Influencers Opinion

Housing construction in California is decreasing. Can anything be done about it?

Note to readers: Each week through November 2019, a selection of our 101 California Influencers answers a question that is critical to California’s future. Topics include education, healthcare, environment, housing and economic growth.

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California Influencers this week answered the following question: Why is the level of housing construction in California now actually decreasing and what can be done about it? Below are the Influencers’ answers in their entirety.

“We are still seeing increased construction costs”

Tia Boatman Patterson - Senior Housing Adviser for the Newsom Administration

Despite California’s healthy economy, including rising salaries and falling interest rates, we are still seeing increased construction costs that have our state severely underbuilding.

While the decrease in net housing construction units in 2018 is partially due to factors like a labor shortage, housing losses from a historically destructive wildfire season and weather conditions that caused delays, it’s also a signal that there are structural barriers to production, many of which are at the local level where the final housing construction decisions are made.

Governor Newsom has pushed for a drastic increase in production and his recently signed 2019-2020 California for All Budget provides a series of tools to help overcome these impediments.

For jurisdictions that are eager to build housing, but lacking the resources and expertise, the Governor has set aside $250 million to help with predevelopment work and planning, as well as $500 million for infrastructure financing. These funds, along with a $500 million expansion of the state’s Housing Tax Credit program, are part of a $2.75 billion commitment to housing and homelessness.

Meanwhile, our Governor and State Legislators have worked to strengthen the consequences for those jurisdictions that continually refuse to even plan for enough housing.

“Local governments play an important role by setting the table”

Carolyn Coleman - Executive Director of the League of California Cities

California’s housing market is driven by a number of diverse factors, most of which are outside of the control of local governments. Land values, costs of materials, availability of construction workers, construction financing and mortgage rates are just a few. A 2018 report by the California Economic Forecast highlights that more than 450,000 new homes are permitted and approved by local governments for construction, but aren’t being built. Any one of these factors, or a combination, are contributing to the homebuilding construction slowdown.

While the decline in construction underscores the need for a greater understanding of California’s housing market, local governments play an important role by setting the table so homes can be built. Cities are committed to doing their part to increase housing supply. Although cities don’t build housing, we have an obligation to ensure we’re planning for, zoning and approving the housing our residents need while minimizing delays, costs and barriers to housing. We appreciate the Governor and the Legislature including significant new resources for planning, housing-related infrastructure, and affordable housing construction in the FY 2019-20 state budget. These resources will go a long way in helping cities do their part to change the trajectory on housing production in our communities.

“We must find ways to be more efficient”

Richard Bloom - California State Assemblyman (D-Santa Monica)

Construction costs and economic uncertainty are both increasing, leading to a housing slowdown at a time when we can least afford it. Costs are being driven up by a national labor shortage and by increasing costs of materials. With the cost of producing a single unit of multi-family housing approaching $700,000, we must find ways to be more efficient.

Californians are optimists and should look to our considerable strengths which include significant market power. We also have a long tradition of innovation and reform, for example the explosion of affordable-to-build Accessory Dwelling Units that followed key 2016 legislation that I, along with others, authored.

One important and largely untapped manufacturing innovation that also leverages California’s own housing market demand is in the realm of modular housing. Modular housing achieves numerous efficiencies that can help lower construction costs. We have almost unlimited in-state housing demand, technical know-how and resources. With areas like the Central Valley and Inland Empire still recovering from the last recession, modular manufacturing looks to be a major in-state economic driver.

In fact, there are a number of modular construction start-ups in the state that are slowly ramping up production. We should help this industry mature faster and more strategically.

Finally, much of the legislation to gin up housing construction has already been enacted and will play out over the next few years. My legislation reforming the Regional Housing Needs Assessment process is a case in point. Passed in 2018, the updated rubric for determining how much housing our cities must build is only now being implemented, but with likely dramatic impact.

It is frustrating that the solutions to the housing crisis are taking a long time. But, that should not be surprising given that the problem was decades in the making.

“The solution cannot be one-size-fits all”

Shannon Grove - California State Senator (R-Bakersfield)

California’s housing crisis affects families in both urban and rural areas. The solution cannot be one-size-fits all. State laws have discouraged construction outside of transit-rich areas. Municipalities are also approving residential building permits at a slower rate this year than 2018. The Department of Finance states cities and counties issued permits for an average of 111,000 residential units per year during the first five months of 2019. That’s a decrease of 12.2 percent from the same period in 2018.

