Real Estate News

Bad news for Gavin Newsom’s housing goals: New home permits are down in California

California communities are approving residential building permits at a slower rate than they did last year, a sign Gov. Gavin Newsom faces an even bigger hurdle to reach his housing goals than when he took office in January.

In the first five months of 2019, cities and counties issued permits for an average of 111,000 residential building units per year, according to data released Friday by the California Department of Finance.

That’s a decrease of 12.2 percent from the same period in 2018.

Permits for multi-family units like apartments declined by an even greater rate, falling by 42.2 percent to a seasonally adjusted average of 46,000 units per year.

Matt Schwartz, president and CEO of the California Housing Partnership, said the decrease in home construction stems from a market shift that has made developers either want to put projects on ice or kill them entirely.

“These days you see most interest in the luxury apartments in places like downtown San Francisco, because otherwise the rents don’t pay for the high cost of construction,” Schwartz said. “Yes, rent has gone up, but construction costs have gone up two to three times as much.”

Newsom has made easing California’s housing crisis a top priority. He’s set a goal of 3.5 million new units by 2025, which would require the state to build housing five times faster than its current rate.

His first budget includes $1.75 billion to boost housing production by financing loans and tax breaks for affordable housing developers, resources to help cities plan for more housing and grants for housing construction.

He’s also sought to punish cities that put up obstacles to development. Newsom tried and failed to convince lawmakers earlier this year to take road repair money from cities that don’t meet state-mandated housing goals. A compromise passed with the budget allows the state to fine communities that don’t plan for affordable housing construction in accordance with state law.

Former Gov. Jerry Brown tried to spur more home construction, too. Two years ago, he signed a series of laws aimed at building more housing, including one that eliminates some local development restrictions in communities that fall behind on their housing goals.

But Friday’s report shows housing production is moving in the wrong direction to address the state’s massive housing shortage.

Over the last decade, California has seen about 80,000 new homes built each year, far short of the projected need of 180,000 new homes needed annually, according to the state’s Housing and Community Development Department.

As a result, housing prices in the state have ballooned. A third of California renters spend more than half of their income on rent. The state also has disproportionate levels of homelessness: California is home to 12 percent of the country’s population, but 22 percent of its homeless people.

Sacramento has been building housing at a relatively fast clip compared to the rest of the state. The capital saw the most new home construction of any California city north of Los Angeles in 2018. But rent prices in the region are still climbing and the city is struggling to house its growing homeless population.

Schwartz said Newsom’s proposal to tie transportation funds to meeting housing goals would have helped, because many localities have been resistant to new developments. That resistance by local governments translates into higher costs for developers.

“The market is just no longer working for them,” Schwartz said.

The University of California at Los Angeles Anderson School of Management predicted in March that the California housing market would continue to grow more slowly through 2019 and 2020.

“With our national forecast for slowing economic growth, continued discussion on when the next recession will be, and the Fed indicating that the peak of the interest rate cycle could be near, we now expect weaker housing markets into 2020,” wrote Director Jerry Nickelsburg. “As a consequence, our forecast for housing starts in 2019 and 2020 has been revised downward, with a recovery in building beginning in 2021.”

In addition to existing barriers to housing production, Newsom will also have to battle headwinds from federal tax cuts passed in 2017, which reduced tax breaks for affordable housing. Data from the California Housing Partnership, a nonprofit that advocates for low-income housing, found at least 15,000 affordable housing units were delayed or killed in California as a result.

Meanwhile, the highest-profile bill this year to spur housing construction stalled in the Legislature in May. Senate Bill 50 by San Francisco Democrat Scott Wiener would have required local governments to allow taller and denser housing construction near transit and job-rich areas.

“The numbers are troubling,” Wiener said. “Even though there’s a perception that we’ve accelerated housing production in California, we haven’t. We’ve fallen dramatically far short of where we need to be and it’s getting worse. And this is threatening the state’s future. In terms of our economy, our environment and people’s quality of life.”

The proposal’s critics, including local officials, argued the legislation hijacked their local zoning control and housing plans. Other housing advocates said the legislation would have displaced longtime residents already battling gentrification.

Lawmakers are still considering Senate Bill 5 by Democrat Jim Beall of San Jose, which would free up hundreds of millions for housing initiatives starting in 2021. The state would dole out the money for local homeless and affordable dwelling projects.

“(SB 5) is a contract between the state and cities,” Beall said. “And the contract will specify the number of units and the timeline. Each city that wants to participate in SB 5 will be given a mandate to meet their goals. Otherwise they have to meet that goal on their own.”

This story was updated at 11:30 a.m. on July 23, 2019. An earlier version incorrectly stated the number of building permits issued by cities and counties for single family homes, concluding that the figure from the California Finance Department report’s wording – “Residential building permits issued for the first five months of 2019 averaged 111,000 units” – meant a monthly average. It meant they are on pace to issue 111,000 building permits for single family homes this year.

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Sophia Bollag covers California politics and government. Before joining The Bee, she reported in Sacramento for the Associated Press and the Los Angeles Times. She grew up in California and is a graduate of Northwestern University.
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Hannah Wiley joined The Bee as a legislative reporter in 2019. She produces the morning newsletter for Capitol Alert and previously reported on immigration, education and criminal justice. She’s a Chicago-area native and a graduate of Saint Louis University and Northwestern.