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California is among the top destinations for high-tech workers, who earn among the highest incomes in the country. Those who already own homes in the state, especially in San Francisco’s tony Bay Area, are the envy of their peers elsewhere. Even so, California’s new governor, Gavin Newsom, sees a growing “homeless epidemic” haunting middle-income workers and single-income households in the state, for whom both home ownership and renting are unaffordable. The median price of a home in the state was $570,000 last year, up 6% from 2017, and set to rise further, according to a forecast by the California Association of Realtors.
Newsom wants to make way for 3.5 million affordable new homes by 2025, and has incorporated proposals to achieve that in his budget earlier this month. Standing in the way of more affordable housing in California are 40-year-old laws that discourage home sales and encourage higher rents; restrictive urban planning policies that curtail land supply; and old mindsets that resist change, according to experts at Wharton and the University of San Francisco.
Susan M. Wachter, Wharton professor of real estate and finance, noted that in many cases, it is not possible for one breadwinner to shoulder the cost of housing in California. “It takes often several members of the family working to afford what would be minimally adequate elsewhere in terms of rental housing,” she said. “What’s particularly hard is, elsewhere, the family formation period is often one of homeownership where you then can have stability and be protected against rent increases. But getting on that homeownership ladder is very difficult if rents are high. You can’t save.” Wachter is also co-director of the Penn Institute for Urban Research.
The problem of housing affordability in the state has existed since the times of the Gold Rush in the mid-1800s, said William (Billy) Riggs, assistant professor in the School of Management at the University of San Francisco. Policy makers, businesses, public entities and other stakeholders have to address the housing affordability problem not only for California, but also for other states and cities that could face the same situation in future, he said. “It may be Austin, Chicago or Nashville that we’re talking about next in terms of gentrification and pressures on job growth.”
Wharton professor of real estate Todd Sinai called for “a holistic approach” to the housing affordability problem in California that takes care of the needs of future generations as well. “Even if you solve the housing problem in the immediate short term, five years from now the growth in the number of people who are going to need jobs in California will again present a problem,” he noted.
A holistic approach would focus on not just making land available for the housing needs of a higher-density workforce, but also an integrated transportation infrastructure, Sinai explained. “One of the issues is that the real estate is more expensive in the places where the jobs are, and the commutes in California to get there take so long that people can’t spread out. And that is a transportation issue. The way to make more land available is to have easier access to get from those places into the cities where the jobs are.”
“Getting on that homeownership ladder is very difficult if rents are high. You can’t save.” –Susan M. Wachter
Wachter, Riggs and Sinai discussed the ways out of California’s housing crisis on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)
Increasing Housing Supply
Newsom is focusing primarily on increasing housing supply, where he is working with mayors to make way for new construction with the requisite financing. “We’re seeing a theme of partnerships across sectors whether it is public, private or philanthropic,” said Riggs.
Riggs expected builders to “be open” to Newsom’s efforts. “We’re seeing an openness to engage in that type of dialogue,” he noted. Builders have been experimenting with modular and prefab units that can be constructed relatively faster, and also different house types to suit the needs of changing family structures, he added.
Wachter called for partnerships that bring new types of housing that is modular, high-density, and near transit. She said that those approaches are “the way forward,” but wondered if it is possible to scale them, and especially in the places with the greatest need. Such housing needs to be near more markets that have job opportunities, she added.
The pent-up demand for housing in California is exacerbating the problem. “The difficulty California faces is that the overhang of excess demand to live there is so large that the scale you would need to make a real dent in this is quite high,” said Sinai. One way to solve that problem is to have better technologies that allow developers to build at a cheaper cost, he added. Doing so would mean higher profits for developers rather than lower prices for residents, “unless you really move the needle on supply or if you do controls on the rent that can be charged,” he added.
Threading the Needle
Affordable rental housing in the right places is not easy to achieve, Riggs noted. “Part of the issue is [having] housing in the right location, and it’s difficult to thread this needle in a way that gives a supply bump that is needed.”
