be developed, and housing will continue to remain outrageously unaffordable.

None of this will be easy. California basically invented the term NIMBY, and homeowners’ groups will fiercely oppose the ADU program, and similar initiatives that might lead to denser housing. This will be the political debate of the next several years. However, without taking some of these measures, the future is quite uncertain.

My family moved to California more than 33 years ago. I can think of few places better to live than the Golden State. I say that after having traveled extensively, and lived in New York City for half a decade of my adult life.

Yet, there is little question that our state is facing a crisis. The dream of California, which brought generations of Americans out west, seems to be fading. Costs of housing are a major reason why. A failure to meaningfully solve these issues soon, will harm our state for decades to come.

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