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Insight: California Needs More Housing -- But It's Not As Simple As Supply and Demand

William Fulton on
May 24, 2016

Amid all the alarming news about housing in California, here’s the one piece of information that really stands out for me: 

The average home price in the United States is about $180,000. The average home price in California is about $440,000. Not just in San Francisco, or Oakland, or Los Angeles, or Orange County, or San Diego. The entire state.

As the Legislative Analyst’s Office reported last year, California has always been somewhat more expensive that the rest of the country. In trying to understand the housing price gap, the LAO’s office took a very long view – charting the increase over the past 75 years. And the gap’s been getting worse for decades. In 1970 – the year, incidentally, that the California Environmental Quality Act passed – California housing was about 35% more expensive than the nation. By 2000, that gap had doubled, to about 76% more. And now it has doubled again, to about 144%.

Median home price is a pretty blunt statistical measurement. It masks a lot of things: median income, interest rates, crazy market run-ups, market crashes, lack of capital, changing household configuration. But what the LAO found is a pretty consistent pattern: For three-quarters of a century, California housing has been getting more expensive relative to the national average. 

Most housing experts will say there is only one reason for this kind of a prolonged run-up: California is not building enough housing. Environmentalists, preservationists, and neighborhood advocates have been fighting this idea for decades. But here’s an undeniable fact: It’s true.

For the first half of the 75-year period that the LAO examined – 1940 to 1980 – California’s population grew by 16.6 million people and the state added about 6.9 million new housing units. That’s about one new house for every 2.4 people added.

For the second half of the period – 1980 to today – California’s population grew by almost the same amount: 15.3 million people. But the state during this period the state added only about 4.6 million housing units. That’s about one new house for every 3.3 people. There’s an important blip along the way that I’ll come back to in a minute. But overall it’s reasonable to estimate that California is a couple of million housing units down from where it should be, given the population growth over the past half-century. 

Furthermore, at a time when housing prices were rising faster than the national average, incomes were stagnating, and coastal areas were running out of buildable land, the state built more single-family homes than before. Since 1980, California has built about 60% single-family detached and another 10% townhomes, compared to 53% and 5% between 1940 and 1980. Meanwhile, the percentage of units in flats – five or more units – has declined from about 28% to about 21%. 

In short: California has not built enough housing for its people for decades, and it has consistently built the wrong kind of housing. 

It’s easy to blame all this on CEQA and other land-use regulations, but I don’t think it’s quite that simple. The story of California since the 1970s has been the story of a state that has put a variety of barriers in the way ways of doing business – CEQA, Proposition 13, etc. – and then figured out how to end-run the barriers. ‘

Nobody in the 1980s would have guessed, for example, that by the 1990s voters throughout California would be routinely passing school bonds by the two-thirds vote required by Proposition 13. 

And nobody would have guessed in the 1990s that between 2000 and 2010, California would build 1.4 million housing units That’s one housing unit for every 2.3 new residents, which is better than we ever did in the 1940s, ‘50s, or ‘60s. Even with CEQA.

That housing boom ended with the Great Recession and has never come back. Since 2010, California has added more than 1.5 million people – yet built only 244,000 housing units. That one unit for every seven people.

But here’s the weird thing: During that time the median home price has only gone by 8%. By contrast, between 2000 and 2010 – when production of housing was, relative to population, higher than anytime since World War II, the median home price went up 40%. (This is reminiscent of the 1970s, when population growth slowed to a halt, more housing was built relative to population than housing than ever before, and yet California experienced its first housing price run-up.)

These decade and half-decade totals, of course, mask the huge run-up of the early 2000s and home price crash after 2008. But they help to make an important point: Building lots of housing didn’t lower prices. And then building very few housing units hasn’t increased the price all that much. 

That’s because, at least in the short run, production and price are not simply a result of supply and demand. They result from a complicated stew of regulation and the entitlement process, the availability of capital, interest rates, creditworthiness of prospective homebuyers, and a whole bunch of other things. 

Homebuilding went up in the early 2000s because mortgages for more expensive houses were easier to obtain even for buyers with marginal creditworthiness, which increased the price of new houses, which in turn made it worthwhile for homebuilders to navigate California’s complicated regulatory system and build new houses. (It’s also true that cities got bolder about using CEQA exemptions for more and more projects.)

Homebuilding went down because all this stuff got unwound: the mortgage collapse made it hard for people to obtain mortgages, especially for expensive houses, so home prices went down, meaning lenders no longer wanted to finance new housing projects and therefore homebuilders didn’t build houses. At the same time, of course, lots of people defaulted on their mortgages and were then bought by investors, thereby turning owner-occupied units into rental units.

The point here is that the housing market is a whole lot more complicated than just CEQA and regulation. Yes, California has been under-producing housing for decades. Yes, regulation has a lot to do with it. And yes, a lot of the regulation has to be cleaned out. 

Local governments need both carrots and sticks to produce more housing. Surprisingly, as our blogger Adam Christian pointed out not long ago, a little money from the state will go a long way. [https://www.cp-dr.com/node/3888] And, as far as sticks go, Gov. Jerry Brown, for example, has proposed a state override of local approval of certain affordable housing projects.

But even if the carrots and sticks line up – and housing production goes up – that doesn’t mean prices will go down tomorrow. The housing market’s more complicated than that. 

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