How California Became America’s Housing Market Nightmare
 

How California Became America’s Housing Market Nightmare
Noah Buhayar and Christopher Cannon
November 6, 2019
Bloomberg

Bloomberg

Some take aways:

1] CA has the highest poverty rate when adjusted for cost of living.
2] CA needs 3.5 million new homes, right now.
3] Cost Burden: CA has the highest share of households spending more than 30% of their income on housing.
4] CA has held the second highest home prices for decades [only behind Hawaii, for obvious reasons]
5] The cost burden hits all income brackets.
6] Job growth exceeds the growth of the housing supply. The Bay Area saw 5.4 new jobs for every unit of housing it built between 2011 and 2017.

How much of this crisis is caused by NIMBYs? Like 95%?

I am still not sure if this is all NIMBY caused or if it has to do with high cost of business and regulation, leaving little return for developers.

I understand places like the Bay (especially the peninsula) and San Diego are quite conservative when it comes to upzoning, which is odd, due to the region's uber liberal population.

Oakland could really take advantage of this housing crisis and up zone it's entire western half and absorb a good 150,000 people, but BART will need significant help to deal.

Saying California is a "housing market nightmare" is like saying Apple is a "valuation nightmare". Homeowners are sitting pretty.

Most people are existing homeowners, obviously, and benefit from strong property values. You wish you bought in Palo Alto or Flint?

It's not odd, it's logical. Why would existing homeowners not wish to protect their wealth, and why would they wish to change their neighborhoods? And what does "uber-liberalism" have to do with anything?

San Diego and Silicon Valley are hardly "uber-liberal", BTW.

''Housing for All''
''Free Healthcare''
''Everyone is equal'' ect.

The Bay Area is famous for being super far left swinging, and this generally means that people favor more left leaning policies, like universal healthcare and government subsidies ect.

I understand why current homeowners wouldn't want more housing, obviously. But a good chunk of the voting population is renters, who would most certainly want more housing units constructed so their rents go down and have more housing options.

Also, sure- there are conservative areas of California. But they are the minority. To say otherwise is being intellectually dishonest. CA is one of, if not THE most reliably liberal states in the country.

You're conflating all sorts of things.

Most of California isn't "liberal" and even most liberals don't support "housing for all" and "free healthcare". Yes, obviously most believe in equality, but that isn't a liberal take.

The Bay Area isn't "super left". SF, Oakland and Berkley are "super left". Silicon Valley, which has the crazy home prices, is politically moderate. Actually the super left areas are some of the most affordable areas. Even lefty-leaning Marin has lagged, because it doesn't have tech.

There are more homeowners than renters. Why would homeowners want cheaper housing? My aunt in Coastal CA, a retired nurse, has a modest oceanfront house that's probably worth $4 million. You think she's crying about her home values? Maybe she should have bought in Cleveland or Detroit back in the 70's, so her children and grandchildren would get nothing when she dies.

Also, she's in a traditionally conservative area that's very NIMBY and still has tons of Republicans (southern Orange County). I bet you the remaining Republicans are every bit as NIMBY as the liberals. Still tons of Republicans in places like Newport Beach and Dana Point, even a decent share of hard-core Trumpies.

CA homeownership rate is about 55%, which is low. If you go to urban areas, it's most certainly lower than half. So this argument doesn't really hold.

Homeowners vote much more than renters. They're also older and much more politically engaged.

Yes, if CA eventually became renter dominated, like NYC, the dynamics might change. But keep in mind that NYC is super-NIMBY too. The renters apparently hate tall buildings too.

That sounds like your opinion rather than a fact.

If homeowners voted much more than renters, 99% of my peers shouldn't have had the ''Voted'' sticker on their chest on Tuesday.

Anyway, I asked about the reason for this housing shortage and we're splitting hairs and getting nowhere. There clearly is a problem with a housing shortage, see the homeless camps everywhere in CA. Would like to understand the reason behind this rather than discuss the republican pockets of CA or why calling California liberal is wrong.

