Why Housing in California is Unaffordable

It’s interesting how similar land policy is around the world. In the United States today, we don’t have collapsing buildings like they do in Mumbai (see video above) but the fanatical fear of density and the slow approval process are the same. Berkeley Mayor Jesse Arreguín, for example, says a bill that would allow higher density construction near transit hubs and bus lines is “a declaration of war against our neighborhoods.” And a new report finds that in San Francisco:

in 2000, it cost approximately $265,000 per unit to
build a 100-unit affordable housing building for families in the city, accounting for inflation. In
2016, a similar sized family building cost closer to $425,000 per unit, not taking into account
other development costs (such as fees or the costs of capital) or changes in land values over this
time period.

Did you get that? Inflation adjusted construction costs have increased in San Francisco over the last 16 years by 60% not including changes in land values.

Interviews and focus groups identified four local drivers of
rising construction costs: city permitting processes, design and building code requirements,
workforce regulations and ordinances, procurement (small and local business) requirements,
and environmental regulations.

the most significant and pointless factor driving up construction costs was the length of time it takes
for a project to get through the city permitting and development processes.

Comments

I contacted my representatives to support SB 827. It would probably have some impact in my small southern California city (we have quite low hight restrictions, but then again, most of the city is built on sand).

Overall though, I think national pundits over concentrate on a few towns around San Francisco. The LA sprawl is bigger and building a lot more.

LA defined sprawl when land developers built light rail to provide access to the land the bought for a few dollars an acre and sold for thousands an acre, funding building and operating trolleys at below costs. Then after they had sold the land, they abandoned the trolleys and the government had to take over. Hiking taxes to rip up trolley racks to build roads and highways.

Plenty of land exists in California for housing, but what is needed is government supporting Elon Musk in being free to bore tunnels everywhere he wants. He could pay for boring a thousand kilometers of tunnels by boring to a million acres of desert, boring tunnels to carry water from the LA water district supply plus tunnels for moving cars to key points in LA.

But if Elon bored a tunnel and created an entrance in your neighborhood, should your house lot be rezoned from R-1 to some mixed use zoning and your property assessment changed, overriding Prop 13, to be valued at a million dollar per acre value instead of your $20,000 an acre valuation, forcing you to sell out to property developers to pay the property tax bills?

I live in a blue area (Boston suburb) where people pride themselves on being anti-racist, with lots of "Hate Has No Home Here" signs on display. Residents also oppose construction of apartment complexes that would enable non-wealthy people to live here. Blue areas keep blacks and Hispanics (who have lower average incomes) out by keeping housing prices artificially high. Some politician should point out that the most effective racists are found not in the Deep South (where housing prices tend to be lower) but in San Francisco and other blue bastions.

What exactly would you propose? That these people allow their neighborhoods to degenerate, schools to go to hell, and housing values to collapse? This already happened to people in the 1960s/70s when they had their neighborhoods in the cities destroyed and had to flee to the suburbs. Now that gentrifiers want to push browns out of the city (so their own housing values till go up) they need some suburb to shove them into, and the suburbs are fighting back.

Flooding a neighborhood with poor brown people is, "a declaration of war against our neighbors." People are defending their property rights in the only way they can, that its inefficient is your fault for making discrimination illegal and having tons of government workers, lawyers, and journalists trouncing around waiting to call people racist and sue them for just not wanting trash in their neighborhood.

Your right, its hypocrisy. It's necessary hypocrisy. You won't allow them to admit, "I don't mind a couple of browns with college degrees around but please lets keep the trash out," so instead you get asinine building restrictions as a backend way for people to defend their families and livelihoods.

Catch and release, a small and misshapen fish of an argument:

"that its inefficient is your fault for making discrimination illegal"

The problem is these same people then push aggressively for more open policies in other respects (immigration, college admissions, labor market, etc). Hypocrisy is not OK...even if it's the only alternative that seems doable.

*you’re

Surely there is some space between "exclude all minorities via zoning regulations that hurt everybody besides incumbent homeowners" and "shithole"?

You are going to make the black kids angry with this kind of hate speech.

