Walters: Why the California Housing Market Is So Expensive in 2024

This is a simple question answer—“Why is California Housing so Expensive”?  In one word, GOVERNMENT.

Taxes, mandates, permit fees, silly studies, forced building of affordable housing—so the  developer must raise the market price of others homes.    The long tim it tskes to get through the government bureaucracy adds to the cost.  In many cases the mandated use of union workers, not the best workers, adds to the costs.

“Rents are among the highest in the country in California, home to four of the ten most expensive large cities for tenants, according to the rental listing website Zumper. Believe it or not, that’s actually an improvement since 2020. In the state’s priciest cities, an outflux of residents and an modest apartment building boom have had the combined effect of slowing (or in some cases) even reducing rents.

Still, California is anything but affordable for most renters.

The state’s low homeownership rate plays a role here. As it has become more difficult to buy a home, wealthier people have remained stuck in the rental market — and driven up rents.

Wages can’t always keep up

Though renters saw sluggish wage growth in the first half decade after the Great Recession, median incomes among California tenants have ramped up in recent years. On average, income over the past two decades has finally caught up with escalating rents.”

The Democrat created infltion has made this worse.  As the article says, those harmed the most, “cost burdened” are blacks and Hispanics.  Sound like the Biden/Harris economic polices are racist.

Why the California Housing Market Is So Expensive in 2024

By Ben Christopher and Manuela Tobias, San Jose Inside,  9/11/24    https://www.sanjoseinside.com/news/investigative-reports/why-the-california-housing-market-is-so-expensive-in-2024/?utm_source=ActiveCampaign&utm_medium=email&utm_content=Housing+Prices+Soar&utm_campaign=SJI+Newsletter+-+091224

California is an expensive place to call home.

It’s such a fundamental part of California life it almost feels silly to say. Along with good weather, sunny beaches, Hollywood and the Golden Gate Bridge, the skyhigh cost of housing has become part of the state’s national identity.

The high cost of housing touches virtually every aspect of life across the state. It shapes where we can and can’t live and with whom, where our kids can grow up and go to school, where we can work and how long our commutes are. It is the root cause of some of the state’s most pressing crises, like homelessness and poverty, and there are few challenges Californians face that aren’t made worse by the relative scarcity of affordable places to call home.

High rents widen the gap between rich and poor. High home prices make wealth generation an ever-more exclusive pursuit. Expensive cities force more workers to commute, which means more driving, traffic and greenhouse gas emissions.

“There’s no issue that impacts the state in more ways on more days than the issue of housing,” Gov. Gavin Newsom has said. “This is the original sin in the state of California.”

We know all of this is true. We live it every day. But how did things get so bad? And is there anything we can do to make California affordable again? Here’s what you need to know about California’s housing costs.

Buying a house in California

Really hard. Both compared to how difficult it is in other states, and how challenging it was for previous generations of Californians.

In the late 1960s, the value of the typical California home was more than four times the average household’s income. Today, it’s worth more than 11 times what the average household makes.

While it’s always been more expensive to be a homeowner in California, the gap between the rest of the country has widened into a chasm. The median California home is priced nearly 2.5 times higher than the median national home, according to 2022 Census data.

Both high and low interest rates haven’t helped much. During the COVID-19 pandemic, the Federal Reserve pushed down borrowing costs, making it easier to take out a mortgage on better terms. But that only drew more would-be borrowers into the market, pumping up demand for the short supply of homes for sale in California. So prices went up.In the face of roaring inflation, the Fed jacked up interest rates in 2022. That drove plenty of buyers out of the market, but it also convinced many homeowners to reconsider selling. Homes, already in short supply, disappeared from the market. So prices went up.

Homeownership rates

Given how expensive it is to actually buy a house here, maybe it’s not surprising that California’s homeownership rate is on the low end. Just over half of Californians own the home they live in, the second lowest rate of any state in the country. Nationwide, two out of every three households own their homes.

California’s homeowners also skew significantly white. White Californians are twice as likely as Black Californians to own, according to 2022 Census data. That racial gap widened over the years, which also means Black Californians are less likely to build wealth over time, said Carolina Reid, associate professor of city and regional planning at UC Berkeley.

Racial disparities pop up in every corner of the housing market.

“Blacks and Hispanics are more likely to be cost burdened, more likely to live in overcrowded conditions, more at risk of eviction, and displacement,” she said.

