Fixing California- Part five: Affordable market housing

By Edward Ring
July 14, 2021

Editor’s note: This is the fifth article in a nine-part series on how to fix California. Read the first article in the series here, the second here, the third here, and the fourth here.

Everyone’s heard it by now. California’s got a housing shortage, with prices within 50 miles of the coast among the highest per square foot in the world. The median price of a mid-tier single-family dwelling in Santa Clara County—better known as the Silicon Valley—is now $1.4 million. Statewide, the median price of a home in March was $759,000, up nearly 20 percent from just one year earlier. According to Zillow, the national median price of a mid-tier single-family dwelling is $287,000, barely more than one-third what the same home costs in California.

There’s a perfect storm of factors causing this imbalance, which is rapidly spreading across the rest of the country. Santa Clara County’s foreign-born population is an astonishing 38.5 percent. In California overall, 27 percent of the population is foreign-born. These millions of immigrants are bidding up the prices of housing in California.

At the same time, and with increasing voracity, major hedge funds are buying homes. It’s a savvy diversification strategy. Home prices go up because people are buying them, and investment portfolios chasing yield can ride the bubble for as long as demand exceeds supply, depending on inflation to give them a soft landing if and when the market finally cools. According to a real estate consulting firm based in Southern California, one in five homes sold in 2020 were purchased by investors. In Orange County, 3.5 percent of all residential parcels are owned by corporations with portfolios of 200 or more properties.

But this is only half the story.

Also driving the storm is a supply chain strangled by regulations, mandates, permit delays, and excessive fees. Developers and members of builders associations in California all tell the same story: a subdivision that takes two months to get approved in Texas, and might incur a few thousand dollars in permitting fees, can take two decades to get approved in California, if it gets approved at all, and will incur millions in permitting fees.

Further catalyzing the storm are special interests, all lined up to benefit from unaffordable housing. Politically influential hedge funds have perfected the art of doing virtual inspections and can outbid individual buyers with huge down payments and pre-arranged financing. They can continue to expand their share of existing stock and exploit the benefits of buying at scale. They have no interest in seeing supply drive down prices.

The public sector as well is well served by a property bubble. When properties turn over, their values are reassessed at market rates, and property tax revenues soar. As long as building is confined to “infill,” and new construction is limited, local property taxes grow commensurately. People who bought in before the run-up in values are protected by Prop. 13, which makes them relatively indifferent to the price bubble. Property owners also appreciate the opportunity to use their home equity as collateral. But the upshot of all this is people of modest income cannot afford to live in California.

How Policymakers Get Everything Wrong

To cope with unaffordable housing, California’s policymakers are doing absolutely everything wrong. Their biggest mistake is to not confront the central moral argument used to justify artificial scarcity of housing, which stems from environmentalism run amok. Not one state legislator is willing to challenge the core premises of the environmentalist lobby, which are that California is running out of open space, and that new suburban developments create excessive “greenhouse gas.” Both of these premises are false.

To begin with, California is a huge state, with tens of thousands of miles of undeveloped land. There are 25,000 square miles of grazing land in California, and only 8,200 square miles of urbanized land. The math is almost unbelievable, but the math is simple and immutable: If you built homes for 10 million new Californians on quarter-acre lots, and those homes were each occupied by families of four, and if you allocated an equal amount of land for roads, parks, retail establishments, and industrial parks, you would only consume 1,953 square miles. That equates to 1.2 percent of California’s total land area; it equates to 7.8 percent of California’s grazing land; it increases California’s urban footprint from 5.3 percent to 6.5 percent.

The idea that greenhouse gas emissions are increased when suburbs are built is based on biased analysis, paid for by agenda-driven activist organizations. Telecommuting, job-creating businesses migrating to new suburbs, and new, clean and sustainable modes of automotive and aerial transportation all debunk that narrative. A density delusion possesses California’s policymakers, and it must be broken.

In the name of stopping urban “sprawl,” a cordon has been wrapped around California’s cities, with increasingly aggressive state laws passed to mandate densification. Local zoning laws that residents expected to be enforced when they bought their homes are being usurped, with legislators calling yards and single-family homes “immoral.” Senate Bill 9, currently sailing through the California state legislature, “allows 4 market-rate homes where 1 now stands, up to 6 units if developers use a hidden ‘two-step’ that Livable California volunteer attorneys spotted, and 8 units with local accessory dwelling units (ADUs).”