Flooding a neighborhood with poor brown people

Poor brown people have no agency. They are just tools of evil liberals who are out to destroy nice white suburbs. Who are just that brilliant - they can control hordes of black and brown people with their insane mind control powers that tell them where to live.

Dang, y'all really don't like 'brown people' around here

Hire a few more police and besides the crime rate among those "brown people" has been falling. And crime rates among those immigrants is already low: http://www.lagriffedulion.f2s.com/hispanic.htm

Flooding well to do white liberal neighborhoods with low-income non-whites would definitely help in turning the next generation of white suburban youth into lifelong skeptics of melting pot idealism. This era is an echo of the '60s. Today's white children are tomorrow's equivalent of the Reagan battalion. White liberals will get their comeuppance and their children will vote republican.

some suburb

Ferguson was such a nice place in the 70s 80s and 90s then in the 2000s affordanle housing (section8)was built in the only undeveloped area of Ferguson. Ferguson is not such a nice place now.

Section 8 is NOT a government housing project. All it does is provide vouchers to qualifying poor people to help them afford rent in existing privately owned rental housing.

Yes, it is amusing to hear people from Portland lecture the less enlightened parts of the country about diversity an economic justice.

However, it's not really about race, but rather, income. The sizable middle and upper income black people in the Atlanta area choose to live away from low-income riff-raff also.

"The sizable middle and upper income black people in the Atlanta area choose to live away from low-income riff-raff also."

Racists!

Your example shows it is really about class, not race. My suburb was integrated in the 1960s but by middle to upper middle class blacks, whose lifestyles/music/customs were similar or even identical to the white residents. Mom and Dad were married with the Mom staying at home to raise the kids and the kids being encouraged to excel at school.

Not saying there were not problems but it was a smooth transition overall.

The blacks who have arrived in the last 10-15 years or so are largely single parent households with much lower income and their lifestyles/music/customs are much different. We now have two separate cities, a white/Asian, middle to upper middle class professional one north of a major street and a black, lower middle and working class one south of the street.

It is more about class than race. But the shifting economic fortunes of various neighborhoods are not something that people really can control. Poor people need to live somewhere. They're going to live somewhere. If you notice that your neighborhood is becoming dominated by poorer people, it might be more appropriate to sell your house and move to a different neighborhood than to try to restrict building to prevent poor people from moving nearby.

Another line of inquiry might be why are the transaction costs on buying/selling houses so high and how can we reduce them.

They don't need to build low income housing. If they built luxury apartments that catered to a richer base, those people would move out of places that are already expensive, lowering those costs. Simply, more housing of any kind would lower the cost of all housing. You don't need to cater to strictly low income people.

Yes, trickle down housing.

I suspect that much of the permitting and development process is attributable to the risks attendant to buildings in the Bay area, namely earthquakes and fires. In my area the risk is from hurricanes, a risk that has been addressed by ignoring it.

Much of the 60% increase in permitting costs over the last 15 years is a result of more fires and earthquakes over the last 15 years then?

Well, no, it seems as if 4 and above on the Richter scale events remain commonplace in the Bay Area - http://abc7news.com/bay-area-earthquake-tracker/25012/

3.6 Jan. 23, 2018 10:06 p.m. -- Gilroy, Calif.

4.1 Jan 17, 2018, 2018 at 9:55 p.m. -- 14.0 miles from Healdsburg, California

3.0 - Jan. 17, 2018 at 6:41 p.m. -- 9.8 miles N of Morgan Hill, Calif.

4.4 - Jan. 4, 2018 - 3 miles northeast of Emeryville, Calif.

Moment magnitude. I don't think anyone uses the Richter Scale anymore.

I suspect you are not from California. I've had farts that shake a house up more than M4 earthquakes.

'Moment magnitude. I don’t think anyone uses the Richter Scale anymore.'