Some California builders have already paid up to $100,000 in permits and waited months, if not years, before they pound their first nail. We need to take a serious look at comprehensive CEQA reform. Strict CEQA requirements make it difficult to build housing in both urban and rural areas. Sacramento Democrats offered CEQA exemptions to build sport stadiums for the Oakland A’s and Sacramento Kings. It is time to help all builders which is why Senate Bill 384, authored by Republican Senator Mike Morrell, would have been a sensible solution. SB 384 offered a statewide CEQA exemption and it was killed on a partisan vote in the Senate Environmental Quality Committee.

“California would have to build 3.5 million housing units to keep up with demand”

Perry Pound - Founder and CEO of Cambridge Pacific Ventures

California would have to build 3.5 million housing units to keep up with demand. This lack of supply has produced some of the highest rents in the nation. Los Angeles residents, on average, must spend 47% of their income on housing, the highest rent to income ratio in the U.S. According to the Economist Intelligence Unit, LA has grown from the 39th to the 10th most expensive global city over the past several years, due to the high cost of housing.

Along with sky-high rents, construction costs are also at an all-time high, having risen 50% since 2012 due to a tight labor market along with tariffs on building materials. Antidevelopment land-use initiatives like LA Measure JJJ have also curtailed the supply of developable land, preserving high land values. Politically, there is a push-back against traffic congestion caused by new developments, which results in CEQA lawsuits.

Policy leaders must make the plan check process easier for developers to embrace new technologies like modular construction, which cut down on project timelines. Municipal fees should be capped in order to reduce the cost of housing. In addition, affordable projects must be expedited through CEQA exemption, like new stadiums are.

NIMBY voices are loud, but when unified, housing advocates can be louder

Lisa Hershey - Executive Director of Housing California

Many factors influence housing production, including availability of resources, not in my backyard (NIMBY) voices growing louder statewide, and the specter of a recession.

But there’s good news. Voters’ passage of Propositions 1 and 2 last fall, combined with Governor Newsom’s recent budget appropriations, effectively primed the pump with the largest infusion of state financing in decades. For Californians experiencing homelessness or housing instability, construction workers, and, in fact, all Californians, public investment can lessen economic dips by providing jobs and economic growth.

With these important new resources, nonprofit developers are busy constructing apartments and single-family homes that most Californians can actually afford – homes that have long been in the pipeline. And yet, to truly address the scale of the need – 1.4 million homes for those struggling the most – we must continue to advance bold policy solutions.

Pending legislation like AB 10 (Chiu) and SB 5 (Beall) would fuel this momentum, providing more certainty for investors and creating opportunities for nonprofit developers to keep building even in the face of a recession. Governor Newsom should grab these lifelines to ensure we make steady progress toward the day all Californians can afford a healthy place to live in a thriving community.

“We need to find ways to lower development costs”

Amanda Eaken - Director of Transportation and Climate for the Natural Resources Defense Council

Most experts agree that the high cost of housing development – whether land, labor, materials or extensive permitting processes – is a major barrier to producing the amount of housing California needs to keep pace with demand. To tackle this challenge, we need to find ways to lower development costs, especially for affordable housing. In high-priced real estate markets, where so much of the high cost of development owes to land costs, we need to continue to reform rules that block multi-family housing, and we need to find ways to expedite the permitting process, both of which will lower per unit costs. Senate Bill 50, which the legislature punted to 2020, does both.

“All that is lacking is the political will to seriously address the problem”

Jon Coupal - President of the Howard Jarvis Taxpayers Association

While the reasons for California’s lack of housing supply are many, they are nonetheless well known as are the solutions to address them. All that is lacking is the political will to seriously address the problem. First, get rid of excessive developer fees. Second, reform CEQA and adopt laws which prevent labor unions from using CEQA as a tool for extortion. Third, abolish rent control and affordable housing mandates. These policies are counterproductive to the goal of building new homes.

