CALMATTERS EXPLAINERS ARE PRESENTED BY
Forty percent of the state’s households struggle to afford the roof over their heads. Homeownership—once a staple of the California dream—is at its lowest rate since World War II. Nearly 70 percent of poor Californians see the majority of their paychecks go immediately to escalating rents.
Here’s what you need to know about one of California’s most vexing issues.
John Osborn D’Agostino contributed to this story, which was updated May 2, 2018.
Hard. Really hard. Both compared to how hard it is in other states, and how hard it was for previous generations of Californians to buy homes.
Source: Legislative Analyst’s Office.
While it’s always been more expensive to be a homeowner in California, the gap between us and the rest of the country has grown into a chasm. The median California home is now priced 2.5 times higher than the median national home. As of 2017, the typical California home costs $560,000, easily beating the likes of Massachusetts or New York (only Hawaii had more expensive houses).
Despite relatively low mortgage rates, exploding housing prices have caused California’s homeownership rate to dip significantly. Just over half of California households own their homes—the third lowest rate in the country, and the lowest rate within the state since World War II.
It’s not just housing prices that are affecting homeownership rates. Studies have found that student debt loads, rising income inequality and changing housing preferences among younger Californians are also at play.
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Rental costs across the state are some of the highest in the country. While listed housing prices dipped dramatically in the wake of the Great Recession, rents in California remained relatively stable before soaring in recent years in hot markets.
Across the state, the median rental price for a two-bedroom apartment is about $2,400, the third highest in the country. But statewide figures water down how absurd the situation is getting in urban coastal markets, where the vast majority of Californians live. The median rent for a two-bedroom apartment in San Francisco reached more than $4,000 this year.
That’s somewhat true—median earnings for Californians are higher than the national average, and are significantly higher in certain regions like the Bay Area with tremendously pricey costs of living.
But on average, income over the past two decades has not kept pace with escalating rents.The problem here is not just housing. Income inequality and wage stagnation in California also hinder low and moderate-income households’ ability to pay for a home.
But in certain markets, even extremely high incomes aren’t enough to blunt the cost of housing. In San Jose, where the current median income is nearly $100,000, renters can still expect to pay 40 percent of their monthly income on rent, according to an analysis by the real estate data firm Zillow.
It’s difficult to measure things like “gentrification” and “displacement”—when the arrival of higher-income, higher-educated residents in a community results in the expulsion of longtime lower-income residents. But there’s little question change is happening rapidly across many California cities.
Researchers at UC Berkeley found that more than half of low-income households in the Bay Area are at risk of, or already experiencing, gentrification. It’s not just lower-income communities bleeding households—higher-income neighborhoods are losing their lower-income members as well. And in places like the Boyle Heightsneighborhood of Los Angeles, gentrification protests have exposed escalating tensions between longtime Latino residents and new, predominantly white arrivals.
Where are these low-income people going? Increasingly, out of state.
From 2000 to 2015, the state lost nearly 800,000 residents with incomes near or below the poverty line. Nearly three-quarters of those who left California since 2007 made less than $50,000 annually. The leading destination for California’s poor? Texas.
Housing costs are just one factor in the complex tangle of reasons people become homeless. California actually has fewer peopleexperiencing homeless now than it did a decade ago. But there’s little question rising rents are linked to more Californians living in cars, shelters, and on the streets—especially in the greater L.A. area.
While the vast majority of states saw a dip in their homeless population between 2015 and 2016, California saw an increase of about 2,400 people, according to statistics compiled by the U.S. Department of Housing and Urban Development. California accounts for about 12 percent of the nation’s population, but more than 20 percent of the nation’s homeless live here.
Recent numbers from Los Angeles County, where the number of people experiencing homelessness grew 30 percent over the past two years, have prompted cries for more eviction protections and rent control. Zillow recently estimated that a 5 percent increase in rent would result in an additional 2,000 homeless Los Angelinos. In 2016 rents grew an average of 4 percent there.
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Nearly a decade removed from the depths of the Great Recession, and 38 percent of California’s 18 to 34-year-olds still live with their parents, according to U.S. Census data. That’s roughly 3.6 million people—more than the entire population of Chicago.
Again, housing costs are not the only thing keeping junior from moving out. Student debt loads, disappearing labor markets, and delaying marriage are also contributing to the trend. We’ve seen no thorough analysis yet on how California’s abundant avocado toast supply may be keeping millennials confined to their nests.