Interesting, but wikipedia does say this - 'Popular press reports of earthquake magnitude usually fail to distinguish between magnitude scales, and are often reported as "Richter magnitudes" when the reported magnitude is a moment magnitude (or a surface-wave or body-wave magnitude). Because the scales are intended to report the same results within their applicable conditions, the confusion is minor.' https://en.wikipedia.org/wiki/Moment_magnitude_scale

No, but rayward has a point: could the 60% real increase over the last 16 years be due to increased safety factors? I recall when I lived in California they would constantly tear down and rebuilt perfectly fine structures (such as the Bay bridge leading to Oakland) because they were not seismically up to date with the latest regulations. Recall that famous photograph of the elderly (I think) lady who died when her car plunged what looked about 25 feet into the lane below in the 1989 SF quake. That's bad optics.

Thanks, Ray. In my hurricane prone area, houses now have to be built with the living area above the flood plain, certainly a rational idea. But otherwise they don't have to be built to withstand a hurricane, not exactly a rational idea. The rational idea wasn't the result of rational local government, but the federal flood insurance program. If a hurricane strikes, like it did in September, the houses built below the flood plain get full coverage from the flood insurance program, to be rebuilt for another day (and hurricane) while the houses built above the flood plain get little or nothing, the rationale being to discourage owners of houses built above the flood plain from making any improvements below the flood plain, which defies gravity: houses built above the flood plain aren't suspended in the air. Which brings me back to California. If a house wasn't built to current code requirements for earthquakes and fire, and if it is destroyed by an earthquake or fire, does insurance cover the cost of rebuilding the house, and if so, to current code requirements? And do owners of houses not built to current code requirements pay the same insurance rates as owners of houses built to current code requirements?

Yes rayward, good points. When I built my luxury home here in typhoon (hurricane) prone Philippines, I installed a steel roof with eight foot panels that looks just like a textured architectural shingle roof from a distance. Aesthetic and functional. I don't like the fact the builders did not overlap the bolts holding the metal sheets to the underlying wooden frames (instead they put washers under the bolts, but I would have liked overlapping sheets) but that's a small quibble.

I would not see why that would make the permitting cost much higher, the building costs per sq ft yes.

California has addressed the risk from earthquakes and fires by imposing stricter building codes during the past 15 or so years, unlike my area where the risk from hurricanes is ignored. Of course, one can argue that the stricter building codes are pointless and only serve to drive up the cost of construction.

Definitely not. The process is held up by neighborhood review and politicians. The city of berkeley for example was recently sued for denying a permit, and lost.
http://www.dailycal.org/2017/09/09/berkeley-city-council-to-pay-44k-in-housing-development-lawsuit/

No, it's primarily from CEQA abuse. CEQA is a law that requires extreme "environmental" (e.g. calculating how many more seconds of shadow will hit the street, making models of the project and putting it through wind tunnels to calculate wind impacts on the street, etc etc etc etc etc) analysis where anyone can anonymously sue and it causes a 2-year delay in the project, regardless of the merits of the suit.

Also, the process itself is ridiculous, as we have a 100% discretionary review (compared to most places, where if you meet the zoning, you can basically immediately get building permits and get to work), which means that the SF planning department has to review 3x as many applications as the NYC planning department, despite having 1/10 as many people. There's also a bunch of additional review steps not seen else like multiple levels of design review that add months to the process and also a point at which people can object and force developers to go back to the drawing board.

(source: I am a city planner in the Bay Area)

California government is loaded with professional economists responsible for analysis & policy development on this type of economic issue -- why have they not noticed this problem?

A curious GMU economist might informally contact fellow economists in California and inquire about this issue. For instance, Dr Lynn Reaser is Chief Economist at California State Controller's Office.

Maybe they have, but most of the action takes place at the city level, and city attitude is often to let someone else (a neighboring city) build more, especially low income housing.

SB 827 is a rather surprising attempt to overrule cities.

...right, the California State government is so small and timid that it rarely interferes with local governments? Gov Brown just signed 15 new statewide housing regulations bills, on top of the huge existing state regulatory bureaucracy for housing and construction.

What's your guess as to the viewpoint of the UC Berkeley/UCLA/Stanford/etc Economics Departments... on rent control and robust housing regulation? Where do you think California government hires its spiffy economists from?

