Affordable Housing Crisis: Causes & Cures

First published: February 11, 2015  |  Last updated: September 9, 2017

The reasons California home prices and rents are so high has been well documented in reports published by an assortment of organizations including the California Legislative Analyst's Office (LAO) and the Federal Reserve Bank of New York (FRBNY). To summarize these reports, the highest housing costs, where they are found, are the result of restrictive zoning codes, a tortuous planning process, high government fees and other government regulations. In other words, we have a government induced shortage of supply.

California is in the beginning stages of a housing affordability crisis that will only get worse. California's Legislative Analyst's Office (LAO) released a report in 2015 on California's high housing costs. Among other things, the report concluded that California needed to build in the neighborhood of 100,000 more housing units each year than it was currently building. It is this housing shortage that causes median home prices to be about 2.4 times higher than the national average and about 3 times higher than the median home price in Texas.

Renters feel the effects as well. The average rent nationally for a 1 bedroom apartment is $1,018 but it's $2,483 in San Jose and $3,240 in San Francisco.

The Causes in a Little More Detail

"The Impact of Building Restrictions on Housing Affordability," published by the Federal Reserve Bank of New York (FRBNY), concluded that the highest prices, where they exist, are the result of zoning and other land use controls.

The State of California's Legislative Analyst's Office (LAO) released its report titled "California's High Housing Costs: Causes and Consequences." The LAO report identifies a lack of supply in California's coastal communities as the primary cause of California's high housing costs. Among other things, it noted that "over two-thirds of cities and counties in California's coastal metros have adopted growth control policies explicitly aimed at limiting housing growth." Even when it's not explicitly prohibited, it's still difficult to get projects approved. A consortium of developers spent $17.2 million on the planning phase of San Jose's Coyote Valley before abandoning their plans. Even if they successfully navigated the planning phase, the lawsuits from environmental groups and neighbors that were sure to follow would have created unknown additional costs and years of delay.

A 2009 paper from the CATO Institute entitled "How Urban Planners Caused the Housing Bubble" provides a compelling case that restrictive planning regulations and high government fees created an artificial shortage of housing. Among things cited in the CATO paper is that "The eight counties in the San Francisco Bay Area, for example, have collectively drawn urban-growth boundaries that exclude 63 percent of the region from development. Regional and local park districts have purchased more than half of the land inside the boundaries for open space purposes. Virtually all of the remaining 17 percent has been urbanized, making it nearly impossible for developers to assemble more than a few small parcels of land for new housing or other purposes." The San Jose Mercury News ran a story on July 13, 2014 titled "Bay Area home builders struggle to keep up with demand." It indicated Bay Area developers were paying $3 Million to $5 Million per acre for development land.

The Independent Institute looked at affordable housing mandates that require builders to set aside a certain percentage of their homes for sale at below market rates. San Jose, for example, has an inclusionary housing ordinance that requires builders of 20 or more housing units to sell 15% of the units at below market prices or set aside $122,000 for each below market home that is not sold. In "Below-Market Housing Mandates as Takings: Measuring their Impact" the authors concluded that "cities that impose a below-market housing mandate actually end up with 10 percent fewer homes and 20 percent higher prices."

Likewise, tax credits and subsidies given to wealthy builders to promote the construction of below market rate housing do not increase the supply of housing as much as they add buyers competing for a limited amount of land upon which housing can be built. For instance, how many more developers are needed in the Bay Area to bid up land prices where existing developers are already paying $3 million to $5 million per acre for development land? Clearly, what is needed is more land upon which to build.

Another impediment to providing an adequate supply of homes are the high fees charged by some government entities. The cost of building permits and other direct fees is currently over $50,000 per home here in rural Yuba City where the median home price is about $285,000. That doesn't include another $20,000 to $25,000 in lost purchasing power from Mello-Roos taxes that are added to the annual tax bill.

The LAO's report also says that "California's inland metros added housing at about twice the rate of the typical U.S. metro between 1980 and 2010" but that high prices there are due largely to the spillover effect from the inadequate supply in the coastal areas. While prices in the inland metros may be higher than the national average, the extra supply has clearly had a positive impact on housing affordability.

