The Housing Affordability Gap

Memo

To: All Interested Parties

From: David Cogdill, CEO and President of the California Building Industry Association

Re: 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 middle-income 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, middle-income wage earners.

This memo serves to summarize the causes and consequences of the current home affordability gap, including:

  • 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 

"Poverty is caused by the cost of living -- and specifically the cost of housing -- in our state," said Micah Weinberg, president of the Bay Area Council Economic Institute.

If we want to bring those poverty rates down, we've got to get serious about building housing in the Bay Area. We're a million units short of where we should be."


- Contra Costa Times: New Census Data: Bay Area Grappling With Poverty, Housing Costs; December 2, 2015 


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:

  • 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
  • Thecontinuation 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:

  • 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 4th quarter 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:

  • 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.
  • 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.

Public policies that can exacerbate the affordability gap:

  • Inclusionary zoning: In its February 2016 report, Perspectives on Helping Low-Income Californians Afford Housing, the LAO noted that inclusionary housing 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:
    • Raising the cost of a median priced home by over 12 percent
    • Pricing approximately 683,000 households being priced out of the real estate market
    • Reducing annual single-family housing production by 10,450 units
    • An annual loss of $9.7 billion in gross state product and about 95,000 jobs in the California economy
    • 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 Analysts Office: High Housing Costs: Causes and Consequences; March 17, 2015

 Legislative Analysts Office: Perspectives on Helping Low-Income Californians Afford Housing; February 9, 2016

 Next 10: Current State of the Housing Market; March 3, 2016

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-20160414-story.html

Real Clear Markets: NIMBY-ism, and the California housing shortage

http://www.realclearmarkets.com/articles/2016/03/24/nimby-ism_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-high-california/

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-toni-atkins

WSJ: California's Housing Costs Hurt Economy, Increase Poverty, Report Finds

http://www.wsj.com/articles/californias-housing-costs-hurt-economy-increase-poverty-report-finds-1426623141

 [1] http://www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx

[2] Capitol Matrix Consulting: Impacts of SB 32 on California's Housing Market and the Economy; http://www.cbia.org/uploads/5/1/2/6/51268865/sb_32_impacts_final.pdf