Recently, Southern California Newsgroup financial columnist Jonathan Lansner asked how to fix California’s housing mess through a series of questions. Mr. Lansner kindly allowed us to reproduce some of his questions. They appear below, with my answers.
Housing “affordability” essentially means falling prices for purchases and renting, no?
Yes, it does.
There are two challenges regarding California housing affordability. One is that very few households can afford mortgage interest, principal, insurance, and property taxes on the median California home, whose price is about $900,000. In the second quarter of 2024, the California Association of Realtors estimated that only 14 percent of California households could afford these payments. In contrast, the median California household, which has an income of about $90,000, can afford a home valued around $340,000. Out of 59 California counties, only about six have median home values near this price point, and most of those counties are sparsely populated areas near the Sierra Nevada mountain range.
The other challenge in home affordability, which traditional affordability statistics do not account for, is scraping together the down payment on a home. For example, a traditional 80/20 loan (80 percent loan-to-value ratio) requires a down payment of about $180,000 on California’s median home. In contrast, median net worth of renters in the US is about $10,000. There are only a few renting households who can come close to a California-sized home down payment.
California has passed more than 100 laws since 2017 to facilitate housing construction, and the state has spent billions on housing as well. But despite this, less new housing is being developed, with current construction at only about 50 percent of its level of years ago. The state’s current approach to housing policy is moving us backwards.
If the state is an insurance company for earthquake and fire risks, why not be a homebuilder, too?
Government agencies don’t have a good track record when it comes to housing affordability. California state and local government involvement in homebuilding is associated with remarkably higher building costs. Affordable or low-income housing development throughout the state significantly involves government, because the funding for these projects uses federal, state, and local subsidies and financing. The cost of building these units is nothing short of astronomical. A single apartment unit in an affordable housing development in California can exceed $1 million. Further government involvement in housing would likely make a very bad situation worse.
Why can’t California simply start new cities as places for housing?
Creating new cities could be a game changer for California housing affordability, but the state has essentially outlawed this through its regulatory morass. New communities would have the benefit of implementing the latest infrastructure, transportation, and energy technologies and wouldn’t face pushback from those protecting their own interests within existing cities. But California hasn’t approved a new city since 1994, when Mountain House, a community of about 25,000 in the foothills of the Sierra Nevada was approved. That same year, developers submitted plans to build Tejon Ranch, a 60,000-person community near Valencia, about 35 miles from Los Angeles; 30 years later, no homes have been built, because of a never-ending series of environmental lawsuits filed under the California Environmental Quality Act (CEQA), which permits virtually anyone to file a suit against development, including interests outside of the state. One of the leading litigants fighting Tejon Ranch is the Center for Biodiversity from Tucson, Arizona. The owners of Tejon Ranch agreed to preserve 240,000 acres of the 270,000-acre ranch, but a nearly 90 percent preservation rate is unacceptable to an increasingly extreme environmental lobby that seems to have drawn a line in the sand against any development on virgin land. CEQA could be easily changed by the legislature and governor, or alternatively, Sacramento could issue a CEQA exemption for Tejon Ranch, as was done with the LA Clippers’ new arena. But if the state hasn’t stepped up for the last 30 years to fight for Tejon Ranch, there is no chance they will now. CEQA remains the biggest elephant in the room. Answering this question raises another. Why doesn’t Sacramento make the needed changes to CEQA so that the law is no longer used to block sensible development?
Are regulations requiring lenders to make sound mortgages part of the affordability challenge?
In a perfect world, where borrowers without collateral never miss a mortgage payment, then the down payment requirements could be changed. But we found out the hard way that inadequate collateral was a major factor driving the financial crisis of 2008. The median down payment on a California home in 2024 was around $85,000, which is far above the capacity of most renters. Some borrowers can obtain mortgages with a relatively small down payment, but those products tend to be available only to a limited number of buyers and will tend to have higher interest rates or require private mortgage insurance. The down payment is an impediment to California home ownership, but there is no obvious, low-risk approach to get around it.