Rent is too high

Rents are among the highest in the country in California, home to four of the ten most expensive large cities for tenants, according to the rental listing website Zumper. Believe it or not, that’s actually an improvement since 2020. In the state’s priciest cities, an outflux of residents and an modest apartment building boom have had the combined effect of slowing (or in some cases) even reducing rents.

Still, California is anything but affordable for most renters.

The state’s low homeownership rate plays a role here. As it has become more difficult to buy a home, wealthier people have remained stuck in the rental market — and driven up rents.

Wages can’t always keep up

Though renters saw sluggish wage growth in the first half decade after the Great Recession, median incomes among California tenants have ramped up in recent years. On average, income over the past two decades has finally caught up with escalating rents.

That’s the good news.

The bad news is those income gains haven’t been spread around the state evenly, even as rents continue to ratchet up for everyone.

More than half of California renters are rent burdened, which means that more than 30% of their income goes toward rent, according to the Harvard Joint Center for Housing Studies. Nearly a third of Californians are severely rent-burdened, which means that rent eats more than half of their income. No surprise, rent burdens are rare among high earners and virtually ubiquitous among those living below or near the poverty line.

The numbers are worse for families of color, too. A California Housing Partnership analysis found that in 2019, Black renter households were about twice as likely as white renter households to be severely cost burdened.

Homelessness is on the rise

The number of people experiencing homelessness is notoriously hard to track, but the estimates available indicate that the problem is as bad as it has ever been.

State numbers show that throughout 2023, more than 300,000 people accessed homeless services through local agencies. About 220,000 were single adults, and nearly 116,000 in families with kids. Los Angeles County, the state’s most populous county, also had the highest number of people experiencing homelessness, with about 100,000 people accessing services. But the crisis affects every corner of the state.

People lose their homes for a wide variety of reasons. The sudden loss of a job, a mental health crisis, a severe substance abuse problem and becoming the victim of domestic violence are common factors that can push a Californian into homelessness. But there’s no evidence that California experiences those social ills at substantially higher rates than other states. Experts and survey results suggest that the main reason that homelessness is so much more severe in California than most other states is a lack of affordable housing.

Housing shortage

California just doesn’t have enough housing to keep up with demand. The difference between the number of homes we need and the number we’ve been building has been growing for decades.

The gap is starting to shrink. But very, very slowly.

Population has essentially broken even over the last decade, while the state experienced a modest building boom in the wake of the COVID-19 pandemic. As of 2024, there are more homes per person — 3,789 units for every 10,000 Californians — than there have been since at least 1991.

But the picture might be less encouraging than those numbers suggest.

The number of people living in each home has been on a long-term decline across the country, a trend turbo charged during the pandemic. That makes the number of homes that the state needs to build to keep up with demand a moving target. And however you define the size of the state’s housing shortage, we’re nowhere close to closing it.

Gov. Gavin Newsom’s administration has set a statewide production goal of roughly 2.5 million new units by the end of the decade — or roughly 315,000 per year. The state has never come close to building that much that quickly.

Building new homes is expensive

Part of the problem boils down to the (literal) nuts and bolts of housing development. The cost of building multifamily housing in California spiked by about 25% between 2010 and 2020, according to a report by the Terner Center for Housing Innovation at UC Berkeley. In the first few years of this decade, construction costs in the state’s major metros increased nine % or more each year, according to a state cost index.

On average, each square foot cost $44 more to build in 2018 than it did a decade ago across the state. In the Bay Area, however, that cost jumped up by $81 a square foot, according to the Terner Center. And affordable housing was more expensive to build than market rate housing.

The reasons are many and complicated. Land costs, permitting delays, borrowing costs, local fees and the threat of litigation can all add up. Subsidized housing typically receive public funding and so have to abide by heightened hiring, wage, environmental and public amenity requirements. But two especially big ones are more expensive materials — which saw particularly price hikes during and immediately following the pandemic — and a relative shortage of labor. While the number of permitted units spiked by 230% between 2009 and 2023, the number of workers has grown by only 45%. Experts attribute the lack of construction labor to restrictive immigration laws, a tighter overall labor market, the inability of residential jobs to compete with higher paying commercial projects and a construction workforce that is still coming back online after it was gutted during the Great Recession.

Expensive land

But construction costs are only part of the problem.