I doubt homeless camps are the primary indicator of a housing shortage. I think it's more people working in the Bay Area making $130k+ living with 4 roommates. California may be a massive state, but the most desirable areas are still geographically constrained. If tech companies wanted to locate in Fresno or Bakersfield instead of Palo Alto, housing affordability would likely be far less of an issue. As it stands, there is a long-time contingent of wealthy and powerful homeowners that have little to gain from supporting intensification of their neighbourhoods with mixed-use, medium/high-density projects.

I don't know Los Angeles as well, but I know BART has done a pretty good job of incentivising private investment into exurban transit stations that bring a drastic uplift in value to the surrounding land. I've used a couple of examples there as case studies for similarly structured deals here in the GTA. Unless the State is going to implement some sort of mechanism to overrule local zoning disputes, I see developments like this one in West Dublin/Pleasanton being the primary method of adding large numbers of units.

https://i.imgur.com/wQn5ETnl.png

There are over 1,500 units in this photo and it's about a 45-minute train ride to Downtown (according to Google Maps, never done the route myself). There's no existing layer of low-density residential full of NIMBY homeowners. Also, upzoning from medium-density like this to high-density in the future should be far less of a battle than going from SFH to 4-5 storey blocks.

It's mostly NIMBYism, but not just that. Proposition 13 has also played a role. It means that unless a house changes hands, property taxes cannot go up by more than 2% per year - which is of course generally speaking not only lower than property appreciation, but lower than inflation.

The proposition was originally put into place in 1978 in part to ensure seniors would not be priced out of their homes. But it applies to all property equally, and ensures that if you've owned a property for decades, you will be paying very low property tax rates, eliminating most of the incentive to sell. IIRC you can even pass down houses in families without your children getting reassessed.

The result of this is it fucks up the California housing market. People who in other states might choose to downsize to smaller units - or move within the state - just stay put where they are for long periods of time. On average, homeowners in the major coastal cities stay put around three years longer than they would have otherwise, which doesn't sound like a lot, but it means a lot of units which could be taken up by the local workforce are just kept off the market entirely.

Excellent and insightful comment. Pretty wild though that the best solution we've come up with is building dense greenfield developments ~40 miles away and shipping people into cities by the train-full.

Silicon Valley is extremely libertarian. It's probably the most libertarian region in the entire country, and that ethos is integral to much of the tech industry. I would also generalize that California overall is more libertarian leaning than many places east of the Mississippi.

I mean it's not really a new practice in many other places, but it requires good transit coverage and decent speeds. The faster the trains are, the further away from the core developments like this should be viable. With true high-speed rail there shouldn't be any reason that someone couldn't work in the Bay Area and buy a $250,000 condo in Stockton, protecting valuable farmland and ecological areas between the two.

It may be libertarian, but it's the opposite in limiting density. It's truly bizarre that there aren't several thousand new units per year right in the valley.

Really? What % does the Libertarian party even get in local CA elections? Do they even have ballot access in CA at all? At this point, I think the most libertarian state is probably New Hampshire, while Kentucky libertarians have the most sway in local elections.
Maybe in private, a lot of silicon valley types are libertarian, but they sure do not vote that way outside of maybe gay rights and drug legalization, which are closely aligned libertarian issues with the Democrats. Progressives have completely opposite view, especially on economic issues, compared to libertarians.

No idea, but in Silicon Valley libertarianism is hardly a scarlet letter. This is the land of Peter Thiel and Marc Andreesen we're talking about.

Peter Thiel is a black swan and a contrarian, and he moved to LA away from Silicon Valley, because he was in a tiny minority.

The rest of the Paypal mafia is still there.

Keep in mind that the most insane housing prices aren't in SF; they're in Silicon Valley. SF (proper) really isn't that crazy expensive compared to other first-tier cities. And Silicon Valley is sprawly and centerless.

The East Bay also isn't that insanely expensive. It's pricey, of course, but considering the local salaries, normal households should be able to afford a house and reasonable commute. The real issue is how do you fix SV sprawl where crap homes go for $2 million+ because they're close to giant corporate HQ, and where non-vested employees endure horrific commutes.

LA suburbs are late to the party, but I'm starting to see more big projects next to light rail/commuter train stations. Even places like Compton have plans to redevelop industrial sites with dense housing near it's stops.
It's going to be interesting going froward but they still need to do more.