I may not be up on all those (a summary would be great) but isn't this housing crisis really about permitting and approval?

And isn't that a city affair?

Costa Mesa approves, Newport Beach does not. Etc.

Ah, interesting. Most of those 15 are about preventing cities from blocking high density projects that builders and investors want to do.

https://www.ocregister.com/2017/09/29/brown-signs-bills-seeking-to-address-california-housing-crisis/

It is kind of a mixed bag though. Builders will probably get more approvals, but more obligations as well.

"Gov Brown just signed 15 new statewide housing regulations bills,..."

You mean the bill that allows virtually anyone in R-1 zoning the right to build a tiny house in their backyard with virtually no local regulatory authority to prevent doubling the population of a neighborhood school system, water and sewer, roads, etc?

SB 1069, Wieckowski. Land use: zoning.

"...This bill would instead require the ordinance for the creation of accessory dwelling units to include the provisions described above. The bill would prohibit the imposition of parking standards under specified circumstances. The bill would revise requirements for the approval or disapproval of an accessory dwelling unit application when a local agency has not adopted an ordinance. The bill would also require the ministerial approval of an application for a building permit to create one accessory dwelling unit within the existing space of a single-family residence or accessory structure, as specified. The bill would prohibit a local agency from requiring an applicant for this permit to install a new or separate utility connection directly between the unit and the utility or imposing a related connection fee or capacity charge. ..."

Actually, the state government rarely interferes with local control of land use.

You're correct that a bunch of new housing bills just got passed, but most of those don't actually take on local land use authority. That's why this SB827 is such a huge deal.

The state has known about the underproduction problem for years (see a bunch of LAO reports), but it hasn't had the political will to tackle the underlying cause until very recently.

Isn't it exactly the sort of thing that commerce clause was put in the constitution for?

"A curious GMU economist might informally contact fellow economists in California and inquire about this issue."

Why hasn't Brad DeLong weighed in on this?

What's the source of the report?

I wondered the same, and found this: http://ternercenter.berkeley.edu/uploads/San_Francisco_Construction_Cost_Brief_-_Terner_Center_January_2018.pdf

An increase of $160,000 sounds huge.

A 60% increase sounds huge.

That works out to an average annual increases of 3% which is in line with average inflation for the US as a whole (if my quick internet search is accurate).

16 years is a long time and the magic of compounding interest (same idea).

Is this really a story?

You're missing the phrase "accounting for inflation" in the excerpt. This is a 60% increase on top of inflation.

The (very brief and easy-to-read) article clearly states that the 160K delta has already been adjusted for inflation.

It's good to check to see if a report is accounting for inflation and dealing with real values, or ignoring inflation and presenting nominal gains as real. However, it's bad to assume that a study is not accounting for inflation without really checking, and poor reading comprehension to skip over the phrase "accounting for inflation" when it's in the excerpted phrase that's part of the post.

Here's a related recently published NBER paper. California's energy codes don't significantly decrease the amount of energy used (total or per square foot), but they do dramatically increase the cost of constructing housing at the low end.

Questions:
For residential/commercial energy use - how does California's climate of days above 90 degrees Fahrenheit and nights below 60 degrees Fahrenheit compare to the other states listed? Or in other words if you don't have to run the A/C or Heat a single day of the year in San Diego of course your energy use will be lower than other areas.
For industrial - break it down by NAICS 3 digit manufacturing sectors. Me willing to bet a lot the variance is based on the types of manufacturing in each state.
For transportation - obviously high population density makes a big difference. I'd be interested to know if California is being rightfully charged its allotment for all the air traffic in and out of LAX.

There is a big data opportunity for someone there.

It should be a hint that Florida is 3rd lowest.

We moved from Maryland to the Bay Area a couple years ago and ended up with a townhouse, mid-60s construction. We decided that we wanted to replace the old stone fireplace with a modern one. HOA was fine with it, since the exterior wasn’t affected. Our contractor said this would require submitting drawings of the new fireplace to the county and recommended someone who apparently does this sort of drawing for a living. She was booked up for months. We eventually gave up. We’re still not sure why the county needs drawings of the new fireplace.