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, prepping it for construction and getting the regulatory approval to break ground not only makes new housing more expensive, it influences what kind of housing gets produced: Developers prioritize high-end projects, since even the cheapest prefab unit will come stuck with a steep fixed cost.

What makes land expensive? A lack of supply doesn’t help. Take San Francisco: Seven-by-seven miles of rolling hills 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 (and oh-so-expensive) 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 demand. And for decades, it has not.

NIMBY

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 (paradoxically) 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, too.

And object they have. For generations, land use planning in California was a strictly local process — and one that afforded 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 “Not in my backyard”-ism 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.

Public dollars: A bust then a boom

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% of any increase in property tax payments.

With the end of redevelopment came the end of the single largest source of non-federal money for affordable housing in the state. Between 2013 and 2018, state investments in affordable housing dropped from an annual average of $1.3 billion to less than $500 million, according to the California Housing Partnership.

Spending ramped back up during the Newsom administration through a combination of new bond sales, the rare tax measure and a glut of one-time funding during good budget years. But even as spending has crept back up (and then some), the cost of building housing purpose-built for lower income Californians continues to climb faster and affordable housing advocates still yearn for a permanent source.

Getting around local opponents

It’s hard to get people to agree on a solution when they don’t even agree on the problem.

Ask some state politicians 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, they argue.

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. The powerful League of California Cities has 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 the California Environmental Quality Act or similar eco-minded regulations. 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 and the conversion of parking lots into affordable housing. The law’s defenders counter that legal challenges are fairly rare.
• Building trade groups also benefit from the status quo. Proposed changes to make it easier to build almost invariably lead to debates among organized labor groups over what kinds of high wage requirements and union-hiring mandates should be included. When the trades don’t get their way, they’ve been known to block legislation or oppose local developments.
• Anti-gentrification activists, who often argue that developers should be saddled with more restrictions, not fewer. New houses may bring down prices over time and in general, 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. As California lawmakers have set their sites on building denser, more affordable housing within the state’s exclusive suburbs, local lawmakers and irate homeowners have gotten creative in their efforts to get around the rules. A few examples of what cities have tried: Declaring themselves mountain lion habitats, requesting historic designation protections, rewriting their local constitutions and shunting required development onto parcels that are literally underwater.

What about Prop. 13?

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 % of a home’s purchase price and limited the rate taxes can tick up each year by 2 %. Financially, a city giving available land to new housing doesn’t necessarily make much sense if a sales-tax-paying restaurant or clothing store is waiting in the wings.

But 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 housing affordability crisis. Lower property tax rates allow many longtime homeowners to stay in homes that have skyrocketed in value. But it also means empty nesters with large homes face less financial pressure to downsize and make room for new buyers. 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.

Legislation timeline

Once upon a time, it was taken for granted in Sacramento that housing policy was to be left up to the locals. That is no longer the case. Since 2017, a growing chorus of state lawmakers — an informal caucus that includes both progressive Democrats and conservative Republicans — have come to the conclusion that the state needs to play an active role in ensuring that California builds more homes, even if that means steamrolling reluctant local governments, environmental interests and unions.

The laws that they have passed have radically reshaped California housing law, even if they’ve been slow so far to resolve the affordability crisis.

A few of the biggies:

• Regulator teeth: A 2018 law gave state housing regulators more power to force local governments to plan for more housing development.
• ADUs in every backyard: A 2019 law makes it harder for local governments to keep homeowners from building backyard bungalows, also known as accessory dwelling units.
• Rent cap: This 2019 law put a lid on how much landlords of some (though not all) properties can raise from year to year.
• No downzoning: Another 2019 law, this one prevents local governments from reducing the overall number of homes that can be permitted within their borders.
• Density for affordability: A 2020 law allows developers to radically increase the number of units in a project if a certain share is designated affordable.
• Duplexification: In 2021, the state passed which is still known in housing circles by its bill number, SB 9. It requires cities and counties to allow for duplexes on parcels currently exclusively zoned for single family homes.
• Stripmalls to housing: This 2022 law makes it easier to convert defunct businesses along commercial corridors into apartment buildings.
• Apartments by-right: A 2023 law by San Francisco Sen. Scott Wiener allows many proposed apartment buildings with some units set aside for lower income Californians to be exempt from environmental litigation or local discretionary review. The law was an update to an earlier version, also by Wiener, from 2017.