Lead Story… Since the end of the Great Recession, California’s cities have failed to produce anything close to the number of housing units needed to accommodate the state’s growing population. The responses from cities has run the gamut from inaction at best and open hostility to new development at worst. We are now dealing with the fallout: a crushing housing affordability crisis in which a state with some of the highest wages in the nation also has the highest poverty rate. This has finally got the attention of politicians in Sacramento who have offered up a slew of legislative measures to address the crisis. Today, I want to focus on SB 35, authored by Senator Scott Wiener of San Francisco since it is the bill that has gotten substantial press of late since passing through the state Senate last month. At a high level, SB 35 – also called the Housing Accountability and Affordability Act (per the OC Register):
Creates a streamlined approval process for multi-family developments that are in “infill” areas and jurisdictions falling behind on providing housing for all income levels.
Since 1967, California cities and counties have been required to develop plans every 8 years for construction of new residential units in their communities under the Regional Housing Needs Assessment (RHNA). Under the RHNA, cities and counties are required to account for units at all income levels under a jurisdictions housing element. The problem is that there is no enforcement mechanism for cities who choose to ignore their own plans. In other words, it’s little more than urban planning Kabuki theater where cities put on a big show to pretend to care about housing and then quickly give in to NIMBY constituents when it’s over. If you want more background on why the RHNA is a farce, Liam Dillon of the LA Times wrote a terrific piece about it late last month. So, how does SB 35 aim to fix things? Here is the press release from back in January (emphasis mine):
Today, Senator Scott Wiener released a detailed description of Senate Bill 35 – the Housing Accountability and Affordability Act – which he first introduced in December. SB 35 will create a streamlined approval process for housing when cities are not meeting the housing creation goals required by the Regional Housing Needs Assessment (RHNA), which will expedite the construction of affordable housing. SB 35 also creates a more robust reporting requirement for housing production by requiring all cities report their annual housing production to the California Department of Housing and Community Development (HCD).
Before I jump to my analysis of a couple of major issues, I want to be clear on one thing: this bill is a step in the right direction. The RHNA is generally a good idea but needs an enforcement mechanism, otherwise it’s existence is pointless. This should have been done years ago before we got to today’s miserable state of affairs but this is at least a start. Here’s more from the above-quoted press release (emphasis mine):
Under SB 35, if cities aren’t on track to meet those goals, then approval of projects will be streamlined if they meet a set of objective criteria, including affordability, density, zoning, historic, and environmental standards, and if they pay prevailing wage for construction labor. Currently, RHNA goals are reassessed and updated every 8 years. Under SB 35, cities will submit their progress on housing production to HCD every 2 years. If the city is not on track to meet its RHNA goals at one of these progress checks, streamlining will be in effect for the entire next two-year cycle. A city is “on track” if it is 1/4 of the way to its goal by year 2 of the 8-year cycle, 1/2 of the way to its goal by year 4, and so on. The streamlining applies only to the income levels that aren’t being built for – so if a city is building sufficient market-rate units but not enough low-income units, the project must add low-income units to qualify for streamlined approval.
Despite the clear good intentions, there are two big issues in that highlighted passage that will make it very difficult for this bill to do much of anything to mitigate the housing affordability crisis:
- Existing Zoning – The streamlined process only applies to projects that already comply with existing zoning. This seems to makes sense until you consider just how much California cities have been down-zoned since the 1960s. Want an illustration? This graph is from a dissertation by UCLA Ph.D. student Greg Morrow and looks at potential residential capacity in Los Angeles:
LA’s population was 2.5 million in 1960 and city zoning allowed for enough housing for 10 million residents. The population has grown to 4 million today but the city only has capacity for 4.3 million people – nearly at capacity. If this strikes you as ass-backwards, that’s because it is. This is why streamlining only for conforming zoning doesn’t mean much. The playing field has already been tilted so far that there simply isn’t much capacity left. The only way to truly address this issue is through amending restrictive zoning which will still require the same brutal discretionary process that has us in this predicament to begin with whether this bill passes or not.
2. Cost – The streamlined approval process only applies to projects that pay prevailing wage for construction labor. This is the equivalent of digging a hole next to your house with a shovel in an effort to get up on your roof. Much to the chagrin of certain powerful interests in Sacramento, increasing construction costs by 25% or more does not make it easier to build affordable housing. Governor Brown tried to do something similar to SB 35 last year but scrapped the plan after union interests insisted on inserting prevailing wage language because it would drive up costs to much to be economically viable. Here at Landmark, we look at multi-family construction projects in California cities all of the time. These days, they are barely clearing a 6% return on cost at stabilization. Affordable projects are typically substantially lower and rely on the sale of tax credits and cheap bond financing to be viable. That’s a 6% yield to take on construction and market risk. Hardly a developer making a killing. The counter argument to this is usually that land is overvalued and needs to fall. However, apartment projects aren’t single family homes in Irvine where the land makes up nearly 50% of the home sale price. Land is typically around 15% of the cost of an average apartment project while construction costs are well over 50%. If you increase construction costs substantially, it’s actually quite easy to get to the point where the project doesn’t work, even at a land cost of zero. Any way that you look at it, increasing construction cost substantially is not a wise way to incentivize affordable housing development. If the project can support the increased cost that’s great but a substantial number can not.
I really hope that I’m wrong and that bills like SB 35 lead to more development in areas of California where it is most needed. However, the provisions in the bill that I mentioned above leave me with a very skeptical outlook. In order to fix this problem, the state of California is going to need to take an honest look at the factors that are causing it in the first place and then take action that may piss off powerful political constituents. We are no where near that point yet but, as a wise man once said, “the journey of a thousand miles begins with one step.”
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Chart of the Day
Consumer credit update, courtesy of the always insightful WSJ Daily Shot:
Credit card debt, as a percentage of disposable income, has been far below the peak levels, barely rising over the last few years.
On the other hand, auto loans and student debt levels, as a percentage of disposable income, are at record highs.
With persistently low interest rates and a post-recession decline in mortgage balances, total interest obligations as a percentage of disposable income remain benign.
Source: Wall Street Journal
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