“There is no one actor or one set of interventions”

Ashley Swearengin - President and CEO of the Central Valley Community Foundation

This simple equation describes a very complex problem that virtually every region in California is experiencing: low wages + high construction costs = structural barriers for housing construction. Like every complex problem in California, there is no one actor or one set of interventions that can solve the problem. Each locale and region needs to be proactively developing its approach to ease the burden of the housing crisis. The state needs to work in concert with these locally sourced solutions and add to the mix shortening approval processes, investing in infrastructure to support infill, assisting with land assembly, providing access to more public lands for construction, and making it easier to increase densities in existing neighborhoods.

“The entire system is broken and needs to be rethought”

Janice Rutherford - San Bernardino County Supervisor (2nd District)

Housing construction is low right now because home builders are stymied by lack of predictability. They worry about the costs and delays caused by CEQA compliance and lawsuits. They’re discouraged about the uncertainty in processing and timing that could cost them even more than they’ve estimated. They cannot find the skilled labor force they need to do the work. And, of course, on top of CEQA, there are innumerable local regulations and fees that complicate their investment.

Clearly, the Legislature has got to tackle CEQA reform and restore the law to its important purpose of protecting vulnerable environmental areas. It has been hijacked by too many interests that mask their agendas and NIMBYism in faux-environmental concerns.

Californians need to put our heads together about how state and local governments are financed. As the state has prioritized K-12 spending, cities have been left to figure out how to fund parks, recreation, public safety, and other needs on their own. This has led to the fees and regulations that are now strangling the housing sector. The entire system is broken and needs to be rethought, but the political constraints on doing that are massive.

Stop letting locals balance their budgets at the expense of new housing

Rob Lapsley - President of the California Business Roundtable

CEQA has long been the boogey man of housing construction, but unfortunately project development fees tacked on by cash-strapped local governments are becoming an even bigger hurdle. A recent study by the Terner Center for Housing Innovation at UC Berkeley clearly identified the explosion of fees paid by developers and ultimately homeowners. But Terner also mentioned that Prop. 13 is also partially to blame for these fee increases as locals use them to backfill revenue they claim is lost under this measure. Nothing could be further from the truth. Data from the California Department of Finance shows that cities, counties, and school districts were made whole immediately following Prop. 13’s passage as politicians quickly raised new taxes and fees and the state took over financial responsibility for several local program costs. Revenue to cities went from $3.8 billion in FY 77-78, the year Prop. 13 passed, to $4.9 billion in FY 80-81. It was $78 billion in FY 16-17. Excessive development fees are a hidden tax that are decreasing new housing starts while driving up the costs. As cities and local governments continue to increase spending on their expanded programs and employee costs, California families should not have to pay the price just for a place to live.

Building trades unions will step up to build the affordable housing needed

Cesar Diaz - Legislative and Political Director of the State Building and Construction Trades Council of California

The slowing of private sector construction activity is a reflection of the waning economic cycle. It demonstrates that the public sector needs to be more proactive in funding and building the kind of housing that working families need, and cannot rely solely on the finance and real estate development industry. The traditional model of using unskilled labor to build sprawling tract-boxes on cheap suburban land has not worked for California. We need to think big, and outside the box. Urban investment tools such as that proposed by Senate Bill 5 (Beall) can fund more affordable housing, and at the same time provide countercyclical economic stimulus for local communities by creating good quality jobs.

Public sector construction activity is a proven tool for economic growth. If we can build dams, bridges and powerplants, there is no reason why we cannot build more homes. There are three types of partnerships necessary to make this work: market-rate and affordable housing developers to provide expertise and experience into project delivery, building trades unions to provide the skilled workforce and apprenticeship opportunities in construction, and public agencies with land, leadership and resources to make large-scale projects feasible.

“The ‘cost of uncertainty’ may be the greatest challenge”

Curt Pringle - President of Pringle and Associates

Building housing is a profit making enterprise. We will have more housing built, when builders can make money.

When costs are too great, profits diminish. Land and construction are the leading drivers of costs. With the last many years of a strong development market, land and construction costs are near all-time highs.

Development fees and environmental regulations certainly add to the cost of developing housing.

However, the “cost of uncertainty” may be the greatest challenge. The time it takes to secure land, jump through the regulatory hurdles and get development approvals, make many developers pause with concern, as to whether they will have a product available before another slowdown in the cycle – thus housing starts will slow.