Just DIY it and don't tell anyone.

and when it falls down in the next earthquake, you'll have no problem collecting from the Calif Earthquake Authority when you tell them it was not permitted!

It's a fireplace, so I'm guessing it's not load bearing.

A few ideas:

- building codes for "fire things" might interest neighbors who don't want their houses to burn down

- building codes for "fire things" might also interest concerned citizens who worry about the children of foolish parents.

- damage to chimneys is quite common in earthquakes and might result in payout from State disaster funds

That said, if you are out in the country you can get creative.

https://youtu.be/tBnIxtTZryY

I'm not competent when it comes to moving gas lines and tearing apart old stone fireplaces that adjoin a common wall. I'd also distrust any contractor willing to lose a license over doing this without a permit.

Most of the bay area already has complete crap for neighborhoods, so I don't see what they're trying to protect. The only neighborhoods there that have a neighborhood feel are exactly in the places with the highest residential density, like parts of San Francisco. I've explored many urban areas around the world and often had the sense that I was visiting places that succeeded at creating districts that felt like flourishing neighborhoods. But I've never once felt that way in fucking Fremont. California is an urban planning is a catastrophe, and any sensible person should see that taking a wrecking ball to all those endless miserable low-rise commercial buildings is the only way things will improve. That someone could say with a straight face that those abominations should be protected just boils my blood.

Move to San Franciso so you can embrace your urban anonymity and disappear. Those living in Fremont want a quiet enclave with a gas fire table on a patio in the back surrounded by orange and lemon trees. There is very little privacy living in a row house in S.F.

Fremont was built with effectively zero urban planning, driven instead by private for profit developers.

Private for profit developers were often effective at lobbying for government projects that increase the profits they can reap with railroads, highways, highway exits, public transit stations, etc., government support for factories to create customers from the influx of workers.

How much was built by public non-profits? Oh yeah, zero

Re: Why Housing in California is Unaffordable [In coastal metros]

No remaining flat land.

End of discussion.

You're missing the key point that the amount of housing per unit of land is not constant.

What Borjigid said, plus of course the various government bodies have allocated a substantial amount of land to themselves, and thus withdrawn from development. The federal government alone owns about 45% of California as a whole.

"The federal government alone owns about 45% of California as a whole." Sure, the Mojave Desert is much of this Fed owned land (upwards of %90).

As for Santa Clara Valley or LA Basin, this Federal Government ownership thing is NOT a factor, except for Moffett Field, but much of that's even reverting to Google ownership.

Only an economist believes that it's government that prohibits building 100 single family homes per acre.

HOUSING AND THE CALIFORNIA DREAM ARE AT A CROSSROADS
by Joel Kotkin 01/23/2018

“The Plains of Id, urbanophiles might sniff. Can anything good come from suburban Nazareth? Yes, the suburbanites were responding. Everything good was coming from this Holy Land: a house, a job, the quiet enjoyment of one’s premises …” — Kevin Starr, Coast of Dreams, 2004

For generations, California has offered its people an opportunity to own a home, start a business, and move up, whether someone came from Brooklyn, east Texas, Morelos or Taipei. That deal is still desired by most, but in a state that increasingly sees such activities as socially regressive and environmentally disastrous.

In new legislation, and supporting narratives from the academy and media, what most Californians have long sought out, a home of their own, is being legislated out of existence for all but the very rich and those who, 50 and older, got in when the getting was good.

Read the entire piece at The Orange County Register.
https://www.ocregister.com/2018/01/20/housing-and-the-california-dream-are-at-a-crossroads/

Joel Kotkin is executive editor of NewGeography.com. He is the Roger Hobbs Distinguished Fellow in Urban Studies at Chapman University and executive director of the Houston-based Center for Opportunity Urbanism. His newest book is The Human City: Urbanism for the rest of us. He is also author of The New Class Conflict, The City: A Global History, and The Next Hundred Million: America in 2050. He lives in Orange County, CA.

He's an asshole.

Assert eminent domain those living in the vast sea of Eichlers, to build high rises.

Good luck with that one.

