Here’s an important part of the solution for the state’s housing crisis

Despite the failure 的 Senate Bill 1120 this year, there is a growing consensus that an important part of the solution is what might be called “middle density” housing – small-scale duplexes, triplexes and fourplexes, which historically played an important role in the California housing supply. 

Emotions ran high on SB 1120, with opponents calling it a giveaway to speculators.  But there’s little evidence that this is true. Even if the state loosens zoning regulations to permit more duplexes, the private real estate industry doesn’t know how to finance them. 

Such housing was once common in California – as recently as 1970, duplexes, triplexes and fourplexes represented 10% of the housing stock. They’re often found in prewar neighborhoods across the state. Owned by individual families who live in one of the units, they can provide affordable living for both the renters who inhabit them and the homeowners, who have an additional income stream. And this “gentle” approach to density can increase the housing supply without fundamentally changing neighborhood character. 

But today almost no one is building them. In the last 20 years, only 100,000 such units have been built in the entire state. 

Even with the failure of SB 1120, introduced by Senate President Pro Tem Toni Atkins, a Democrat from San Diego, the state has been pursuing zoning reform to make these units easier to build for some time. Last year, new laws were passed that makes it fairly easy for single-family homeowners to “triplex-ize” their lots by adding two accessory dwelling units on their lot. And Assembly Bill 725, introduced by Assemblymember Buffy Wicks, a Democrat from Oakland, which made it to governor, would encourage cities to plan for more market-rate duplexes in their housing elements. 

But zoning is only part of the problem. There’s also a gap in the real estate development business. The industry is simply not set up to finance duplexes, triplexes and fourplexes. 

Developers and lenders know how to finance single-family homes, apartments and condos. And individual homeowners and small builders are figuring out how to finance and build so-called accessory units. But it’s been decades since 2s, 3s and 4s have been common real estate products that lenders understand. 

Real estate developers and their lenders are risk-averse. In order to mass produce a particular real estate product, they have to believe there’s considerable upside potential and little risk. They won’t lend on a new product until they see examples of how such projects work.

For a real estate development product to succeed, two separate financing mechanisms have to be in place. First, the developer has to be able to get financing to build the project in the first place. And then homebuyers have to be able to get a mortgage. 

The state government has the ability to fill both these gaps, at least in the short run, in order to “make the market” for 2s, 3s and 4s. 

On the development side, the state Department of Housing & Community Development administers billions of dollars in affordable housing bond funds. Some of these funds should be dedicated to financing affordable projects involving duplexes, triplexes and fourplexes. This won’t be easy, because the state – just like private lenders – prefers the lower transaction cost and lower risk of large projects. But in order to make the market, the state must take the risk on 2s, 3s and 4s – because no one else will.

On the mortgage side, the California Housing Finance Agency runs a variety of mortgage programs for homebuyers who may have difficulty in the private marketplace. Although CalHFA sometimes helps finance homes with accessory units, the programs often focus on single-family homes. Like the Department of Housing & Community Development, CalHFA should dedicate a portion of its funds to providing individual homebuyers with mortgages to buy duplexes, triplexes and fourplexes.

The state’s zoning reform is a potential game-changer for California’s housing crisis. But without similar leadership from the state in the financing arena, it’s not likely that many duplexes, triplexes or fourplexes will be built at all.