California's affordable housing reality

There has been a lot of chatter lately about California's lack of "affordable" housing. It has been the focus of a flurry of policy proposals aimed at increasing the stock of below-market priced properties. Unfortunately, these policies accomplish little except to distract from the true scope of the problem.

It's understandable why low-income households are the focus of attention. The rule of thumb is that people shouldn't spend more than 30 percent of their income on housing. However, more than 90 percent of California families earning less than $35,000 per year spend over 30 percent of their income on housing. This isn't new - that percentage has been stubbornly high for years - nor is it an exclusively California problem (the comparable figure for the United States overall is 83 percent). This is a poverty issue, not a California housing issue.

What is disturbing about current trends in California is that the crisis is now spreading to middle-income households, families earning between $35,000 and $75,000 per year. In 2006, 38 percent of middle-class households in California used more than 30 percent of their income to cover rent. Today, that figure is over 53 percent. The national figure, as a point of comparison, is 31 percent. It is even worse for those who have borrowed to buy a home - over two-thirds of middle-class households with a mortgage are cost burdened in California - compared to 40 percent in the nation overall.

The social and economic costs of this middle-class housing crisis are not sufficiently appreciated. Housing costs put stress on these households and reduces their ability to spend on other goods and services. It forces California employers to pay higher wages than elsewhere in the nation, raising costs for California consumers and diminishing the state's competitiveness. Perhaps most worrisome is how many middle-class households choose to move out of California in search of more affordable housing, depriving the state of young, skilled workers who represent the backbone of the workforce - and the state's future.

What's driving the crisis? It's a classic problem of supply and demand. The state doesn't build enough housing to accommodate population growth. California is home to roughly 13 percent of the nation's population, and has slightly greater than average population growth. Yet over the last 20 years the state has accounted for only 8 percent of all residential building permits.

To put the shortage in proper context, consider the amount of housing that would need to be built in order to move the state to national norms for housing stock, vacancy rates, and crowding: California would need to expand its stock by between 6 percent and 7.5 percent - that's between 800,000 and 1 million additional residential units.

These figures dwarf the meager efforts policymakers are proposing to fix the problem. The bill known as Assembly Bill 35, would have supplied 3,000 affordable housing units, while Assembly Bill 2, would have only managed to build 10,000 affordable housing units in a decade. These are laughably small relative to the scope of the problem.

One obstacle is the high cost of building and doing business generally in California, but not sufficient to explain the difference in prices. If you were to compare the same newly built house in California and Texas, the California house would typically sell for twice as much as the one in Texas - to large of a gap to be explained by land costs, permit fees, etc. Builders make a lot more profit building a house in California than they do in Texas.

Normally, this would attract more supply into the state. The trouble is, we're not talking about a free market in California. The state has erected two giant barriers to entry: Proposition 13 and the California Environmental Quality Act, known as CEQA.

Start with Prop 13, which limits the value of housing to local governments by keeping property taxes low, and diverts most of the revenue to schools. This means that California's local governments are financially incentivized to avoid residential construction since these residents use a lot of expensive public services, particular high-density developments. Fiscally it makes more sense to use the land for commercial investments - low in cost relative to tax revenues generated.

You might argue that commercial space is useless without residents to shop or work there. But the fractured political environment of California - consider that there are 88 individual cities in Los Angeles County alone - leads to a peculiar form of the tragedy of the commons: let someone else build it. Some cities have succeeded spectacularly with such anti-residential strategies - consider Santa Monica, Vernon, Industry or Beverly Hills - all rich cities with very small residential to non-residential land use. They use zoning rules, restrictive permitting processes, the empowerment of local NIMBY groups and fees to discourage residential building.

The state's CEQA law imposes similar costs on growth. Yes, such environmental laws are well intentioned and desirable in theory - forcing developers to mitigate excessive disruptions they might create in the natural or urban environment. The problem is that "excessive" is being interpreted to mean "any" in the current application of the law. Developers are forced to pay for many costly mitigations. Even worse, various interest groups and NIMBY-minded residents have essentially figured out how to hijack the system to block development and serve their own ends.

Is there any conversation about reforming CEQA in Sacramento? None. Any chance of reforming Prop 13? Very little. The only discussion to date involves the so-called "split-roll" that would raise commercial rates while leaving Prop 13's limits on residential property taxes untouched. This will only make the local government bias against residential real estate worse.

And so, California families continue to face a very real housing crisis. The state leaders, meanwhile, are not helping. It's the cruelest irony; we have a housing crisis, and California's leaders are not addressing it. They're merely professing to help with costly policy gimmicks that are no substitute for freeing the market to align supply with demand.

Christopher Thornberg, Ph.D is the founding partner of Beacon Economics LLC and the director of the UC Riverside School of Business Administration Center for Economic Forecasting and Development. Learn more at www.BeaconEcon.com.