Just like the Jeffersons, eh? Movin' on up to that deluxe apartment in the sky.

After twenty years in this permitting business (not in California but in Israel), rarely met open public opposition to building and development based on the arguments mentioned above. The opposition mostly comes from specialists inside the permitting bureaucracy. For example, Disability Access specialists have been added to all committees and they demand drawings and reports by private disability specialists, adding another layer of bureaucracy and additional costs. Now we have caught the American anti-discrimination pest, and more legal specialists demand their share of reports to be submitted and approved. I don't see rent seeking real estate owners, I see over-eager protectors of 100% safety, 100% equality, 100% social justice for the imaginary public, and protectors of their own safe and well-paying jobs in the bureaucracy/

As you say, it is a 60% increase over 16 years, or a 3.75% rate of gain.

Over the same period the CPI for homeowners equivalent rent for all of the US rose from 198 to 304,or a 53.5% . That is a 3.35% average annual gain.

So the difference between San Francisco, supposedly the epitome of government restricting housing supply, and the national average is some 0.4% annually. Yes giving the power of compound interest that is significant. But for all the discussion among economists one would expect a much larger impact.

Over the same period the Case-Shiller index rose from 100 to 192, or a 5.75% average annual gain. So using your measure, home prices in San Francisco rose much less than in the rest of the country. Maybe you need to look at your data again.
average annual gain.

OK, I just checked the Case-Shiller index for San Francisco.

It rose from 100 in 2000 to 247 in 2017, or a 9.2% annual average.
That looks more like one would expect for San Francisco and clearly does not contradict your analysis as the other measures seamed to.

Good for you Spencer.

"Over the same period the CPI for homeowners equivalent rent for all of the US rose from 198 to 304,or a 53.5% . That is a 3.35% average annual gain"

These numbers aren't inflation adjusted as Tyler's summary clearly states the 60% increase is, there's the cause of deviation.

"Interviews and focus groups identified four local drivers of rising construction costs: city permitting processes, design and building code requirements, workforce regulations and ordinances, procurement (small and local business) requirements, and environmental regulations."

So the government is mainly to blame for high costs. However, because the notion that government could make things needlessly expensive is not part of the leftist worldview, this problem will never be solved and can only be aggravated by California's leftist polity. Instead of easing on regulations, the government simply doubles down with more "affordable housing" fees, below market mandates and rent control.

If you were in control, you could craft tax cuts and deregulation that increased the supply of single family homes from 10 per acre max to 100 single family homes with backyards per acre minimum?

A few years ago my son bought a nice condo here in Gainesville FL for $44,000. Surely a similar condo could be built in Fan Fransisco for less than $100,000 if allowed. Can you even turn your garage into an apartment or build one above your garage in San Fransisco?

Commies wanna stack us like cordwood in Commie apartments so we gotta smell each other's farts!

That's Cali policy in a nutshell, my droogs!

The City blackmails developers into yielding a proportion of units as "Below Market Rate" (BMR) awarded by lottery (a system that seems almost tailor-made to benefit the well-informed, i.e. the well-connected). The required proportion is 25%, but to get expedited permission, they often have to yield more, in one recent case fully 50% of the units. The opportunity cost of those unprofitable units has to be factored in those costs somehow, and I suspect that is a factor in the 60% increase.

Not just the city, as developers often have to meet with neighborhood groups to make preemptive concessions for support

As someone else mentioned few if any development approvals are ministerial in nature in SF so everything can be appealed

Why are there so many posts about housing in California (and San Francisco in particular) on this blog?

Lots of press and academic research because it is incredibly awful here

What if unaffordability of first-tier human capital hubs (like the bay area) is required to keep enough human capital in second-tier hubs (like random Sun Belt cities) to ensure that those second-tier hubs remain viable, relevant, and productive? If every great technologist living in Charlotte moved to SFO, the SFO economy might further strengthen, but then Charlotte's could hollow out. Might that be a bad outcome? I generally think housing regulations are stupid, but might housing regulation arbitrage be important in helping us keep our talent geographically diverse and avoiding further geographic political polarization?

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