The California Housing Crisis

Jeff Berger —


71CbPHtmMcLConor Dougherty’s new book, Golden Gates: Fighting for Housing in America, is an important contribution to understanding the housing crisis in the United States. Dougherty is a New York Times journalist who grew up in San Francisco and who returned to his home city in 2013. While the book focuses on California, and especially the Bay Area, the housing crisis is by no means unique to California. The same story is playing out throughout all of the cities that “suffer” from a booming economy, because they are the clusters of high-income jobs, usually in the hi-tech and financial sectors.

Around the United States and the world, Dougherty notes, the home ownership rate for young adults is at a multi-decade low. About a quarter of tenant households spend half of their income on rent. Eviction displaces a million households a year. About four million people spend three hours commuting to and from work. Dougherty writes:

[Y]ou only need to look out the window of an airplane to realize that this has nothing to do with a lack of space. It’s the concentration of opportunity and the rising cost of being near it. It says much about today’s winner-take-all economy that many of the cities with the most glaring epidemics of homelessness are growing technology centers where good paying jobs are plentiful and industries of the future are on the rise. California, home of the nation’s worst housing crisis, has the dubious distinction of having somehow managed to produce some of the highest wages in America as well as the highest state poverty rate once the cost of housing is figured in.

While there are statistics about homelessness, evictions and long commute times, it is harder to get a feeling for how many people are sleeping in their cars or sleeping in the living room on a sofa or floor. It’s hard to get a feeling for how many income generators comprise a single household. It’s hard to get a feeling for how many people are living on the edge of disaster.

Not long ago, Governor Jerry Brown of California, who served as governor from 1975-83 and 2011-17, said that the housing crisis is full of paradoxes and complications. In this article, I will attempt to explain those paradoxes and complications for which there is no consensus on the solutions. The political alliances and the conflicts are not along traditional political boundaries. For the most part, the conflicts pit “liberals” against “liberals,” because the cities who suffer most from this crisis are also the cities where the most liberals reside, and that is because liberal cities are the gravitational centers of high-income job growth, often associated with the immigration of both high-income and low-income people. Among the liberals is California state senator Scott Weiner, who has been attacked by “progressives” when in fact Weiner’s only crime is to try to overcome NIMBYs (Not In My Backyard) who are resistant to building high-density housing in their neighborhoods.

Conor writes that it is a popular narrative to blame the crisis on gentrification, or to blame it on foreign investors or hedge funds, or companies like Airbnb. These things are all happening and they are being exacerbated by years of federal disinvestment in affordable housing, a tax code that subsidizes wealthy homeowners at the expense of poor renters, and a building industry that hasn’t had any meaningful innovation in decades.

But underlying all of this is a larger problem, which is a housing shortage in the places where people and companies want to live and invest. The new economy has fueled a resurgence in the inner cities where people with money want to cluster. The rising costs are also responsible for creating more segregation, more income inequality, more racial and generational wealth gaps, and more carbon emissions that is adding to global warming. The irony is that even the wealthy people are suffering and complaining, not because of their high taxes but rather because it is too crowded; and it is increasingly difficult for them to obtain services from low-income people. Thus, whereas Palo Alto (home to Stanford University) used to be the envy of Californians, now it’s just a place to make quick killing and then flee.

Housing in the 1960s

Dougherty explains the historical trends that led to the current crisis in California. The seeds of the crisis began in the 1950s and 1960s. In many ways, Governor Jerry Brown’s father, Edmund “Pat” Brown, started the problem. When Pat Brown was Governor of California (1959-1967), his goal was to encourage population growth. In 1963 when California overtook New York as the most populous state, he celebrated the “achievement.” Brown’s signature accomplishment was in creating the aqueducts to supply enough water to Los Angeles to fuel population growth. Brown also accelerated massive freeway construction, replacing its older urban rail systems with automobiles. Los Angeles has regretted the loss of its rail systems ever since.