The problem is there's few developments like this in the Bay Area. Dublin is one of the few exceptions because they build the suburban housing and mixed-use developments like this. Literally across the freeway in Pleasanton or Livermore, you'd never see developments like this and there's few suburban housing developments.

In countless areas of the Bay, there's suburban shopping centers with parking lots that are >50% empty most of the time, yet trying to rezone these areas to allow for midrise residential on top of commercial big box stores would be like asking someone to tear off their arm. The Bay Area is one of the extreme examples of what happens when you don't build housing (the most extreme example in California to me is Santa Barbara). You don't have to build neighborhoods of McMansions, but a few townhome developments and mixed-use could solve a lot of issues. But my views! The shadows!

I wouldn't say LA suburbs are late to the party considering Bay Area suburbs haven't done much anyway. LA suburbs just haven't received the rail yet, but even near the Metrolink stations you see developments like this. The Orange County line being a great example, as Anaheim, Orange, Fullerton, Santa Ana, etc., all have multiple mixed-use developments near their stations. There's others like Corona, Riverside, and Montclair. Rancho Cucamonga has a big development planned near theirs. Greater LA in general does a better job with housing as there is more land and slightly less NIMBYism among it's residents, especially away from the coastal areas.

Compared to DC metro (where I'm from), I consider LA extremely late. The blue line to Long Beach should've been much more built up by now, even if its just affordable housing.
They're trying to catch up, true.
I don't know as much about the Bay Area's situation. I assumed they were doing well with TODs.

The other ones I used were Contra Costa Center and to a lesser extent, Concord. Couple examples in the D.C. area as well.

Who represents the opposition to shopping mall/big box redevelopment? Every institutional owner here worth their salt who has large retail exposure has big redevelopment plans in their back pocket. It's going to be a race to start selling residential and office space in, around, and over those second-tier malls before they're left with a useless shell.

Yeah Walnut Creek and Concord are other examples of suburban cities there that builds housing, and they are about the only ones too. Bay Area cities, especially the Inner Bay Area, has been extremely slow in aiding the housing issue. I think a lot of owners in CA would like to do the same thing as GTA, but the problem is the residents who've already made it by owning a house in expensive coastal CA or other high dollar areas continue to vote down many rezoning/upzoning measures that get put in place.

The red tape to even building a highrise amongst a row of highrises is too much. In LA, there was a proposal for a residential highrise along Ventura Blvd that was in the middle of commercial highrises, yet residents were able to block it. The reason was because it was apparently going to block views and give extra shadows. Now what's going to be built is half the size of the proposal (or had half the units, one of the two). That made absolutely no sense considering where it was going to be built. Another example is Playa Vista on the west side. Before the development, Playa Vista was essentially a blank canvas and was mostly greenfields. Somehow nearby neighborhoods were able to block many proposals, so now Playa Vista is a short low-rise district with really high housing costs that has a Home Depot with a gigantic empty parking lot. The same thing happens in the Bay and it's completely ridiculous.

There's this from Apartmentlist.com (a pro-renter voice):


Renter voices are underrepresented in American politics. Renters are less likely than homeowners to be voting eligible, and even among eligible voters,
just 49% of renters cast a ballot in 2016, compared to 67% of homeowners. Renters are significantly more likely to lean left. Among homeowners, President Trump
beat Hillary Clinton in the 2016 election by a margin of 6 percentage points, but Clinton won the renter vote by a staggering 30 percentage points.
We estimate that if renter voter turnout had matched homeowner voter turnout in 2016, Hillary Clinton would have won four key swing
states — FL, MI, PA, and WI — leading to an electoral college victory of 307-231.


https://www.apartmentlist.com/renton...g-preferences/

Those who vote get to make the rules, and the rules (tax laws, zoning) in most of the United States are heavily weighted to make homeowners wealthier, and to preserve their relatively comfortable lifestyles and protected position in society. (California through its ballot initiatives has further segmented this hierarchy: long time property owners get a preferred position over new owners, from a tax perspective.) And for all of the talk of liberalism, when the rubber hits the road many purported liberals aren't willing to give up much in terms of their own lifestyles, comfortable neighborhoods, and preferential treatment just to help a few (million) unfortunate souls who don't have the same privileges. (Thus, for example, you might see self proclaimed liberals paying to haul in giant rocks to block sidewalks from access by the "homeless").

