Capitol Alert

Here’s why California’s historic housing legislation won’t bring down costs anytime soon

'We know that this is just a start,' Assembly speaker says of housing bills

Assembly Speaker Anthony Rendon discussed legislative passage of a package of housing funding and regulation bills earlier this month.
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Assembly Speaker Anthony Rendon discussed legislative passage of a package of housing funding and regulation bills earlier this month.

California lawmakers this year took historic action to address what one housing economist says is the state’s most serious problem: unaffordability.

“Over the past 30 years, we’ve made it very difficult to build new housing and wages have not kept pace with the rising cost of house prices or rents, to the point it has grown into a crisis. It’s the single biggest problem California faces,” said Ken Rosen, a professor at UC Berkeley’s Haas School of Business and chair of the Fisher Center for Real Estate and Urban Economics. “If we don’t solve this problem, the economic impacts over the next five to 10 years will be devastating.

“Companies will move out. Young people won’t be able to afford to stay here. As people retire, they’ll move, and California will no longer be the Golden State,” Rosen said.

Democrats in the Legislature – and one Republican – have advanced to Gov. Jerry Brown a package of housing bills that seek to stem the bleeding. Through a spokesperson, Brown said he supports each of the 15 bills, which provide new funding for low-income housing development, seek to lower the cost of construction, fast-track building and restrict the ability of cities and counties to block new development.

Housing experts say it is the most ambitious move the state has taken in decades – and perhaps ever – to address the issue. They say it is “historic” in part because the state’s housing affordability crisis, with rising home values, skyrocketing rents and rampant tenant displacement, is unprecedented. As costs have grown since the recession, the state has done little until now.

But Californians should not expect the effects to be felt immediately. Even years down the road, the measures will not stop rents from increasing or home prices from trending upwards.

“It’s very hard to get enough housing built to lower the price,” Rosen said. “New funding may build several thousand units, but that’s very small compared to the size of the need. If we make it easier for developers to build housing, the market will be able to better keep pace with demand, and therefore we may be able to slow the rate of increase.”

Prices are unlikely to fall any time soon for several reasons.

Funding is a major one.

Two of the bills in the housing package include funding to increase production of low- and middle-income units.

Senate Bill 2 from state Sen. Toni Atkins of San Diego would generate roughly $250 million per year through a fee on real estate transactions, such as mortgage refinances. Senate Bill 3 from state Sen. Jim Beall of San Jose would generate $4 billion in one-time revenue through a state housing bond. It needs voter approval next year.

Together, the funding would generate an estimated $6.5 billion over the next decade. It’s difficult to estimate how many units that could generate – future money is earmarked for more than just affordable housing projects, like local and regional planning, veterans’ mortgages and homelessness assistance, for example. Building costs also vary widely depending on the type of construction and its location.

But on average, the cost of affordable housing is around $300,000 per unit, said Brian Uhler, the chief housing expert at the state Legislative Analyst’s Office. On average, the state picks up 20 percent of the overall cost, or about $60,000 per unit. Using calculations he provided at an Assembly hearing earlier this year, that would pencil out to to roughly 90,000 housing units – about 5 percent of what the state says it needs over the next decade.

“It’ll make some dent, but there will still be a large number of people who for the foreseeable future will be having a hard time affording housing,” Uhler said.

The state says production now is at its lowest point since 1965. Statewide, the median single family home price has risen more than one percent in the past year alone, to $565,330, with sharper increases in the Bay Area and along the coast, according to August data from the California Association of Realtors.

Production of multi-family housing is also stagnant, and renters, particularly low-income families, have been hit hard. Current estimates show there is a shortfall of 1.5 million low-income rental units across the state.

“There are still going to be a lot of people struggling,” Uhler said. “Nothing is going to fix this overnight, and nothing is big enough to make rents go down.”

One way to directly lower rents is by freezing how much landlords are allowed to raise prices. Assemblyman Richard Bloom of Santa Monica this year wanted to clear the way for stronger rent control measures, but he pulled his proposal citing political opposition from the California Association of Realtors, which argues that rent control stifles development. It could come up again next year.

It’s really expensive to build here, and that’s not going to change.

Land is expensive, especially in cities where more people want to live. To offset the local impacts of development – on public infrastructure like water, roads and sanitation systems, as well as public services like schools and parks – local elected officials have increasingly looked to one-time charges on new development to accommodate growth.