During the postwar era, California was as racist as the rest of the country. In the 1960s California voters tended to be liberal when it came to national civil rights, but they resisted integration in their own backyards. Most Californians supported President Lyndon Johnson and the US Congress when it passed the Civil Rights Act in 1965, but in that same year the impoverished community of Watts erupted in a large-scale riot that frightened the white population of Los Angeles. Segregation continued. Thus, the earliest NIMBY movements were born out of racial conflict and racism.

Rather than trying to integrate the cities or invest in the city infrastructure, the white population began to flee the cities. The concepts of white flight and urban sprawl were born. White people appreciated a better quality of life in the suburbs, even if it wasn’t because those communities were racially pure. They could have their cake and eat it, because they could live “in the country” while not having to drive too far to work in the city.

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Edmund “Pat” Brown

Pat Brown introduced the notion of “redevelopment” of the inner cities, otherwise called “slum clearance.” Today such a notion is called “gentrification.” Under Brown, the state government began to subsidize redevelopment and that continued until his son put a stop to it five decades later. But in the 2010s, when inner-city living became popular again for white people and immigrants alike, gentrification of the cities became a new problem. This time the changes were happening without government subsidies, replaced by private, corporate and religious donations. And the name would be renamed by some people to “displacement,” as in the “displacement of poor people.”

Since 1913, the federal government has subsidized home ownership by allowing mortgage interest payments to be tax deductions. No such deductions have ever existed for rent. Thus, the federal government has always discriminated against poor people, who have always been overrepresented by minorities. That is the complicity of the federal government in creating the housing crisis. If the federal government really wanted to help renters, it could create a tax deduction for rent. But that might not help in an unregulated free market because landlords would be tempted to raise the rent knowing that renters could afford it.

As the new suburbs were built in the 1960s, these suburbs were allowed to incorporate as new cities. Cities incur the cost of providing government services, but incorporation enables those cities to obtain a degree of autonomy in the form of local zoning laws. Sometimes they bar high-density housing that is typically used for apartment rentals but could also apply to owner occupied condominiums. These zoning laws help to maintain property values. Once this norm is created, if it were suddenly changed, a recent purchaser could lose his entire investment and be foreclosed as real estate prices dropped (unless somebody refunded their cost basis). When laws change, there are always winners and losers.

Housing in the 1970s

The stagflation of the 1970s produced yet another new phenomena and another crisis. Housing prices began to explode like never before. Previously home ownership and home price appreciation was not viewed as a means to wealth creation. Suddenly it was. In this new world, anyone who chose to rent or was forced to rent in California was forever doomed to be poor or, at best, to lose any hope of retirement before death. That was new phenomena. And yet, along with higher real estate prices came higher property taxes that were forcing retirees on fixed income to become priced out of their homes. In 1977, Proposition 13 solved that problem by limiting property tax increases to 2% per year, while allowing new purchases to be assessed based on the sales price. This new kind of housing discrimination favored the older population at the expense of younger workers and immigrants. Home ownership became hereditary.

Jerry Brown first became governor of California in 1975, but unlike his father, he was anti-growth, and in 1976 he declared “an era of limits.” Brown recognized the emerging housing problems, but he wasn’t able to accomplish much except for one singular achievement shortly before his governorship ended in 1983. In 1982 California passed the Housing Accountability Act that would allow people to sue cities that tried to block high-density housing developments. It was passed without a fuss and then forgotten—for a time.

Vulture Capitalism

In spite of high real estate inflation, rent remained somewhat affordable, that is, until the 2010s. Then came the concept of “flipping houses” and “vulture capitalism.” Flipping houses isn’t pernicious, but flipping apartment complexes is.

Vulture capitalists buy apartment buildings (and mobile home parks) for the stated (or unstated) purpose of evicting poor tenants, making building improvements, renting to high-income tenants, and then often selling the building. This is gentrification in its most evil form. Sometimes these capitalists obtain funding by attracting money from small investors who fail to understand the ramifications of what they are doing. (It’s not unlike all of us who invest in a stock mutual fund while ignoring the actions of the companies who comprise the mutual fund.)