In my town, Denver, homeowners recently defeated a proposal to allow luxury row houses in a SFH neighborhood, because they didn't want the "character" of their neighborhood changed (Eee gads, who would want to live on the same street of a row house dweller when we all have ridiculously large single family homes??!!!!).

Of course, many renters aspire to, and do become homeowners and at that point have the same incentives to favor policies that favor homeowners. And the world turns.

I disagree with most of the premise and the usual analyses of the CA housing situation.

If you look at topographical maps, you'll see that the readily developable land in close proximity to CA's economic centers is really pretty fully developed in the sense the land is covered with constructions of one sort or another.

Yes, we could build UP. We could replace the 1 and 2 floor homes with 4-12 floor apartments and condos and, in cities, where there may already be midrises we could build high rises (except some of Silicon Valley which has FAA restrictions on height).

But who says Californians want to live in apartments or anything other than single family homes. Frankly, that's NOT the "California dream". But maybe the dream is changing. Or maybe not. Maybe it'll have to, but maybe there'll be an awful lot of resistance with an awful lot of people preferring a single family home in the exurbs out in the Central Valley or Inland Empire at whatever price they have to pay to an apartment in the economic center.

I'm just not at all sure if CA removed all the restrictions to dense development in center cities and close-in suburbs that developers would find willing renters for all the apartments they could build and the price of single family homes would decline much. And since many of the construction workers for those apartment projects may be among those wanting a single family home somewhere (seems like a majority of such workers commute from the CV now) and may need to continue making high wages to pay for those homes, the cost of building even apartments in low demand could remain high--high enough to curtail their development.

I guess the point here is that it's all very complicated.

Isn't the Bay Area one of the few places - outside of college towns - where you actually see adults who are not in a relationship with one another regularly co-renting a house, because there's just so few purpose-built rental units to go around?

That would certainly suggest to me there is a shortage of apartment units overall.

Paying $3,000 a month to rent a 1br apartment should also suggest shortage of apartment units...

Are Californians somehow unique in having too much pride and belief in the California dream to live in anything less than their ideal dream home? I'm sure plenty of apartment dwellers across the world would like to have a SFH, but they make do renting while they accumulate the means to do so. The difference in the Bay Area is those aspiring homeowners probably make at least twice as much and need to save a lot longer to make that a reality.

At least it provides options compared to what exists today.

In San Francisco, yes. Lots of people have roommates they are NOT in any romantic relationship with. These people are mostly young(ish), single and want to live in the city for the excitement, night life etc. Nothing unusual there.

But they don't share living spaces because they couldn't find a place of their own. I see "for rent" signs all the time (although certainly the vacancy rates are quite low). It's because of the cost, as in an average rent of $3600/month for a 1 bedroom, $4700 for a 2 bedroom (just divide $4700 by two and you've saved $1250/month).

Even somebody newly arrived out of school for a tech industry job (average starting salary $91,700) would be stretching a budget to be paying over $43,000 out of that $91K (before taxes and CA has high taxes) for just rent. Got to leave room for the $5 cups of coffee (at Philz; at tech fave Blue Bottle it's more), $25 Mexican lunches (unless your employer has a great cafeteria), $12 Uber rides and so much more.

I'm not really arguing there's no shortage of apartments--rather that building more apartments (or allowing them to be built, whether or not it then happens) wouldn't solve the problem for a lot of people. And it is true that nearly all the apartments that ARE getting built are at the top of the cost spectrum. That $3600 average includes a lot of older buildings and subdivided homes made into flats and so on. The average for new construction, especially highrise construction, would be much more.

Even with apartment units being available, alot of workers in Silicon Valley would rather rent a room in a 3 bedroom SFH than a room in a 3 bedroom apartment. Especially transplants from the midwest and east coast that want to take advantage of the year round nice weather :cool:

If more development is allowed, the choice would not be between renting a room in an apartment or a room in a SFH. The actual construction cost, even with California regulations and taxes, is probably around $1,500 per month for a 1br, the rest ~50% of rent cost is just NIMBY premium due to restrictive zoning.

