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What California Can Teach America About How To Increase Housing Production
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What California Can Teach America About How To Increase Housing Production

Recent legislation in California has reduced the legal barriers to producing new housing units—everything from accessory dwelling units to large, multifamily buildings—when local governments fail to zone their communities for adequate housing.

Construction of apartment complex with palm trees in background
Construction workers help build a mixed-use apartment complex, January 25, 2024, in Los Angeles. (Getty/Mario Tama)

Many regions in the United States are suffering from a shortage of affordable housing. The U.S. Department of Housing and Urban Development and most economists define affordable housing as either rental or owner-occupied housing that costs “no more than” 30 percent of an individual’s or family’s gross monthly income. For the approximately 44 million (or 36 percent) of American households that rent, the trend continues to be one of rising cost relative to income.

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According to Moody’s Analytics, the median household now spends 30 percent of gross income on rent for the first time in more than 20 years of tracking the data. Recent data from the Census Bureau’s American Community Survey are slightly worse, showing that 52 percent of households spend 30 percent or more of their income on rent. Moody’s data show that the three most unaffordable states as measured by the average rent-to-gross income ratio are Massachusetts at 32.8 percent, Florida at 32.6 percent, and New York at 31.2 percent.

The numbers are also challenging for homeowners. A study by Harvard University found that homeownership costs are rising. Assuming a modest down payment, the monthly cost of owning the median-priced home is now $3,000.

The burden of unaffordable housing does not fall evenly across racial and ethnic lines. Black and Latino households are hit especially hard. Nationally, roughly 58 percent of Black or African American households and 52 percent of Hispanic or Latino households rent. By comparison, 40 percent of Asian households and 30 percent of non-Hispanic white households rent.

There is, of course, nothing magical about the 30 percent income threshold; it’s an arbitrary line but one with both historical roots and common sense attached. During the Great Depression of the 1930s, people advanced the idea that a week’s pay was a fair amount to spend on a month’s rent. This translates to a rent-to-gross income ratio of 25 percent. In 1969, Sen. Edward Brooke III (R-MA) successfully advocated for an amendment to the Housing and Urban Development Act of 1969 that stated rent in public housing units “may not exceed one-fourth of the family’s income, as defined by the Secretary.” In 1981, Congress raised the rental cap to 30 percent, where it has remained ever since.

Every household’s expenses and financial obligations are different. But the 30 percent threshold rests on a commonsense foundation that housing shouldn’t chew up so much of a family’s income that there isn’t anything left over for life’s other necessities. When the rent-to-income ratio rises, families are often forced to make wrenching decisions about what expenses to cut, including health care, higher education, and retirement. The crunch is real.

The Harvard study cited above also found that the amount of money left over after paying for housing continues to fall for both renters and owners: “In 2021, the median renter and homeowner households with incomes under $30,000 had just $380 and $680 per month, respectively, after paying for housing to cover other necessities—the lowest residual incomes in two decades.”

The housing market is complex, and the factors affecting price vary by region. With that said, the single most important source of price increases is an insufficient housing supply. Data from the Federal Reserve Bank of St. Louis show that since the 2008 financial crisis, the United States has significantly underproduced new housing units—both single- and multifamily units. In fact, the total production of new units in 2022 was still 27 percent below the production of 2005.

Economists at the Federal Home Loan Mortgage Corporation (more commonly known as Freddie Mac) estimated that low housing production created a housing supply deficit of 3.8 million units by 2020. This deficit has only grown since that time. From 2005 to 2023, the U.S. population grew by 37.8 million people, or 13 percent. The insufficient production of new housing units means that the millions of new households formed over this period are chasing fewer housing units relative to past generations.

California holds cities accountable for accommodating new housing

Perhaps no state faces a more dire housing shortage than California. For decades, the state has underproduced housing units, leading to sky-high rental and homeownership prices. The median sale price for an existing single-family home in California for the year ending August 2023 was $860,000, compared with $382,600 in the nation as a whole. The political pressure to address the need for more housing has finally produced some substantial policy changes at the state level which offer a model that other states can emulate and which the federal government should encourage.

Since 1969, the state of California has required cities and counties to plan for the expected housing needs of their communities in the coming years. These plans are referred to as the “housing element” within a larger comprehensive plan. According to the state, “in order for the private market to adequately address the housing needs and demand of Californians, local governments must adopt plans and regulatory systems that provide opportunities for (and do not unduly constrain) housing development.”