Renting a home at affordable rates is also difficult in California because several factors constrain availability and drive up rents. For one, “there’s no incentive right now for builders to build rental stock,” said Riggs. He noted that a typical studio or a one-bedroom apartment would rent for between $3,000 and $5,000 monthly, which would be beyond the reach of middle-income workers or single-income families.
Riggs also pointed to what he called “the elephant in the room” — a 1978 state law called Proposition 13 that caps property taxes at 1% and increases in assessment values at 2% a year between two sales of a property. That has a “lock-in effect,” discouraging sales of owner-occupied homes, according to a research paper published by the National Bureau of Economic Research. “The large effect of Proposition 13 on renters’ tenure is particularly striking and suggests that longer tenure by owner-occupiers forces younger households to delay their transition from renting to owning,” the paper’s author wrote.
“It may be Austin, Chicago or Nashville that we’re talking about next in terms of gentrification and pressures on job growth.” –William Riggs
Riggs said that because Proposition 13 has fixed property taxes for many for many generations since 1978, it has “created great wealth disparity and generational wealth disparity.” That would be one challenge for Newsom, and already, efforts are underway to dismantle it and allow the state to earn more tax revenues.
A third obstacle to building affordable rental housing is the availability of land. “Where is the land?” Wachter asked. “How do [builders] get into the market at a price point that’s affordable?”
Will Higher Wages Help?
One way to tackle the affordability issue is with higher wages for employees in the state, Sinai suggested. “The people who can afford to live in California are those who either have a lot of money or who are willing to work a tremendous amount to earn a lot, just to be able to be there, or people who are willing to spend a larger fraction of their income in order to be there,” he said.
However, higher wages could be counterproductive in addressing the affordability problem. “We have to be cautious with that lever,” said Riggs. He cited case studies which showed that higher wages have caused home prices to rise.
A Partnership Approach
Riggs suggested “creative uses” of land controlled by public entities such as parking lots, school district sites and underutilized inner city lots to make way for a “wide-scale building boom.” Wachter backed Riggs’ idea of finding new uses for publicly owned lands. “Public entities are aligned in terms of incentives for getting this done,” she said. However, Riggs pointed also to “fragmentation” in the ownership of lands as an obstacle in freeing up sites for development.
As mayors in the state explore those and other ways to increase the supply of land for housing with the requisite approvals, Wachter reiterated that they must be able to do so at scale to have a meaningful impact. And for that to happen, they must secure the support of their constituents. “Behind all of this is [the question]: Are constituents supportive?” Wachter said. “There will need to be change along many lines to solve this problem in a holistic way.”
“The overhang of excess demand to live [in California] is so large that the scale you would need to make a real dent in this is quite high.” –Todd Sinai
How Businesses Could Help
Businesses in the state are also eager to try and do what they can to solve the housing affordability problem, Riggs noted. Companies like Genentech, Google and Facebook are among those that are “willing to contribute to [solving] this issue” and partner with the state in its efforts, he said.
Companies don’t want the housing problem to make it difficult for them to find talent and therefore be compelled to move out of the state. “The Bay Area companies really want to stay here,” Riggs said. “They want to see change. They want to be able to house particularly some of their service employees, and some of their junior employees.”
According to Sinai, companies could play a significant role in facilitating “truly affordable workforce housing” because it benefits them. “To a degree, companies historically have provided affordable housing for their employees,” he added. “Nothing is keeping a firm in San Francisco from buying land … and making it available for their employees at below-market rates [so they can] afford to live in a good location.” Wachter added that companies could also use such lands they may buy to provide transit infrastructure.
Averting a National Crisis
More broadly, Wachter saw a role for the federal government, too, in helping California solve its housing problems. “There needs to be a federal answer as well,” she said. “There needs to be encouragement to produce affordable workforce housing. There has to be an emphasis on that throughout the nation, connected to transit. California is an outlier, but it’s also a harbinger here.” Policy makers and builders in other states could learn from the positive steps that California may take, and try to replicate them.
Sinai agreed that affordable housing is “a national issue.” Research has shown that San Francisco, in particular, and California, in general, are “under-housed from an economic perspective,” and that has consequences. “There’s productivity loss in the aggregate economy by not having more affordable housing in those areas.”