In the Bay Area, people live in the city because they enjoy the city--even in tiny or shared spaces--but it's usually kids that drive them out. The city schools are problematic at best and the cost of private, even Catholic, schools is too much for many parents on top of the high cost of everything else.

Most of the people found moving to Texas or somewhere will tell you it's because living in SF they could NEVER save enough for a single family home in a good school district. I'm not sure that many people living in SF even try because they see it as impossible. If they have the ability, many plan on moving to a different part of the country when the kids come. But they do NOT want to live in an apartment the rest of their lives (until the nest is empty again).

Nobody is actually forced to do that though. Most of them are recent grads, transplants and fresh off the boat foreign workers. They don't really know their options around the bay. They can easily rent a place in the east bay for around 2k and commute to work like everybody else.

Why guess? The average construction cost in the Bay area is now $417/sq ft. Most new 1 bedrooms run around 650 sq ft so around $270,000 to build. The cost of land, which I don't believe is included in that figure, could easily double it. In San Francisco, using land it already owns, it costs the city about $450,000 per unit to build "affordable family housing" which is subsidized for the occupants.

I'm not expert calculating how much rent should be charged on a unit costing around $500,000 to build (not counting fees and regulatory costs which, you are right, can be quite high) but I'm pretty sure it's more than $1500/month.

Very few people aspire to rent for their entire lives, but the Bay Area receives a massive influx of the prime renting demographic. That being young, high-income, childless professionals. That's why it seems odd to me to say that developers could build a bunch of units that might sit empty due to local preferences. Somewhere like Sacramento I could see that being more pertinent, but as mentioned, in a city with $3,000 shoebox rentals I think preferences be damned in the short-run.

I mean, having roommates in high-cost cities isn't unusual at all...for apartments! Happens all the time in NYC, and has for decades. I'm not arguing that having roommates is a sign that things are screwed up in the San Francisco market. I'm arguing that having renters split houses is a sign things are fucked up.

Basically, in a normal, healthy housing market (i.e., not California) the most profitable thing to do with a house which doesn't have an occupant is to sell it to someone who will become a homeowner. For various reasons - both related to limited supply and the idiotic property tax regimen in the state - it's much more valuable to hold onto a house forever as an asset.

Outside of student-heavy areas, houses are far more profitable as rental units when they are "chopped up" - as the rent you get from one three bedroom house is less than the rent you get from three one-bedroom units, even after accounting for the initial cost of adding three kitchens and closing some doorways. Again, you only see people splitting houses as roommates in "student slum" type areas typically - and that's because the zoning hasn't actually caught up with the rental demand in that particular area. If the zoning was updated they'd become multi-units pretty quickly.

I'd also note that if a market distorts to the point that three bedroom houses are being occupied by three single people (or worse yet, three couples) it means that families with kids are absolutely doomed in the housing market, because they'd need to make significantly more than all the single people in order to bid into similar units, whether for rent or for sale.

I agree that most people would prefer to rent a room in a house than in an apartment. But most people would prefer to rent their own studio or one-bedroom over sharing a unit with strangers - far and away. Some young people do go through a phase where they want to live with friends when they're young, but most even grow out of that by their late 20s.

In San Francisco, that's called a TIC (Tenant in Common) unit which came into being because the city restricted conversion of rental units to condos so another form of ownership was invented. Most of these are multifloored Victorian homes that have been turned into units--first rented, then sold as TICs--and in most cases they have been remodeled so each floor has an entrance.

There aren't many remaining 3 bedroom units other than single family homes--that is, 3 bedroom apartments are scarce. Nevertheless, a significant number of those renting at market rate have roommates sharing them, each having a bedroom (the city doesn't allow that on subsidized units I don't think).

There are also large homes with many young single people living in them in bunk beds (in other words, either the bedrooms have several beds in them or have been subdivided). These have various names--"incubators", "coliving spaces" and so on. They are now building new "coliving" buildings where everybody has a small cubicle-like room, possibly a private bathroom, but cooking facilities and "living room" spaces are shared.

