Sacramento Discovers a Housing ‘Crisis’
Steven Greenhut
by

Sacramento

Nineteen years ago, I made the trek from a small, industrial city in Ohio to Orange County, California, to take a job at a large daily newspaper. Oddly enough, my friends in Ohio thought I was crazy to head to California, and my wife still sneers at me for accepting the post without having a conversation with her about it. What was there to discuss?

In hindsight, the only real hurdle in building a life in California involved housing. In most places here, you need a hefty income (or trust fund) and down-payment to buy even a modest place. Our move came shortly after the market started rebounding from a previous crash. We were locked into a rental while we saw prices escalating by thousands of dollars a month. We finally bought an older tract house in a modest neighborhood.

These days that house (which we sold years ago) is valued at $500,000 more than we paid for it (according to Zillow), a massive rebound considering the housing market crashed again around 2008. By contrast, Zillow says my historic beauty in Ohio might now sell in the $130s, around $38,000 more than we sold it for. In most of the country, prices go up slightly and steadily, but in California home pricing is like a roller coaster.

Why is California’s market so volatile and dysfunctional?

It’s all about public-policy decisions. California liberal policy-makers have been at war with suburbia and home construction for decades. When Gov. Jerry Brown was attorney general, for instance, he sued counties that had growth plans that allowed the construction of too much sprawling development. The rationale was the fight against global warming, which the governor believes is exacerbated by suburban-style living.

It can take decades here to get all the government approvals to build new housing units, and in already pricy coastal cities government permits and fees can add more to the price of each unit than the total cost of a house in other parts of the country.

In addition, land-use restrictions drive up the cost of developable land. The California Environmental Quality Act (CEQA) makes it simple for environmentalists to tie up proposed projects in years of litigation. The slow-growth-oriented California Coastal Commission must give its blessing for projects anywhere near the state’s coastline.

Because the state has failed to expand the freeways and roadways necessary to move around our still-growing population, many people who already own homes have had it with the congestion and back limits on new growth. That’s true even in the most conservative areas. In liberal cities, especially in the San Francisco Bay Area, rent-control and tenants’-rights ordinances discourage the construction of apartment buildings.

The result is predictable. As the Orange County Register’s Jonathan Lansner reported recently, California’s five major southern counties saw an upswing in construction in the past year, but the state is not keeping up with the national flurry. Southern California’s “six-year tally is slightly fewer new units than Texas added… in just the past year,” he wrote.

The state has long been pricier than other locales (think beaches, palm trees, warm weather), but the gap escalated beginning in 1970, around the time the state began to embrace this slow-growth model. “Between 1970 and 1980, California home prices went from 30 percent above U.S. levels to more than 80 percent higher,” a 2015 Legislative Analyst’s report explained. “The trend has continued. Today, an average California home costs $440,000, about two-and-a-half times the average national home price.” Rents have soared, too.

The LAO report came out two years ago, and in the last couple of years the housing market has heated up and the affordability situation is worse.

About a decade ago, easy lending and other economic factors drove up home prices to asinine levels, pushing Bay Area workers to find houses across the mountains in cities such as Stockton. In Southern California, many people moved to the high desert or the Inland Empire, thus relegating themselves to agonizingly long commutes (so much for battling climate change!). After the ensuing bust, those cities were awash in foreclosures, which could be scooped up for 30 cents to 50 cents on the dollar.

In most of the country, prices went up some and fell some, but here they soared and then crashed, leaving a trail of financial wreckage. It was worse here because builders couldn’t respond quickly enough to pent-up demand because of all the obstacles to growth. In Texas and elsewhere, builders have a shorter lead time to get permits. We couldn’t get enough supply online in California, so prices of existing homes went through the roof.

Prices are back up again, and in some places they approach those bubble levels. And now legislators are scrambling to deal with the latest housing “crisis.” It is a major problem for young families, of course. The state only is building half of the units needed, according to some estimates. No wonder legislators are feeling the heat.

The Sacramento Bee reports that “only 32 percent of California households could afford to purchase the $496,000 median-priced Golden State home ….” That statistic looks at the statewide average, which includes rural areas and gritty inland cities. How many households can afford a home in the greater Bay Area, which has hit a high of $710,000? Wages aren’t high enough even in Silicon Valley to account for the housing costs.

For years, legislators and city councils have embraced slow-growth policies. High density, infill housing is fine, but it can’t be the only option. One can be only minutes from Oakland and see nothing but lovely hills, but those pleasant views (enjoyed in bumper-to-bumper traffic) come at a steep price: the upward mobility of younger generations of Californians.

Despite the legislative attention, there’s little chance the current approach will change. “(M)ore densification, with likely shift toward reducing ownership, is being proposed,” explains a recent Center for Demographics & Policy study by urban writers Joel Kotkin and Wendell Cox. “The 2040 regional plan for the Bay Area (‘Plan Bay Area’) calls for 75 percent of new housing development to take place on barely 5 percent of the land mass.” The study is aptly called, “Fading Promise: Millennial Prospects in the Golden State.”

The Legislature this year had proposed 130 bills to deal with housing issues. Some observers applauded the Capitol’s newfound interest in housing issues. But given the Legislature’s political bent and its long-standing embrace of the policies that created the housing shortages, it’s hard to get too excited about any prospects for reform.

In fact, some proposals — such as a now-revised bill that might have mandated union wage rates on myriad housing projects — were likely to exacerbate the housing shortages. Another bill would impose a new fee on recording real-estate documents. One proposed to eliminate the state mortgage-interest deduction on vacation homes to fund affordable housing credits.

Senate Bill 35 tries to help streamline housing proposals, but does so mainly for “affordable” housing and includes union wage conditions. Mainly, the Legislature wants to fix the housing supply situation by using tax dollars and mandates to fund “affordable” housing, but Californians need more market housing. Granted, markets are not something that California’s legislators are particularly interested in encouraging.

As bad as the state’s business and regulatory climate has become, most people who move to other states don’t do so because of it. Surveys show they leave mainly to afford a house. Housing prices might fall again, of course. But until the state unravels its myriad impediments to home construction, more people will stay in — or move to — places such as Ohio or Texas.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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