Californians Have a Serious Case of 'House Hunters'' Envy
Californians have a serious case of HGTV House Hunters' envy. The show, which predominately takes place in the American Midwest, gives a sneak peek into housing markets across the country. For those of us in California, where the average house price hovers around $440,000 - almost 2½ times the national average - watching homebuyers purchase dream homes for a fraction of that price can be demoralizing. Welcome to the irony of the modern "California Dream." While many still dream of living in California, for far too many owning a home is out of reach, and for many others, renting is just as unattainable (as of March 31, average California rent stood at $2,228 per month - a little over 1 ½ times the national average).
In about two weeks the Hoover Institution will be releasing the May/June 2015 issue of its new every-other-month California-centric policy publication, Eureka, featuring commentary on California's housing conundrum. Specifically, the issue will explore 1) a historical look at housing values, 2) what is causing California's affordability crisis, and 3) solutions to address the problem.
Outrageous Housing Prices are Nothing New: Wendell Cox, an urban policy and demography expert, kicks off this issue of Eureka highlighting the fact that California's exorbitant home prices are nothing new. Since 1970, California's house value-to-household income ratio has significantly diverged from the national average. By 1980, the major metropolitan areas in California - Los Angeles, San Francisco, San Diego, and San Jose - all had home value-to-household income ratios above 4.0, meaning prices were 4 times that of household incomes, a ratio not found anywhere else in the country. During the height of the housing bubble, the ratio was almost 9.0. Yet, even in the aftermath of the correction, California's home value-to-household income ratio still remains significantly higher than what generally prevails elsewhere in the U.S. Bottom line: California has been experiencing a housing affordability crisis for almost 40 years, and Sacramento has failed to appropriately identify the causes or remedy the situation.
The Cause is a Classic Example of Government Failure: Loren Kaye, the President of the California Foundation for Commerce and Education, dives deep into the causes of California's affordability crisis. The government failure is two-fold: 1) a lack of action by state officials, which in turn leads to 2) indifference by local officials. Two problems exist at the state level. For one, the private right of action component of the California Environmental Quality Act (CEQA) - a 1970-era law that requires environmental impact and mitigation analyses for all development projects - while well-intended as a tool to help state and local officials enforce the law, gives anyone the ability to bring lawsuits against public or private development. As a result, everyone from anti-development and environmental groups, labor unions demanding worker unionization, to businesses aiming to restrict competition can use CEQA to their own advantage, but to the disadvantage of individuals and families seeking affordable housing.
Second, the state, pressured by growing entitlement costs like public pensions and retiree healthcare, has de-prioritized helping local governments upgrade and modernize public infrastructure. This impacts local government development decisions. Without the help to update roads, schools, and water and sewer systems, local governments have little incentive to ease the cornucopia of anti-growth policies - such as height or density limits or land-use zoning restrictions - that inhibit housing development. Bottom line: Until CEQA is reformed and the state begins partnering again with local governments on infrastructure projects, local land-use rules restricting development won't change.
The Solutions Are Neither Novel nor Complicated: Carol Galante, the I. Donald Terner Distinguished Professor of Affordable Housing and Urban Policy at UC Berkeley, concludes the issue of Eureka acknowledging that the solutions can be found in the 1982 housing report compiled by the California Department of Housing and Community Development. The strategy behind addressing the affordability problem is threefold: 1) increase the housing supply, 2) reduce the cost of new homes, and 3) locate housing near jobs. The Legislative Analyst's Office (LAO) suggests that California should be building about 100,000 to 140,000 additional housing units on top of the current 100,000 or so a year. One way to make this happen: empower a "Projects Appeals Board," similar to what is found in Massachusetts or Oregon, to approve development when a locality won't. In order to reduce the cost of homes, California should be at the forefront of housing development technology to modernize the way housing is built. Finally, California should get serious about linking infrastructure development with job growth to ensure those areas rapidly growing can handle a boost in housing. Bottom line: It may make sense to dust off suggestions from our past and implement them, so we don't have to have this discussion again another 30 years from now.
Addressing the affordability crisis is vital to the future of California's economic health. As the LAO concludes, "[Housing costs], in turn, will place substantial burdens on Californians...growing housing costs also will place a drag on the state's economy." Ironically, a slowed economy could actually help to counter California's affordability crisis, but Sacramento and local leaders shouldn't let that be the solution.
For a more in-depth look at these topics, keep your eye out for the May-June 2015 issue of Eureka at hoover.org/publication/eureka to be released on Monday, May 18.