Lafayette – A Case Study of Suburbia

51p3s5+v+aL._AC_SY400_Dougherty writes about the city of Lafayette, which became a wealthy bedroom community for workers in San Francisco, Oakland and Berkeley. Lafayette was born in the 1960s. It continues to be a beautiful pastoral setting, but a freeway with eight lanes enables commuters to be in Oakland or Berkeley in a few minutes, passing through the Caldecott Tunnel (about 3700 feet in length) that was built and is maintained at taxpayer expense. In the 1970s, completion of the BART (Bay Area Rapid Transit) rail system included a station in Lafayette, a short 31 minute ride from San Francisco. This BART station is what makes Lafayette a perfect target for high density housing. But to this day, the Lafayette residences fight tooth and nail to prevent high density housing in their city, often by saying that they want local control of their city and they want to keep the “character” of their city. So, we have a democratic struggle between local control and state control of housing decisions.

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Caldecott Tunnel

One of the heroes in Dougherty’s story is Lafayette’s city manager, Steve Falk. Falk spent his whole career trying to serve Lafayette’s NIMBY residents, but in recent years he began to realize that their unwillingness to compromise had become morally repugnant to him. Finally in 2018 he resigned from his job in disgust with his employer.

A bizarre scenario occurred in Lafayette in 2015. A landowner sold a large piece of empty land on a hill situated one mile from the BART station. He sold it to a developer named Rick Holliday. Holliday asked the city to let him build 315 apartments, knowing that he would have to compromise down to a lower number. The city was angry and rejected his proposal. Eventually he worked out a compromise with the  Steve Falk to build 44 houses.

As noted, Falk began to realize that the NIMBY residents’ unwillingness to compromise had become untenable. He warned the city that if they rejected the 44 houses, they would get 315 apartments instead. The NIMBY people decided to sue Holliday. At the same time, an activist named Sonja Trauss used the Housing Accountability Act to sue him for not building high-density housing. Trauss did not live in Lafayette, and the NIMBY folks thought she had no vote in the matter. But that was Trauss’s point. Homeless people had no vote, and renters looking for a place to live had no vote.

So, Holliday was being sued from both sides, even though the fact of the matter was that since he agreed with Sonja, he felt like he was suing himself. In 2017 a county judge ruled against Trauss, but that fight is far from over. The NIMBY people are destined to lose sooner or later.

San Francisco

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Tenderloin district

Lest I single out the suburbs like Lafayette, I also want to mention that the west side of San Francisco has managed to bar all high density housing. In San Francisco the high density housing has been forced upon the east side, which includes downtown and “The Mission.” The Mission district, which used to be heavily Hispanic, has become gentrified. However, the Tenderloin district, which sits between The Mission and the financial center of San Francisco, is plagued by the worst kind of homelessness, accompanied by crime, drugs and feces in the street. Now it has the potential to become a Petri dish for the cononavirus next door to some of the most expensive real estate in the world.

Rent Control

In 1995 California passed the Costa-Hawkins Rental Housing Act. This act placed limits on local rent control. First, it prohibits rent control on houses and condominiums, and apartments built after 1995. Second, it prohibits “vacancy control.” Briefly, this law limits the ability of a landlord to increase rents without “just cause,” until the property becomes vacant. The law encourages renters to remain where they are, resulting in lower mobility and longer commutes. In some cases high income renters would rather stay where they are and purchase a home someplace else that they can rent out to somebody else—which is a perverse situation. But a new landlord is not subject to the law, which is also perverse. Thus, by law vulture capitalists are allowed to purchase property and evict the tenants.

Rent control has always been controversial, because it flies in the face of supply-and-demand logic. If home builders can’t make money, they won’t build. If they don’t build, the housing supply will be low. If the supply is low, purchase prices and rental prices will be high. Some homeowners (such as the people of Lafayette) may like that. Others do not.

