California Confusion Signals An Ongoing Housing Crisis
In a previous RealClearMarkets column, I explored the causes and consequences of California's ongoing housing affordability crisis. In a state where the average house price and monthly rental price hovers almost 2½ and 1½ times, respectively, above the national averages, it is clear that for far too many, homeownership isn't an option and renting is just as much of a strain on household budgets.
Earlier this week, the Hoover Institution released the May/June 2015 issue of Eureka, an every-other-month California-centric policy publication featuring commentary on a timely policy topic. This issue explores, in detail, California's housing conundrum. In addition to the featured commentary on the crisis, this edition of Eureka also analyses the results of the Hoover Institution's second 2015 Golden State Poll, which surveyed adult Californians living in the Bay Area, Central Valley, and Southern California on their views on housing affordability and policy solutions. Overall, they nailed the problem, but on the solutions, they missed the mark.
Assessing the Problem Correctly: The facts on California's housing affordability problems are pretty clear. For instance, monthly median rental prices have increased almost 10% since 2010, but median renter income has fallen almost 3%. Moreover, according to the California Association of Realtors, an average of just 31% of California households is able to purchase the median value home. So when the Golden State Poll asked Californians residing in the Bay Area, Central Valley, and Southern California about housing prices, it is not surprising that almost 7-in-10 said the cost of purchasing a home is very or somewhat expensive for the housing you get. Moreover, a majority of Californians consider the housing market to be very or somewhat competitive - both in the area in which they currently live and in the one they'd prefer to live.
And when it comes to the top concern about the cost of housing in California, a plurality listed "younger generations will have a difficult time owning" as their top concern. This is notable, because according to the poll results, just 16% of millennial Californians are homeowners even though 60% would strongly or somewhat support more construction of the classic home: single-family, big yards, and not close to your neighbor. California has always been a place of new beginnings, but without homeownership, economic mobility becomes more difficult.
Getting the Solutions All Wrong: Probably the most amazing fact about California's housing affordability problem is that it has been festering for more than 30 years. Why is this amazing? Because the solution is very straightforward: increase housing supply (to the tune of 116% of current housing unit construction). California's housing problem is a classic supply-and-demand problem you'd see in an Econ 101 class. There is a lot of demand, but constricted supply leading to an increase in prices. Notably, this isn't a market failure; rather, the supply has been restricted artificially by well-intended state and local government policies that have yielded massive negative unintended consequences. Hence, those barriers to development need to be removed, something California's non-partisan Legislative Analyst's Office made clear in a recent report on the issue.
But when asked to assess three state-level and three local government policies to reduce the cost of housing, Californians sided with the policies that while alleviating the symptoms of the problem, wouldn't address the underlying cause. 54 percent strongly or somewhat support Sacramento subsidizing regional public transportation to ease commutes, 47 percent strongly or somewhat support passing more rent control laws, and 40 percent support Sacramento increasing the renter's tax credit. Meanwhile, the policies that would encourage the construction of more housing units - Sacramento relaxing CEQA for housing development projects or local governments changing zoning laws and relaxing open space requirements - were only strongly or somewhat supported by a little more than 3-in-10 Californians. In fact, in the Bay Area - where 78% said housing costs are very or somewhat expensive, the most out of the three regions surveyed - opposition to relaxing CEQA and open space requirements overwhelmed those policies' support.
This disparity between assessing the problem correctly and not supporting the most appropriate solutions may be the reason California's affordability crisis is stretching into its second generation. Everyone knows California is expensive and that the cost of housing is hurting many younger and low-income Californians' ability to fully achieve the California Dream, but Californians 1) are unwilling to wait for the long-term, sustainable solution to take root, and 2) for those who are property owners, fear what adding housing supply will do their built-in equity. Until Californians are willing to demand the permanent fix from their state and local leaders, Sacramento and the myriad of city councils will continue to pass around-the-edges policies that alleviate the symptoms, but do little to solve the problem. And as a result, we'll be dealing with this crisis for another generation.