This is California’s policy solution to more housing. Use state law to empower developers and investors to buy existing single-family homes, anywhere, and demolish them to build apartments. This is not about “equity.” It’s about money. Not only will developers and investors be empowered to declare open season on any residential neighborhood, but they’ll get special tax treatment and subsidies if they construct low-income housing.

That sounds very high-minded, until you’re the family breadwinner, working two jobs to pay down your $700,000 mortgage, suddenly confronting a subsidized apartment building on the lot next to you, teeming with occupants who don’t have to work and don’t have to pay rent. And of course, the wealthy neighborhoods can afford to litigate, driving predatory developers to the vulnerable middle-class neighborhoods.

A Completely Different Approach to Housing

There’s nothing wrong with an organic process whereby local governments recognize that certain downtown neighborhoods, or certain high-traffic boulevards, would be more appropriately re-zoned to accommodate higher density housing. That has been happening forever, and it is an inevitable fact of urban growth. California can be the place where tantalizing possibilities that urban planners dream of are realized—architectural innovations that range from “parasitic architecture” to grand and inspiring new mega-structures. There is potential for high-rise, indoor agriculture; there is the potential to create more per capita interior and exterior space, even while increasing the population per square mile. Take a look at the skyline of Dubai or Shanghai to see what a confident culture that isn’t riven with Malthusian doubts and bureaucratic paralysis can accomplish.

To stabilize home prices and even begin to bring them down, however, the wood-framed one or two-story home remains a far more sustainable and cost-effective structure than an urban high rise. It is also where most families prefer to live. And that should count for something.

The economic model that enables affordable suburbs requires a redirection of public spending and public policy. As it is, the cost of infrastructure—swollen beyond reason by excessive mandates—is paid for by the developer and passed on to the buyer in the price of the home. This can amount to hundreds of thousands of dollars once the hard costs of parks, streets, connector roads, and utility conduits are all factored into the equation. The result? Unsubsidized developers cannot make a profit building modest “mid-tier” homes that people can afford. But it doesn’t have to be this way.

Public utilities could redirect just some of the money they’re currently plowing into renewables to finance the energy and water infrastructure necessary for new suburbs, as well as to retrofit their existing grid. General obligation bonds and redirected monies from the state’s general fund could help pay for the necessary water and transportation infrastructure. Socializing these costs, which used to be the norm, would not be prohibitively expensive if utilities, civil engineering firms, and developers had safe harbor from environmentalist litigation and excessive environmental mandates—something already done routinely for everything from sports stadiums to homeless shelters.

This is the economic model whereby the land and materials cost for new homes could be brought down significantly, at the same time as the total supply of housing would greatly increase since expansion would not only be up via infill and densification, but outwards via new suburban expansion. But curbing demand is also necessary, and can be best accomplished by using the tax system to make it less profitable for hedge funds to purchase single-family homes as investments.

The approaches necessary to bring the cost of housing down in California do not adhere to any ideological playbook. Libertarians might applaud the freedom of rural landowners to develop their properties, but object to the idea that existing zoning in residential neighborhoods should be respected. They also might not agree with a tax surcharge on properties owned by large investor conglomerates.

Ideological heresy is everywhere in this practical agenda to achieve affordable, abundant housing. Issuing bonds or allocating government funds to build water and transportation infrastructure will further inflame the anti-tax lobby. Developing open land and slowing down the deployment of renewables will infuriate the environmentalist lobby. But these are the practical, bipartisan steps that will make California’s housing affordable again.

It is possible for ordinary Californians to again be able to realize the dream of home ownership in upgraded, modern, glorious, sprawling, glittering cities and suburbs. It is possible to find a new balance between environmental concerns and the aspirations of California’s 40 million residents. It is possible to find a balance between urban densification and suburban expansion. It is possible to redirect government spending to build the infrastructure to make the enabling elements of urban growth—energy, water, and transportation—abundant and affordable again.

This is the optimistic, pragmatic vision that offers an alternative to the Malthusian, special interest-dominated agenda that currently governs Sacramento legislators. It must be advocated relentlessly and without reservations, because it is the path to a bright and prosperous future for everyone.

This article originally appeared on the website American Greatness.

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Edward Ring is a contributing editor for the California Policy Center.