As you probably know, California is suffering through a severe housing crisis. The result, inter alia, is escalating home prices, rising rents, lack of affordability, and clogged freeways (from long commutes). And, of course, the corollary, severe homelessness. So, in light of the recent passage of SB9 and SB10, I thought I’d explore with you the housing crisis and the downfall of single-family zoning from the perspective of real estate investors. Are you ready?
First, a little history. I bet you didn’t know that single-family zoning originated in the city of Berkeley, a century ago, as a segregation practice to prevent black-owned dance halls from locating near white-only neighborhoods. In other words, restrictive zoning has its roots in racist public policies. As a result, single-family zoning evolved over the decades as a way to segregate neighborhoods without explicitly banning any racial or religious group.
Today, restrictive (or exclusionary) zoning perpetuates racial and economic segregation by prohibiting lower-cost apartments and townhouses in higher-opportunity single-family neighborhoods (i.e., better schools, parks and other amenities). Just as significantly, single-family housing is very much part of the mythos of Southern California. Single-family neighborhoods have long been held as sacrosanct. But there is a growing recognition in California and beyond that we cannot build enough new housing to meet the needs of the population or in the places we need it most (such as near job centers, good schools or transit), as long as multi-family housing is excluded from two-thirds of the state’s residential land. So, with the housing crisis in mind, let’s mask-up, get vaccinated, social distance, and do a deep dive into single-family zoning (and this week’s other real estate news).
What is Single-Family Zoning?
Let’s break the term down into two parts, starting with “zoning” and then “single-family.” Zoning regulates how land can be used and what can be built on it. For example, can you build a commercial building on certain land? Yes, if that land is zoned for commercial use. On the other hand, can you build a home on that commercial land? No, homes can only be built where there is residential zoning. To make it even more confusing, in a downtown area, you might have “mixed-use zoning” (i.e., ground-floor retail businesses and residential units in the high-rise above). Next, “single-family” zoning refers to a residential area where only one housing unit can be built on a given parcel of land. Think of the Southern California suburban staple of a home with no shared walls (in other words, not a duplex, triplex or multi-unit complex). If you live in a house with a driveway, garage, three bedrooms, two bathrooms, and front, back and side yards, it’s almost certainly a single-family home. In the city of Los Angeles, for example, single-family zoning is known as “R1” (meaning one residential unit on a lot). Other zoning designations include “R2” (two residential units on a lot, plus other uses) and “R3” (which can include boarding houses and childcare facilities). In fact, two-thirds of all the residences in California are single-family homes. Worse, as much as three-quarters of the developable land in the state is zoned only for single-family housing, according to UC Berkeley research. And therein lies the problem. But now here comes SB9 and SB10 to the rescue, maybe.
Senate Bill 9
As a possible solution for our housing crisis, Governor Newsom signed two bills last week designed to make it easier to build more housing in California. The first, SB9 makes it possible to build more than one housing unit on land that was previously zoned for only one unit (“R1”). SB9 will have an immediate and direct effect on local zoning. Simply put, SB9 gives home-owners in single-family zones the right to now divide their lots into two and build up to three additional homes on them, essentially turning a single-unit lot into a four-unit lot. That’s a noticeable shift from current law (which allows only two units — a house and an accessory dwelling unit — per single-family lot). SB 9 has numerous exceptions and limitations, though, that are designed to preserve rental and low-income housing, deter speculators, guard against displacement, retain local governments’ control over design standards, while also preventing local officials from adopting rules that undermine the new law. Although property owners would have these new rights under SB9, local governments still have to approve plans and building permits. As anyone who’s been through that process like me can attest, it can take months to pass through that gauntlet. I’d rather have a root canal than deal with the permitting process. Nevertheless, a recent analysis by the Terner Center for Housing at UC Berkeley projects that only a small percentage of residential lots would see extra units as a consequence of SB9, simply because the extra construction wouldn’t make financial sense in most places. According to the Terner Center, projects would pencil out on just 5.4% of the state’s 7.5 million single-family lots. However, even a small percentage of 7.5 million lots could still yield a lot of extra homes, extra houses we so desperately need! The Center’s analysis projected
that the law would result in 714,000 new units being built statewide over the coming years, with a higher-than-average concentration in Los Angeles.