Local governments need to find ways to reduce, or defer costs and provide certainty in the planning process.

Cities and school districts should defer development fees from the time building permits are pulled, as is prominently done today, until each housing unit is sold or occupied, taking away a large upfront cost and reducing development risk.

Additionally, cities should consider providing time certainty to the planning process and in processing development proposals.

“We must never forget the context of a three-decade drought”

Carl Guardino - President and CEO of the Silicon Valley Leadership Group

Whenever we talk about the need for more homes for hard-working California families, we must never forget the context of a three-decade drought in building the annual number of homes needed to keep up with our population growth. While California residents “get it,” and list the lack of homes affordable to people of all incomes as our State’s number one need, it is still difficult politically for elected leaders at the state and local levels to build on that firm foundation of voter support. What can we do? Plenty:

  • Reasonable reforms to the CA Environmental Quality Act (CEQA), to stop the abuse of a great environmental law that remains greatly abused for non-environmental purposes.
  • Fees from local and state governments on each new home, that by themselves total more than the cost of an entire home in many states.
  • State tax policies that penalize local governments from building homes, and reward “big box” retail and other land use choices.

Rather than pointing fingers, private and public sector leaders need to join arms to provide a political climate that rewards cities and towns that say YES to new homes of all types, to meet the needs of Californians throughout our state.

Unpredictable fees, increased regulation and uncertainty for homebuilders are slowing production

Dan Dunmoyer - President and CEO of the California Building Industry Association

Not with standing the near universal opinion that California is in a housing crisis, and our homeless population is skyrocketing, it is getting harder every day to build homes in California. In his final month in office, Governor Brown dumped two costly and cumbersome regulations on the home building industry: Vehicle Miles Traveled and Waters of the State. Although well intentioned, both regulations will add enormous cost and complexity to the homebuilding process. When a business cannot determine its potential costs, the predictable outcome is risk avoidance, which results in a reduction in investment and production. A recent report by the UC Berkeley Terner Center shows local governments continue to add fees, making it impossible to build housing in California at an attainable price. Local government fees, combined with school and other miscellaneous fees, add as much as $200,000 to the cost of building a home. Even if a homebuilder is able to succeed in building a new home, fewer Californians can afford to buy it. We’re still going in the wrong direction.

“Production is being stymied due, in part, to high impact fees”

Jennifer Svec - Legislative Advocate for the California Association of Realtors

The rate at which cities and counties are approving housing permits is down more than 15 percent compared to last year. A recent housing report concluded that production is being stymied due, in part, to high impact fees, which are almost three times the national average.

While impact fees vary widely, they can amount to as much as 18 percent of a median home price. This does not include any direct fees that are exacted during the predevelopment process. Because of how significantly these fees affect overall project costs, these fees are often passed along to buyers in the form of higher home prices, especially in high demand markets. These fees can also increase the amount of subsidy needed to build affordable housing units.

AB 1484 by Asm. Grayson seeks to daylight ALL pre-production fees, which have been reported to range from $12,000 per multifamily unit in Los Angeles to $75,000 per unit in Fremont and from $21,000 per single-family home in Sacramento to $157,000 per home in Fremont – MORE THAN 5 TIMES AS MUCH.

Until our state leaders get a handle on ALL pre-development costs, future generations of Californians will continue suffer and homeownership rates will continue to decline.

California’s housing crisis is driven by conflicting policies

Jim Boren - Executive Director of the Institute for Media and Public Trust at Fresno State

We complain about a lack of housing in California yet we have public policies that aren’t helpful to the overall goal of getting residents into living places they can afford. You’d think the high cost of housing would open up a market for a moderate range of single- and multiple-family residences. But then we don’t really have a free market when it comes to housing.

Red tape and other housing regulations have driven up the cost of housing, and now some are even toying with the idea of banning single-family zoning. We allow neighbors to block affordable housing projects, even when there are safeguards built in to protect the integrity of existing neighborhoods. Government hasn’t done anything in a generation that would make housing more affordable for Californians. When it comes to housing policy, it seems that we can’t move forward because we have too many in the process having veto power over projects. Let’s start over, and simplify the process.

Dan Schnur, a veteran analyst and longtime participant in California politics, is director of the California Influencers series for McClatchy.
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