The Disparate Impact of These Restrictive Policies

Wealthy homeowners in coastal communities enjoy the benefit of home prices that appreciate at artificially high rates. As landlords, they also benefit from the artificially high rents that result from these policies. Moderate income households fortunate enough to have purchased homes years ago have amassed a great deal of wealth from artificially inflated prices.

Low and moderate income households who are not property owners suffer. The LAO report identified significant trade-offs these households make when faced with high housing costs. These include:

• Spending a larger share of income on housing.
• Commuting further to work each day.
• Postponing or foregoing homeownership.
• Living in more crowded housing.
• Living in substandard housing.
• Living near sources of pollution.
• Choosing to work and live elsewhere.

Moderate income households have also suffered from the devastating financial impact of the most recent housing bubble. The CATO paper concluded that restrictive housing policies and high government fees were a necessary condition for states that had housing bubbles. While it did not absolve Wall Street financial firms, easy money policies of the Federal Reserve or loose lending policies forced by the Community Reinvestment Act, it pointed out that these were all national in scope but that less than half of all states suffered a housing bubble. It also concluded that states that had housing bubbles will have them again unless they rid themselves of the restrictive housing policies that lead to the last housing bubble. California's housing planning policies have only become more restrictive since the last housing bubble.

Affordable Housing Solutions

The LAO's report noted that "the state has approached the problem of housing affordability for low-income Californians and those with unmet housing needs primarily by subsidizing the construction of affordable housing…" It concluded that this approach has only accounted for a small fraction of the needed housing. It goes on to say "We advise the Legislature to change policies to facilitate significantly more private home and apartment building in California's coastal urban areas."

It seems doubtful that California legislators understand the nature and magnitude of the problem. Given that the Legislative Analyst has identified that we need to build in the neighborhood of 100,000 more new housing units a year in coastal California than we are currently building, it's easy to see that there is a shortfall in construction of roughly $50 billion. The Legislature's response is a bond to raise $4 billion. A one time fix of $4 billion dollars is a drop in the bucket when compared to an annual shortage of $50 billion.

Even if California's politicians do understand the problem, there is no evidence they possess the political will to take on the environmentalists and mostly moderate income home owning households who will show up at planning meetings prepared to fight tooth and nail to stop any proposed new housing developments.

Legal action may be required to solve the problem. These restrictive housing policies have a disparate impact on low income households as compared to wealthy households. The wealthy benefit from artificially high real estate appreciation rates while low income households suffer from artificially high rents and a host of other issues. To the extent that minorities, particularly Hispanic and African-American, are over represented in the low income categories, these policies have a disparate impact on them. The U.S. Supreme Court has ruled that public policies that have a disparate impact on minorities violate the Federal Fair Housing Act (FHA) even though no discrimination was intended.

Improving Incomes

Increasing the supply of homes by reducing government restrictions and fees will help improve affordability but should not be viewed as the only solution. The Federal Reserve Bank of New York report also makes the point that often a lack of affordable housing is a problem of poverty and is not a function of housing that is unreasonably priced. Improving the household income of low and middle class families will also have the effect of making housing affordable for more people.

California currently ranks 49th in economic freedom among the 50 states. It also has the 2nd or 3rd highest level of income inequality, depending on the metric used. Economic freedom is distinctly different than the crony capitalism that rewards large and politically well connected businesses and labor unions with special tax breaks and other favors.

According to Antony Davis, economics professor at Duquesne University, states and countries with more economic freedom tend to make it easier to start or expand a business, make it easier for low and middle class families to create wealth, have lower unemployment rates, more income equality, more gender equality, lower child labor rates, higher economic growth rates, and less debt per GDP.

Improving housing affordability will be well served by: articulating to government officials and the public that high home prices are the result of government policies that restrict the supply of homes; facilitating more private housing construction by reducing the government regulations that have led to artificial housing shortages; reducing the high government fees placed on builders; and dealing honestly with the immigration issue in a way that permits more people to prosper and add to our economy.

The interests of affordable housing have been hurt by states and communities that have implemented restrictive and expensive growth management plans. Improving economic freedom holds the promise of controlling the spikes in home prices, the housing bubbles associated with those spiking home prices, and at the same time improving the income and wealth of low and middle income families.