In other words, cities and counties are supposed to adopt land use regulations—zoning—that will allow the market to meet demand for housing units. Importantly, the state allows local governments to determine through their deliberative processes how to meet this demand. The state does not dictate the location or size of any housing development.

Unfortunately, for several decades, the housing element was a box-check planning requirement that didn’t translate into meaningful change. According to one legal analysis, California’s oversight of local housing plans was ineffectual because the state’s “rules had no legal effect” and its “judgments about the adequacy of a local government’s housing plan received virtually no deference from the courts.”

In 1982, California addressed some of these inadequacies with the passage of the Housing Accountability Act (HAA). The act is designed to remove the discretion of local governments to deny housing projects that comply with objective zoning and development standards. In addition, a component of the HAA is commonly referred to as the builder’s remedy. This remedy “allows developers of affordable housing projects to bypass the zoning code and general plan of cities that are out of compliance with the Housing Element Law.” This ability to bypass local zoning restrictions under certain circumstances was dubbed the “builder’s remedy.” Yet even this didn’t kick-start the level of construction proponents had hoped for, so the legislature adopted additional reforms. From 2017 to 2019, the California legislature passed what scholars have called “a series of individually modest but complementary” reform bills, including S.B. 330, the Housing Crisis Act of 2019, that collectively transformed housing production.

The result of all these reform measures has been to dramatically increase the power of the California Department of Housing and Community Development (HCD) to hold local jurisdictions accountable for planning for adequate housing. The process starts with a housing needs determination produced by HCD. Once HCD has determined how much housing is necessary to meet the needs of state residents in the coming years, HCD allocates a portion of this need to each regional council of governments. The regional council of governments then allocates this total among its constituent local jurisdictions. The local jurisdictions must then update the housing element of their long-range comprehensive plans and make appropriate changes to local zoning.

The result of all these reform measures has been to dramatically increase the power of the California Department of Housing and Community Development to hold local jurisdictions accountable for planning for adequate housing.

If HCD determines that a local jurisdiction has not updated its housing element and zoning to accommodate its share of the regional housing allocation, then developers can submit applications under the legal provision known as the builder’s remedy. To qualify for the remedy, the proposed development must set aside 20 percent of units for low-income renters or buyers or 100 percent of units for moderate- or middle-income renters or buyers. HCD defines these categories according to the area median income. The threat of builder’s remedy projects serves as a substantial motivation for compliance.

In 2021, Megan Kirkeby, HCD deputy director for housing policy, stated that, “A housing element is no longer a paper exercise—it’s a contract with the state of housing commitments for eight years and the Housing Accountability Unit will hold jurisdictions to those commitments.” Again, neither the state nor the regional council of governments mandates how local governments accommodate their fair share of housing needs.

California has set an ambitious statewide goal of 2.5 million new units by 2030. For instance, the six counties and 191 cities covered by the Southern California Association of Governments is responsible for accommodating 1.3 million new units. This is no small lift. Out of a total of 539 local jurisdictions in the state, 221—or 41 percent—do not currently have compliant housing elements, potentially opening the door to many new “builder’s remedy” units in the future.

Importantly, California’s ongoing push to permit and construct more housing has been inclusive of projects big and small. For instance, a separate series of reform bills, beginning with A.B. 2299 and S.B. 1069, which both passed in 2016, has made it considerably easier to build accessory dwelling units (ADUs). An ADU is a “permanent residential dwelling unit providing complete independent living facilities for one or more persons, and is accessory to an existing or proposed primary dwelling.” These structures are also sometimes referred to as granny flats, in-law units, or second units. The advantage of ADUs is that they allow for a meaningful increase in housing density within areas that are zoned for single-family homes. The results have been promising. Since 2016, local jurisdictions have permitted 88,937 new ADUs, compared with very few before. Moreover, ADUs represent 8.2 percent of all new housing units permitted in the state.

Conclusion

Decades of housing underproduction mean that California has a big hole to dig out of. Nonetheless, a host of changes to state law have helped reduce the regulatory barriers that have stymied new housing starts—especially ADUs and multifamily buildings—for too long. California’s new approach to housing represents a smart but aggressive strategy that balances the need to substantially boost housing production while also allowing local governments to determine how best to accommodate this growth. Strong planning mandates plus local flexibility on implementation is a model that other states facing housing shortfalls should seek to emulate and which the federal government should encourage. It can do so by providing additional discretionary grant funds and tax incentives to states that adopt this model.

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Author

Kevin DeGood

Director, Infrastructure Policy

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