Chronic shortages of housing supply inflates California house prices

Empowered by State regulations, local development opposition groups prevent construction of much-needed home supply creating shortages that inflate prices.

propert_ladder_pressureWhen any commodity is in short supply, prices tend to rise; houses are no exception. Beginning in the 1970s, California produced more high paying jobs than it did houses. As a result, there were not enough houses to go around, so people began substituting down in quality to obtain a place to live. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market.

This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income. I remember when I first moved to California: I made 50% more than I did in Florida, but I went from an 1800 SF 4/2 on a third of an acre to a 950 SF condo. That’s a huge drop in housing quality despite a major increase in salary.

Unfortunately, the forces that create this situation show no signs of changing; in fact, it’s getting worse.

San Pedro project illustrates a cause of limited housing affordability

By Andrew Khouri, August 8, 2014

At a groundbreaking ceremony in May, neighborhood activists and local government officials celebrated Ponte Vista, a development of 676 homes in San Pedro.

A white-robed Roman Catholic priest thanked God for the “gift of Ponte Vista,” a welcome addition to a community starved for housing options.

But officials also spoke of the decade it took to get construction started, amid neighborhood protests over the size and style of the homes and the traffic they would bring.

trafficOne of the biggest obstacles to getting new construction approved is dealing with the traffic. The traffic systems in California are already overburdened, and some freeways are congested nearly all the time. When we already have bumper-to-bumper traffic, it’s difficult to convince citizens more housing, and thereby more traffic, is a desirable end.

Original plans called for a multifamily development with three times as many homes, with many more affordable options.

Now, with plans modified to include 208 single-family homes, prices will range from about $400,000 to $1.1 million.

The lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain any housing at all. It’s why an income in Southern California that barely affords a condo would buy a McMansion anywhere else in the country.cozy

The Los Angeles project highlights what economists and housing experts call a major contributor to Southern California’s housing affordability problems: Developments routinely get delayed, scaled back or killed amid strong opposition from community groups.

Years ago I worked on a large residential project in Calimesa, California. There is a local opposition group that wants the area to remain rural. We arranged a meeting with them to hear their concerns, and the first words they spoke to us was that they would sue us if we proposed anything with lots smaller than 2 acres; no compromise, just threats — and we took them seriously as they previously sued other developers proposing projects near their area.

The phenomenon cuts back the supply of new homes and drives up prices, said Christopher Thornberg, founding partner at research and consulting firm Beacon Economics.

“The problem is every single major development goes through that same process: from 800 to 400; from 600 to 300,” he said. The high cost of housing is “a supply issue — period.” …

Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Unless many more dwelling units are approved, the shortage will continue, and probably get worse — and there is no sign of this changing.cozy_3

The difficulty in winning construction approvals, however, is a trend that long predates the housing meltdown and will probably continue long after. California has failed to build enough homes, relative to population growth, every year since 1989, according to a November 2013 report from a state Senate committee. …
It’s sort of the desire to keep L.A. a certain way — that is not compatible with it being affordable,” said Richard Green, director of USC’s Lusk Center for Real Estate. “You can have sprawl or you can have density or you can have very expensive housing.”

These community groups who oppose development win two ways: first, they maintain the status quo in their neighborhoods, and second, they inflate the value of their own real estate by choking off the supply. Once set in motion, this kind of opposition spirals out of control.

It will take “many years” of brisk construction — at a much faster pace than California has seen for decades — to make housing significantly more affordable, said Jed Kolko, chief economist of real estate firm Trulia. …

That simply isn’t going to happen.cozy house

Also, the landmark California Environmental Quality Act, or CEQA, gives opponents a powerful weapon to block or delay developments through lawsuits, even after they receive planning approvals. CEQA supporters, however, say the state’s environmental law has led to better-designed projects while saving crucial habitat. …

CEQA is partially responsible for the problem, but the law is widely misunderstood. CEQA merely mandates study and disclosure. An environmental impact report — the product required by CEQA — is a thorough examination of the physical and cultural impacts of a proposed development. It takes a long time to do a thorough study, and it costs a lot of money, which is why developers whine about it, but the findings in the document do not approve or disapprove a project. That is at the discretion of local government officials.cozy_4

The environmental impact report may find significant impacts that cannot be mitigated, and the local government may approve it anyway. Conversely, the report may show no impacts, and the local government may reject it. It’s a completely political decision, and if people don’t like it, they can replace the officials, but the people elected still have discretionary approval powers.

Many environmental groups take these projects to court challenging the findings in the environmental impact report, and they may be able to overturn an approval based on challenging the document. However, that doesn’t end the matter. The developer can go back, revise the report, and try again. Most often developers give up at that point as the political winds blow against them, but some projects get approved and built even after they’ve lost challenges in court.

The bigger point here is that opposition groups prevent the kind of development necessary to make housing affordable in California. As was stated above, you can either have sprawl, density, or high real estate prices. For better or worse, Californians generally chose high real estate prices.

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