The extremes of the state’s housing crisis are concentrated in the Bay Area and greater Los Angeles, but the challenge is truly statewide. A widely-cited report by the consulting firm McKinsey Global Institute found that in every metropolitan area in the state—from Fresno to Palmdale to Salinas—at least 30 percent of residents could not afford local rents.
The intense pressures of housing costs in coastal urban centers are spilling into inland cities. While San Diego, San Francisco and L.A. top the list of toughest rental markets in the country, cities like Sacramento and Riverside recently have experienced the largest year-over-year increases.
Big business is also feeling the pinch of California’s housing crisis.
The McKinsey Global Institute found that housing shortages cost the economy between $143 billion and $233 billion annually, not taking into account second-order costs to health, education and the environment. Much of that is due to households spending too much of their incomes on the rent or mortgage and not enough on consumer goods.
Even the attractive salaries and lavish perks of Silicon Valley struggle to overcome the local housing market, as young tech talent flees to the relatively inexpensive climes of Austin or Portland. Nearly 60 percent of Los Angeles companies in a recent University of Southern California survey said the region’s high cost of living was affecting employee retention.
The state estimates that it needs to build 180,000 homes annually just to keep up with projected population growth and keep prices from escalating further out of control. Unfortunately, for the past 10 years, the state has averaged less than half of that. In no year during that span did California crack the 100,000 barrier.
There’s fierce debate over how long it takes low-income residents to benefit from the construction of new market-rate housing—a renter on the wait list for housing vouchers won’t take much comfort in the luxury condos being built in downtown Oakland or Los Angeles. While California faces an affordable housing gap at nearly all but the highest income levels, the low-income housing shortage is most severe.
According to the nonpartisan Legislative Analyst’s Office, helping just the 1.7 million poorest Californians afford homes would cost $15 to $30 billion a year. The Los Angeles Times estimated that the three marquee bills considered by lawmakers this month would provide less than 25 percent of that total.
You ever hear someone say “It’s just a matter of supply and demand”?
From 2010 to 2017, the population of the state has grown 6 percent. That’s more than 2 million newly minted Californians, all with the nasty habit of wanting a place to live. Making matters worse, most are cramming themselves into our state’s large cities. In fact, 75 percent of the state’s new residents have sprouted up in urban centers with populations over 50,000 (don’t be too hard on them–that’s where most of the job growth has been).
That kind of crowding means more competition for available housing. This doesn’t necessarily lead to pricier homes and higher rents—so long as the housing stock grows at a comparable rate. Oh, but about that…
Part of the problem boils down to the (literal) nuts and bolts of housing development. Over the last five years, construction costs have been ticking up across the entire country.
A labor shortage in the home building industry bears much of the blame for this. When the housing market crashed in the late 2000s, construction workers left the industry in droves. Now that prices are back at nosebleed levels, those same workers haven’t come back. Across the country, employment in the construction industry is down more than 13 percent since the height of the recession. In California, it plummeted twice that far.
Where have all the workers gone? Theories abound: tighter immigration laws, a dearth of skilled labor, the opioid epidemic, depressed wages, coddled millennials not knowing the value of a hard day’s work. Whatever the cause, it all makes it that much harder for developers to build homes on the cheap and easy.
But construction costs are only part of the problem. And sometimes a relatively small part at that.
Source: Morris A. Davis and Michael G. Palumbo via the Lincoln Institute of Land Policy
In most of the state’s major urban areas, the bulk of a single-family house’s price is locked into the land it sits on. That high price tag on the cost of actually buying a parcel and prepping it for construction not only makes new housing more expensive, it influences what kind of housing gets produced: developers prioritize high-end projects, since even the cheapest pre-fab unit will come stuck with a steep fixed cost.
What makes land expensive? When it’s in shortest supply. Take San Francisco: Seven-by-seven miles of hillside penned in by water on three sides. Of the top 15 most physically constrained metro areas in the country, seven dot California’s oh-so-desirable coast. But many of those same coveted locales place additional limits on where—and when and how and how much—construction can take place. That all makes it that much harder for housing to keep up with population growth. And over the last decade, it has not.
*An earlier version incorrectly referred to the structural value of single-family homes as construction costs.