Topographical maps is one thing, but just because there's construction on the land doesn't mean it can't be redeveloped. You could leave the SFH neighborhoods alone and just develop the low-rise shopping centers and you'll solve many of the issues. The problem is the residents near these areas block everything. You do this enough and maybe the rented rowhome or older apartment units are opened up because the higher income earners move into the shiny new complexes. They can also do this in the SV, and maybe some of the houses being rented out to multiple yuppies instead are rented (or bought) by a family.

Apartments and condos in the inner Bay Area are definitely in high demand. Just check the current vacancy numbers.

Yes, there is. They would pay thousands and thousands a year to just commute to work while still needing a car to live in Stockton. It would never work.

Well, we have evidence of it working in the aforementioned Pleasanton, Walnut Creek, and Concord examples which are no less car-dependent than a hypothetical HSR-connected Stockton. It stands to reason that there are thousands of people doing exactly what you describe. What's the difference if you could maintain that same 45-minute commute time from a more distant city with faster train service?

Price and reliability. An HSR line won't be priced remotely the same, and any hiccups in commuting will be impossible for many (new mothers and the like) because there are no realistic alternate modes. So when baby falls at day care, or when spouse is sick, Mom can't Uber home.

HSR isn't for large-scale commuting, and likely never will be, anywhere.

Why are you taking the figure of what it costs the government to build stuff? It costs the government about $20 to just buy a hammer. The relevant figure is the private sector, as developers are using private sector construction costs to build. The price of land is directly tied to zoning laws, as you have to amortize your land costs over less units.

HSR prices are comparable with plane tickets, no one uses it for daily commutes work anywhere, only business trips and vacations, just like planes.
For example, shinkansen from Tokyo to Osaka is about $180 for a one way ticket. Really short commutes start at around $90 for a one way trip... and this is considered pretty cheap.

I know people who have turned down faculty jobs at Stanford due to the housing situation. (Yes, Stanford builds houses for professors, no they don't have enough).

The need of existing NIMBY homeowners for massive profits is trumped by the need of younger people for affordable housing. Like a monopolist trying to keep prices high by blocking competition. Pure self-centered anti-social "rent seeking" behavior. Besides, at some point demand will collapse and home prices will fall sharply as fewer buyers come in. Prices have reached bubble levels in the coastal markets. The only thing keeping prices levitating is low interest rates and fairly strong job markets. If rates rise & the economy slows, timber!

I lived in a LA City neighborhood that is gentrifying. The area is about even between renters and homeowners. There were a few proposals the past decades for new housing either rentals or townhomes/condos. But many of them have stalled or ended up having less units than initially presented.

There were different sides of opposition, with overlapping reasons. Seems like the main common complaint is fear of traffic congestion and loss of street parking. But traffic is always a complaint to locals and visitors. So even if a building with 20 new units is opposed because people fear major traffic from those 20 units. Another common complaint is that it is too crowded already. LA metro is one of the most dense metro's in the USA. As you go away from the core, the density remains a slow decline rather than a sharp drop. So more housing means more people. The lower income people/renters will likely accept a development, despite the traffic and crowdedness, if it is affordable housing. yet few new projects are affordable housing or just a small percentage devoted to affordable housing. If not, then lower income groups will oppose the project.

Overall, there is a lot of NIMBYism even in mixed income areas. Eventually many projects do get cut down 10-50% less units. Affordable units never pencil in and most new projects are actually townhomes or small lot units selling for $600K+ - recently $800K+. Anyway doesn't seem like anyone is winning.

The area in LA with the least complaints is Downtown LA where probably half of all new units in LA have been built in the recent years. You never hear of affordable housing or traffic concerns in Downtown.

The Bay Area could really develop denser housing around BART stations in the peninsula and southern East Bay.

Beyond that, I don't know where to put new housing.

I agree. That's why the suburbs/fringe are going to absorb the additional 70 million people in this country by 2050. The older established cities refuse to allow additional units for a variety of reasons. The result will be developments like these in regions with ample land.

This is one reason why I think Chicagoland will begin to grow rapidly in the future, once they can get a grip on their budget issues in the city and state. It's the same reason why cities like DFW, Houston, San Antonio, Austin, Phoenix, Inland Empire, Atlanta, metro DC/Northern Virginia, RDU, Charlotte, Central Valley cities will continue to grow rapidly.