Senate Bill 10
SB10, on the other hand, creates a voluntary program that makes it easier for cities to “up-zone” any urban or transit-adjacent parcel of land (including a single-family lot), to allow a building of 10 units or fewer. In other words, SB10 allows for denser development near public transit corridors, such as bus, subway, and train lines. But SB10 does not mandate any changes in local land use. Instead, it enables local governments to change their zoning rules much more quickly to allow housing developments with up to 10 units if they’re located in areas served by mass transit or in urban areas that are already largely zoned for multi-residential use. Local governments already have the power to make this sort of change in their zoning, but because the process is covered by the California Environmental Quality Act (“CEQA”), it’s costly and takes years to complete. SB10 now allows such changes to be made without triggering a CEQA review, saving both time and money. However, multi-unit projects proposed in the new zones would still be subject to the environmental law. Again, local governments will decide for themselves whether to adopt the denser zones that SB10 allows for “transit rich” or urban “infill” areas. And even if they do adopt new zoning rules, each proposed development would still have to go through the endless approval process.
Senate Bill 35: Perhaps a more important factor may be the pressure the Legislature previously placed on local governments to build more housing. Under 2017’s SB 35, cities and counties whose land-use rules do not meet the demands of their Regional Housing Needs Assessment (a state-mandated projection of what it will take to house the growing local population) have less power to resist multi-unit housing projects that bring more affordable housing to urban areas. Matthew Lewis, communications director for the housing advocacy group California YIMBY, says it can take five years for cities and counties to update their land-use plans to match their housing needs. Nevertheless, SB10 could help them fend off the much larger developments that SB35 makes possible.
Pros and Cons of Single-Family Zoning. As you can imagine, the passions on both sides of this issue are boiling over.
Proponents: Those supporting the recent changes to state law contend that single-family-only zoning is a relic of a past that is no longer justifiable. They demand that single-family zoning be terminated all together, arguing that in a state with such a deep affordability crisis, opening up neighborhoods to more development will allow less expensive housing to be built there.
Opponents: In the other camp, opponents to the new laws want single-family zoning to remain. They’re concerned that increased density could change the character of quiet neighborhoods and affect their property values. Second, in a state that’s facing both a drought and stress on the electrical grid, opponents question where additional utility resources for more housing will come from. Worse, they fear the market will be dominated by developers looking to make cash grabs by building flashy new housing as cheaply as possible and renting it for top dollar, accelerating gentrification and not addressing the underlying issue of housing affordability at all. What do you believe?
Bottom Line: If you’re still with me, here’s the bottom line. The state needs to add between 1.8 million and 2.5 million homes by 2025 to ease the housing shortage that is driving up rents and home prices. In response, SB9 and SB10 will make it easier for Californians to build more housing.
Pending Home Sales Surge Higher
The number of home buyers who signed a contract to purchase a home in August jumped beyond all expectations. Pending home sales rose 8.1% in August compared with July, the National Association of Realtors reports. Still, compared with a year ago, pending sales are down 8.3%, reflecting just how much home-buying activity has fallen from the boom last summer and fall. The NAR’s “Pending Home Sales Index” measures real-estate transactions where a contract was signed for a previously-owned home, but the sale has yet to close (benchmarked to contract-signing activity in 2001). The Index provides insight as to the direction existing-home sales will take in the months to come (which is based on closed transactions). August’s surge in pending home sales underscores how there’s still reason to be upbeat on the outlook for the housing market. Looking to mortgage applications, the recent trend has shown signs of stabilization in the demand for loans used to purchase homes (despite weekly fluctuations in the data). Normally, mortgage applications data can be an indicator for home sales more generally. But with the preponderance of cash buyers in today’s housing marketplace, this data may miss a large chunk of the demand for housing right now, according to Ian Shepherdson, chief economist for Pantheon Macro-economics. But affordability remains challenging as home-price gains are roughly three times wage growth. There’s now a more tempered search for “affordability.” Record-high prices are motivating buyers to be more selective, and with monetary tightening expected to push rates higher, buyers are likely to become even more cost-conscious.
After practicing law for over 30 years (specializing in real estate litigation), Lloyd Segal assumed leadership of the Los Angeles Real Estate Club in 2017 from the late Phyllis Rockower. Lloyd is also an author, real estate investor, mentor, public speaker, and LANDLORD. He is also the author of four real estate reference books, including “Stop Foreclosure in California” (Nolo Press), “Stop Foreclosure Now” (American
Management Association), “Foreclosure Investing” (Regency Books), and “Flipping Houses” (Regency Books). The Los Angeles Real Estate Investors Club (“LAREIC”) is the oldest (23 years) and largest investor club in California. In his new role as President, Lloyd has been busy expanding LAREIC events and programs for members and real estate investors. For more information visit https://www.lareic.com.