Even 20 years ago, California led the nation in imposing fees on development, according to a Public Policy Institute of California report at the time. Costs have risen since then, exacerbated by growing cities and deeply rooted state law such as Proposition 13, which limits the amount of property taxes cities and counties are allowed to collect and creates tax incentives that favor commercial development over residential.

“We are so under-supplied in housing across our state, at all income levels. What would make a difference in the future is the structure of how housing gets built in California,” said Ray Pearl, executive director of the California Housing Consortium, an affordable housing advocacy group. “What the Legislature and the governor did is unprecedented, and it’s a giant first step...but that basic structure, with all the hurdles and uncertainty and costs and fees associated with housing, still remains in place.”

Some suggest changing Proposition 13 and other state laws often cited for stifling development, including the California Environmental Quality Act.

“We should never undermine the original intent of CEQA and how it seeks to protect and prioritize the environment, but too often it is used as an anti-development weapon by those who do not want any new housing,” Pearl said. “You see that up and down the state, yet it is one of the state’s holy grails and that is one giant impediment to increasing our state housing production.”

The California Building Industry Association, an industry trade group, also contends the state’s landmark environmental law is used to stop projects and drives up costs. It argues provisions in the Legislature’s housing package – mandating higher construction worker pay in some projects and allowing cities and counties to require a portion of market rate development be affordable for low- and middle-income people – will actually lead to higher housing costs, restricting development.

Zoning – the way cities plan for future growth – is also seen as a barrier to changes sought in the housing package to spur construction. Senate Bill 35 from state Sen. Scott Wiener, D-San Francisco, seeks to encourage growth in cities that have not built enough housing at all income levels. State law requires cities and counties to plan for such housing, but they are not required to actually build it.

Wiener’s bill seeks to hold local government more accountable to building housing at all levels through streamlining the development process. But it has limitations.

“It’s saying that if you have projects come forward consistent with local zoning, you can’t tell them ‘No,’” Uhler said. “But that and all these other bills are dependent on the zoning process working well...and cities identifying enough sites for new housing. But in many cities those targets are too low and are not reflective of the actual demand. They should be higher in many communities and that would help with the streamlining in Senate Bill 35.”

Local zoning changes trigger project reviews and public comment, lengthy and sometimes expensive processes which developers, under Wiener’s bill, would be able to bypass.

Gabriel Metcalf, president and CEO of the San Francisco Planning and Urban Research Association, a think tank, said the state should play a larger role in the way cities and counties zone land for future growth. He says the situation is dire, especially in the Bay Area, and thinks the state is underestimating the true housing demand in the region by 50 percent.

“We need to figure out how to get zoning changed, especially around the state’s major transit changes, to accommodate more people. That would take local jurisdictions like Palo Alto changing their direction, or the state needs to step in,” Metcalf said. “We are so far behind, and our housing system is so broken that it’s going to take a really long time to dig ourselves out of this hole.”

Jason Rhine, legislative representative for the League of California Cities, argued Wiener’s streamlining bill “holds cities accountable to actions they cannot control and turns planning and zoning law into somewhat of a production law.”

He refuted the idea of asking the state to take a more direct role in zoning for future housing and said that to spur development, cities and counties need more funding.

“The state already says to cities and counties, ‘Here’s the number of housing units you need to plan for.’ That’s best done at the local level...that’s why we have elected officials and that’s why we involve the community in all those planning phases,” Rhine said. “If we’re going to make a real, meaningful impact on the low- and very-low income units, we’re going to need to identify more funding in the future.”

It’s going to take a massive shift in attitude to bring prices down.

Others said the state should consider “radical” change.

“There’s no overnight, magic wand solution to this,” said David Shulman, a senior housing economist for the Anderson Forecast. “If the state really wants to deal with this, it needs to do whatever it can to fast-track development. It made some real progress that would have been unthinkable a few years ago, but no one should be deluded into thinking that this is going to solve the problem.”

In a report this year, the state Legislative Analyst’s Office found California cities use their local control to limit the supply of housing and that has drastically driven up its cost, worsening the shortage.

The Legislature and Brown are attempting to address the phenomenon of the “Not-In-My-Backyard” attitude, but Uhler said “we decided that addressing this problem is ultimately going to take a huge shift at the local level.”

“Such a change is unlikely to happen on its own,” the report found. “Convincing Californians that significantly more home building could substantially better the lives of future residents and future generations necessitates difficult conversations led by elected officials and other community leaders.”

Without that, “no state intervention is likely to make significant progress on addressing the state’s housing challenges,” it said.

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