You can’t have a conversation about the housing situation in California today without the words “shortage” or “crisis.” National media love to write about our “astronomical” housing prices and rents. Unfortunately, the crisis is real, and Californians don’t seem to have the political will to do anything to solve it.
Let me share a stunning fact. The city of Houston has a quarter of the population of California, our most populous state. Yet Houston has built more apartments and condos in the last ten years than California. If your family has low to moderate income, you can find affordable housing in Houston, but not in California.
Houses cost more in California than in most other states. Less than a third of Californians can afford a median-priced home, compared with half of households in other states. If you already own a home here, that can seem like a good thing. You may not realize that it makes it harder for your children and grandchildren to live nearby.
We know grandmas who must fly to where grandkids live because the young adult children of Grandma and Grandpa can’t afford to live in San Diego County. Many of those young adults grew up in San Diego County and wanted to stay. But they couldn’t afford to buy and so they moved. Maybe they moved to Phoenix, Las Vegas, Austin, Boise, Des Moines or, Raleigh. $300,000 doesn’t buy a condo in San Diego but it buys a fine new house on acreage in most states. From 2007 to 2016, California experienced an out-migration of households making less than $110,000.
On the surface, it seems like a simple supply and demand issue. People moved to the state faster than we built housing. From 2011 to 2016, California only added one new housing unit for every five new residents.
It’s easy to say, “build more housing.” Jerry Brown, our past Governor and Gavin Newsom, our current governor, both decreed that more multifamily housing should be built. Governors’ words don’t build housing. Construction workers do that.
The fact is that the State of California has made choices that hurt families with low to moderate income. The state government can change the incentives. Local government can change to their zoning and fee structure. But California governors have not yet even tried to correct the distorting effects of state sales tax policies which contribute to the housing shortage.
California’s housing shortage is primarily caused by government policies. California returns some sales tax to the city where the sale is made. So, every mayor wants “The Mile of Cars” and the mall because of tax revenue helps that city. $100,000,000 of retail property needs relatively little fire, police, schools, sewer, water, or other services which may cost the city government money.
In contrast, apartments of the same value bring no sales tax revenue but cost local government lots of money for public services. In other words, each city is rewarded for building retail and penalized for allowing apartments. Consequently, every mayor wants all the area’s retail and wishes the city next door would allow the new apartments.
Land use choices are made by cities, not the state. People and institutions respond to rewards and punishments. Guess what? For 30 years cities have zoned and allowed plenty of retail, but not enough condos and apartments for their population need. In states without the distorting sales taxes incentives, zoning allocates enough land to house young adults. Grandparents in those states have a short drive for “sleep overs” or baby- sitting.
California political leaders understand that the sales tax policies encourage retail and discourage multifamily construction. For 30 years every governor has recognized that changing state taxation policies would be extremely difficult and might ultimately fail. No California governor has even attempted to strategically change sales and income tax policy. Each has kicked that can down the road and each year the housing shortage has intensified. Meanwhile, 40 states build enough condos and rental housing for their citizens, including the ones who don’t graduate from college or have high incomes.
California’s slow growth policies boost the price of existing single-family homes and cause disproportionately higher cost of rental housing. In San Diego County the government fees can range from $30-$80,000 per apartment – that’s money paid to the government before any workmen are brought to the site.
Political delusion describes the notion that someone else, anyone else, should pay for the solution. People call for more “low income housing,” just not in my backyard. Others, who’ve never had to make a payroll suggest that businesses should bear the cost, presumably without passing it on to consumers.
Within the next decade California may stumble to some third- rate housing solution. Perhaps we will adopt statewide rent control, as Oregon has just done. Rent control slows the rent increases; yet in the long run it reduces new construction and reduces incentive to renovate existing housing stock. Within a generation low income families and people of color have fewer choices in rent control jurisdictions than in the places without rent control.
Almost every important thing in life is hard. Being married is hard; being a great parent is hard; doing excellent work is hard. Of course, solving our housing shortage will be hard. California recognizes we have a problem but we’re not yet having an intelligent and informed discussion about how to resolve the housing shortage.
Terry Moore, CCIM is an investment real estate broker with a proven history of success in creating value, 1031 (tax deferred) exchanges, and building wealth though apartment investments. He has taught at UCSD, National University’s MBA program, the Appraisal Institute, SD County Tax Assessor, California Association of Realtors and is a National Certified Commercial Investment Member. For more information contact Terry at Tmoore1031@gmail.com, call 619-497-6424 (Direct), 619-889-1031 (Mobile) or visit www.SanDiegoApartmentBroker.com. (License #0091851).