How different would homebuying be if the government stopped its support for fixed-rate mortgages?
Mortgage rates would be higher, perhaps by 1 percentage point or more, if Fannie Mae and Freddie Mac did not exist. Fannie Mae, which purchases mortgages from large, mortgage-originating institutions and then packages those loans into guaranteed, mortgage-backed securities, was chartered by the US government in 1938 to increase liquidity in the mortgage market. Freddie Mac was chartered in 1970 to work with smaller institutions, which at that time were primarily savings and loans. With a median home price of $900,000, I estimate that a California homebuyer with a conventional 80 percent loan-to-value mortgage would pay about $170,000 in additional interest over 30 years without these subsidized institutions.
If California slashed its homebuilding environmental standards, what would really happen?
Less expensive housing would happen. New green building regulations by the California Air Resources Board (CARB) took effect on January 1, 2023. These regulations include solar panels; energy-efficient appliances, heating, and cooling; low-flow water fixtures; sustainable building materials; and drought resistant landscaping. CARB estimated that meeting these regulations would incur a $150 per apartment unit cost increase. The California Apartment Association reports they add about $5,000 per unit. Single-family home costs may rise $30,000 or more because of these regulations. California is all-in on addressing climate change, but being all-in doesn’t make sense for the trade-offs that are involved with this choice. California accounts for about 0.7 percent of global carbon emissions, which means the state can’t move the global carbon needle. There are many competitive investments California can make that would likely have higher benefits than California’s all-in climate strategy, including clean water, forest and grasslands management, water storage, and new power plants. Going forward, Californians should think critically about whether politically appointed regulatory boards should have as much power as they now wield.
Can some sort of “rent control” be built that’s a win-win for tenants and landlords alike?
Rent control began in New York in the 1920s, so if there were a win-win, we should have figured it out by now. The big problem with rent control is the same problem with any law that keeps the price of a good below its market price: it depresses the supply of the good. This means that rent control policies effectively pick winners and losers among those who rent. The winners are the incumbent tenants who remain in a unit below its market price. And as rental units are taken off the market and converted into condominiums, the losers are those renters who can’t find rental housing. Just how bad could the shortage become? Sweden has substantial rent controls. In Stockholm, finding an apartment can take 13 years, and apartments in the most desirable neighborhoods might take 40 years.
Should owners of commercial structures need an entire approval process to switch an old office or warehouse to housing?
No, we should do whatever we can to streamline commercial-to-residential conversions. While this sounds like a no-brainer, it is important to note these conversions can be very costly and may not be the game-changer they sound like. Last year, the former Union Bank building in San Francisco sold at a 75 percent discount relative to its pre-COVID valuation, yet no bids were from residential developers due to the high cost of retrofitting the building from office space to residential space.
Should landlords share rental data through third parties to “better” price and fill their apartments?
The answer to this question is one of those “it depends” answers. If the information is primarily used to facilitate collusion among landlords, then renters may suffer from the sharing of this information. If information sharing doesn’t facilitate collusion, then the answer is yes, because better information enhances scarce resource allocation. And if you are wondering which way to lean, only 28 percent of Californians rent from institutional landlords.
I’ll close with oner question of my own: What should be done?
Many people will tell you that addressing California’s housing mess is horribly complicated. It isn’t. Fixing it requires building at a lower cost, which means removing regulatory barriers, using the most efficient building technologies, and creating housing in less expensive areas within the state.
That said, here is what needs to be done:
- Reform CEQA, stat.
- Subject California’s green building regulations to a strict cost-benefit assessment and eliminate regulations that don’t pass such an evaluation.
- Since land near the coast is very expensive, focus development in California’s inland areas, where land is much more affordable.
- Leverage the cost efficiencies of manufactured housing, which is built at more than 50 percent cost savings on a per-square-foot basis compared to site-built homes.
- Modify the regulatory framework that prevents new cities from being created and existing cities from expanding beyond their boundaries.
If the state makes progress on these items, then housing will become be more affordable. All it takes is for Sacramento to shift course.