Who has cause to celebrate when a new housing project goes up in your neighborhood? Young homebuyers, nearby businesses, new arrivals to the area, and, of course, developers. But people who have been living in the neighborhood for years may worry that the new development will depress the value of the homes they own, or trigger increases in the rent they pay. Those who prefer not to live next door to a construction site, or watch their zucchini garden wither in the shadow of a garish new condo building, have plenty of reasons to object.
And object they do. With the exception of one irregularly enforced state law, land use planning in California is a local process—and one that affords opponents of change ample opportunity to stall, stymie, or scale down. The tool kit of local obstruction includes zoning restrictions, lengthy project design reviews, the California Environmental Quality Act, parking and other amenity requirements, and multi-hurdled approval processes. In California, you’re most likely to find these extra restrictions where developable space is already scarcest—in coastal urban enclaves.
Local pushback might be rooted in concerns about the environment, about congestion, about the creep of gentrification, or in a desire to preserve the “character” of the neighborhood (however that might be defined). But whatever the flavor of NIMBYism and whatever its ultimate goals, higher hurdles to development in the state’s most desirable locations mean many cities have failed to add new units fast enough to keep up with population or job growth.
And that inevitably means higher prices.
A little recent history: In 2012, California began unwinding its redevelopment agencies, the local investment organizations tasked with revitalizing “blighted” areas across the state. By law redevelopment agencies were supposed to provide a guaranteed stream of cash to cities for subsidized housing—20 percent of any increase in property tax payments.
Much—in many cities, most—of that money didn’t end up going into the construction of new housing, but was instead siphoned off to pay for broadly defined “administrative activities.” Still, with the end of redevelopment came the end of the single largest source of non-federal money for affordable housing in the state. California lawmakers never plugged that hole.
In the meantime, temporary influxes of cash from recent bond initiatives, Proposition 46 (2002) and Proposition 1C (2006), are nearly depleted. Excluding the Low-Income Housing Tax Credit program, between 2008 and 2014, state and federal funding for affordable housing development in California has dropped by more than $1.7 billion, or 66 percent.
California lawmakers have made some recent headway in scrounging up public dollars for subsidized housing. Passed last summer, a new $75 fee on home refinancing and other real estate transactions will generate more than $200 million annually for low-income housing. And a $4 billion affordable housing bond measure will be on the ballot this November.
That funding is just a drop in the bucket, considering the sheer number of low-income Californians who can’t afford their rents. The Legislative Analyst’s Office has estimated that it would cost an additional $15 billion to $30 billion each year for the state to provide subsidized housing to those who are most in need. Even in California, $15 billion is a lot of money.
Wouldn’t simply adding more market-rate housing make all housing more affordable? Eventually. But according to one UC Berkeley study, it can take decades before new supply begins to push down rents on the cheapest places. In the meantime, it found, subsidized housing is twice as effective as new private development at allowing low-income residents to weather rising rents and stay within a region.
It’s hard to get people to agree on a solution when they don’t even agree on the problem.
Ask Gov. Jerry Brown, and much of the blame for California’s housing woes lies with local obstructionists. Take away the NIMBYs’ favorite procedural tools and the housing market will eventually build its way out of the shortage.
But red tape has a powerful constituency. Its members include:
- City governments, which generally like having a say in what does and doesn’t get built within their borders. Last summer, the powerful League of California Cities opposed several measures to streamline the local housing approval process. It has called such efforts counter to the “the principles of local democracy and public engagement.”
- Environmentalists, who don’t want the Legislature tinkering with California Environmental Quality Act (CEQA). Pro-housing advocates argue that environmental concerns can be used as a pretext to hold up a project for any number of unrelated reasons. Cases in point: The law has been used in the past to block high-density housing and bike lanes. According to the Legislative Analyst’s Office, CEQA appeals delay a project by an average of two-and-a-half years.
- Building trade groups also benefit from the status quo. Any developer that uses public funds (in other words, anyone building affordable housing) is required to pay workers the most common rate for that job across the region. That “prevailing wage” tends to be set by the union rate. Labor groups have lobbied lawmakers to make prevailing wage restrictions a part of any housing fix. How much more expensive do union-level wages make housing projects? Experts differ with estimated cost increases ranging from 0 to 46 percent.
- Anti-gentrification activists, who often argue that developers should be saddled with more restrictions, not fewer. New houses may bring down prices over time, they argue, but for those who are facing eviction or displacement today, new, high-end development only makes a particular locale more attractive to outside investors and wealthy house hunters.
