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How Do You Solve The California Housing Crisis?

California looms large in any discussion of housing affordability. The largest state by population, one out of every eight Americans lives in the Golden State, but the homeownership rate is dismal. According to Ben Metcalf, managing director of the Terner Center for Housing Innovation at UC Berkeley, the homeownership rate for California is 50 percentage points lower than the rest of the nation at only 44% in 2021. That represents a serious downtrend from a 50% homeownership rate in 2000.

Notoriously high home prices are to blame, with monthly payments for a typical California home sitting at more than $5,500.

What’s the solution? A panel of experts speaking at a recent California Association of Realtors (CAR) leadership conference laid out the scope of the problem — and some potential solutions being offered at the federal, state and local level. John Sebree, CEO of CAR, moderated the discussion between Metcalf from the Terner Center, Selma Hepp, chief economist at CoreLogic, Robert Kleinhenz, director of the Office of Economic Research at California State University, and HousingWire Lead Analyst Logan Mohtashami.

The heart of the problem

Why is it so expensive to buy a home in California? The Terner Center has shown that about half of the homeownership gap is directly attributable to the affordability crisis, which in turn is a direct consequence of a housing supply shortage.

“We’ve made it difficult to build new housing,” Metcalf said, citing environmental regulations, building codes, local control and the opposition to building infill multifamily housing.

Kleinhenz noted that the state has been woefully undersupplied for years. In 2000, CAR estimated that the state would need about 250,000 new units a year to keep up with demand. But Kleinhenz said the state has never gotten close to that number, so it’s now 2 to 2.5 million units behind.

“The increase in home prices is due to increasing demand versus supply — we have to build more,” Kleinhenz said. “How many housing units are we building? For the last 10 years, building permit numbers never surpassed 120,000 units.”

In fact, Hepp pointed out that in 2023 the entire state of California issued only 70,000 permits for single-family homes — about the same number as the Houston metro area. “California [has been] the most inventory-constrained market for years.”

As a result, the housing gap is creating a labor force gap as well. “Think about year over year the numbers of people leaving California. Higher-income people are leaving California because they don’t have opportunity here,” Hepp said. “We need to shift the conversation to: How do we ensure kids can stay here and have the same opportunity as we did?”

The challenge of creating a path for the next generation of homeowners was personal to the speakers on stage and to many in the audience of real estate professionals who have seen family members leave the state for more affordable areas.

“To me, the test is when you have adult children who want to live someplace else,” Kleinhenz said. “That’s when you realize we need to up our game. We need to build more and create opportunities for our offspring to stay here.”

Sebree agreed. “We need to have a shared goal of a California where everyone wants to live and work. How do we incentivize the production of housing?”

That question has vexed California for decades as the state has taken a variety of actions to address its housing problem. Metcalf said there have been 140 distinct pieces of legislation on housing affordability since 2016, but those laws haven’t made much impact in the permitting numbers.

The passage of SB 9 in 2021 outlawed single-family zoning, and there have been numerous attempts to expand the ability to build accessory dwelling units (ADUs) to increase density.

Ministerial approval — a streamlined permit process that doesn’t require public hearings or sign-off by local officials — took effect in California in 2018 and has the potential to move housing forward. But even with all of these laws, costs and local regulations are still limiting factors for development.

“The cost of a piece of land in Southern California is $3-$4 million per acre,” Kleinhenz said. For us [California] as a whole the cost is $700,000 to $800,000 per acre. From the get-go, the cost of building is so much higher than other places.”

So what would move the needle in California? Sebree asked each expert what one policy change they would make if given the chance. Most pointed to zoning changes, especially reversing the downzoning that was done in the 1990s. Mohtashami suggested the government incentivize new building with 0% rates on loans.

What about all those office buildings sitting vacant in some of California’s largest cities? The panel agreed that retrofitting office buildings for residential living was too cost-prohibitive. “The codes don’t work,” Mohtashami said. “You have a better chance of pickleball courts being built than housing.”

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