- Good old fashioned NIMBYs. Last year, Marin County got a special exemption from the state’s housing development quota. What was the justification? According to one county supervisor, ramping up affordable housing construction wasn’t consistent with Marin’s “suburban character.”
You’d be hard pressed to find a single aspect of California life that isn’t affected by Proposition 13. Naturally, it gets blamed for an awful lot of the state’s problems.
So what about the cost of housing? After all, Prop 13, California’s 1978 tax revolt initiative, capped property taxes at 1 percent of a home’s purchase price and limited the rate taxes can tick up each year by 2 percent. From a city’s perspective, giving your available land to new housing doesn’t make much sense if a sales-tax-paying restaurant or clothing store is waiting in the wings.
Last year the Legislative Analyst’s Office looked into the question of whether the state’s capped property taxes distort local land use decisions. Their conclusion: a resounding “probably not.” In short, a city’s dependence on property taxes or sales taxes didn’t predict much about its land use decisions.
Even so, there are other ways in which Prop 13 could be contributing to our affordability crisis. Another consequence of capped property taxes is that local governments have to scramble for other sources of cash. One of those sources is housing developers. On average, California levies the highest developer fees in the country, making it that much more difficult to build new housing.
Los Angeles Mayor Eric Garcetti, third from right, joins other big-city mayors in urging lawmaker sto address the state’s housing shortage during a news conference Aug. 30 in Sacramento. AP Photo by Rich Pedroncelli
State lawmakers introduced more than 130 bills last legislative session to try to do something, anything, even the tiniest thing, about the state’s housing woes. While housing has never been a top goal for Gov. Jerry Brown compared to, say, global climate change, he announced with Democratic legislative leaders that a housing package would be lawmakers’ top priority before they adjourned for the year last September.
After drama-filled negotiations that spilled late into the night, legislators finally passed 15 bills aimed at alleviating the state housing crisis. Three emerged as the central elements:
- SB 2, by Sen. Toni Atkins, a San Diego Democrat, which would impose a $75 fee on many real estate transactions and direct that revenue toward state-sponsored affordable housing. The fee, which would not apply to home sales, could raise upwards of $200 million annually.
- SB 3, by Democratic Sen. Jim Beall of San Jose, which would put a $4 billion affordable-housing bond before voters in November of 2018. The borrowing would support construction and subsidize home loans for veterans.
- SB 35,by San Francisco’s Sen. Scott Wiener, a Democrat. It would ease regulatory hurdles for new housing developments in cities that are not meeting their state-mandated housing goals
Although a diverse coalition of affordable housing advocates, developers and other housing stakeholders support the package, Californians shouldn’t expect to feel the impact of the legislation on their rising rents or mortgage payments anytime soon. The new affordable housing dollars are estimated in a rosy scenario to produce about 14,000 homes a year—well below the 100,000 home gap between what the state typically produces and what it needs to keep prices stable.
Earlier this year Sen. Scott Wiener, a Democrat from San Francisco, introduced a bill intended to force cities to allow taller, denser housing around public transit. SB 827 would have allowed developers to build apartment buildings five stories high within a half-mile of a major transportation hub—even if that meant an apartment building would be located right next door a single-family home.
The bill sparked a national debate over how much power local governments should have in determining what housing gets built within their borders. Proponents of SB 827 argued that forcing cities to allow more density around transit was the only way to dramatically increase housing supply while reducing sprawl and greenhouse-gas emissions from long commutes. Opponents said the bill would irrevocably change the character of local neighborhoods and could displace low-income communities of color.
The proposal died in its first committee hearing, much to the chagrin of urbanists around California. But the fight over how far the state can and should go to override local control over housing decisions is far from settled: Wiener has vowed to bring back SB 827 in one form another in the near future.
While SB 827 may have gotten all the publicity, a handful of other important housing bills are still winding their way through the Legislature. These include SB 828, which would require cities and counties to rezone land to accommodate more housing, and AB 3037, which would revive redevelopment funding for affordable housing.
Want more insights on California’s housing crisis? And what the state is currently doing to try to fix it? Listen to “Gimme Shelter: The California Housing Crisis Podcast”, launched by CALmatters data reporter Matt Levin and Los Angeles Times housing reporter Liam Dillon. Every other week, Matt and Liam will bring you the latest in California housing politics and policy. Listen here, and subscribe on iTunes, Stitcher and your favorite podcast platform.