You might think that all renters like rent control. But that is not always true. Some renters recognize the law of supply-and-demand. Sonja Trauss is one of them. She has a single goal in mind and that is to increase the supply. It doesn’t matter to her if the new housing is affordable or market-rate. The only thing that matters is that there be lots of it.

The modern concept of affordable housing is subsidized rent (if it is rental property). If the supply is low, high-income people will compete for the limited supply. High-income people would rather live in nice homes, but if nice homes don’t exist, they will choose not-so-nice homes, as long as they don’t need to spend lots of time commuting. Time is precious. So they will bid up the prices of whatever homes exist. Poor people cannot compete and will be displaced, with or without rent control. This is a form of gentrification, although not exactly a pernicious kind of gentrification. At any rate, a better solution is to listen to Trauss, or to move the high-income jobs somewhere else.

In 2018 Californians voted on whether to repeal Costa-Hawkins. The measure lost by a large margin. The measure would have allowed local governments to design their own rent control laws, or to have none at all.  Even some renters were afraid of what the local governments might do. Giving complete control to a city like Lafayette might be especially harmful to renters. What would happen in San Francisco? Nobody knows.

The Cost of Building

California had a boom in housing construction throughout George W. Bush’s presidency. At that time there was still plenty of available land in San Jose, Milpitas, Fremont, and in cities further east. The Bay Area exurb expanded out to the Central Valley. An exurb includes all of the people who commute to the core municipal cities, sometimes commuting two or three hours each way. When the 2008 recession hit, the exurb was plagued by foreclosures and vacant buildings. The housing bubble ended, and the construction business seized up. Older construction workers retired and were never replaced.

But then the hi-tech industry came back with a vengeance. Within a few years, while housing prices remained flat in much of the country, housing prices began soaring again throughout California. This time, however, there has been little new construction. There is less available land and few construction workers. Traffic congestion is worse than ever. No new freeway expansion; only more tolls to encourage carpooling. Plenty of older homes are being torn down to build bigger and more expensive homes, but there aren’t a lot of new housing developments, partly because of the resistance of NIMBY people.

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Mark Zuckerberg and Priscilla Chan

Why aren’t there enough workers? Construction workers can no longer afford to live in the Bay Area.  Actually, they can live in the Bay Area if they are paid sufficiently. That is why it costs a lot more to build housing in the Bay Area than anywhere else. That is why cities cannot afford to build enough affordable housing. There isn’t enough money in the country to do it. Companies like Chan Zuckerberg, founded and own by Mark Zuckerberg and his wife Priscilla Chan, are trying to step up by becoming housing philanthropists to fix the problem that they created, but it’s peanuts. It is unlikely that even Zuckerberg and Jeff Bezos have the resources to fix this problem without a strong political will at all levels of government. Colonizing Mars will not solve it.

However, there is another potential solution, pre-fab housing, that could alleviate the cost of construction. The concept of pre-fab housing is not new. Houses don’t necessarily need to be cookie-cutter houses, but they can be built at a central location and then transported (in pieces that can be assembled). That location can be any affordable place as long as the distance is not too great from its target. It does, however, require some capital investment to build a facility, and that investment is risky. If competition develops, the investors might lose money. Or if the housing bubble ends, the investors could lose money.

Another problem that is affecting the cost of housing construction is labor unions. The most cost-effective way to build a house is to use a minimum number of workers. If one person could do the job of a carpenter, an electrician, a plumber, a sheet rocker and a painter, the labor unions would object. Labor unions exist for each sub-specialty and they do not like it when someone outside of their union steals their jobs. Labor unions protest whenever a builder wants to hire workers who can fill many different roles. I don’t want to demonize labor unions, but they are an obstacle for housing developers and for the politicians and not-for-profit organizations who support them.

One takeaway from Dougherty’s book is that developers are not the demons that many anti-growth people think they are. Indeed many (or most) of them are truly interested in solving the housing crisis, not exploiting it. They are not vultures. Rick Holliday is one of them. He is not young anymore, but he still wants to revolutionize the way houses are constructed so that he can help to increase the supply of housing. Profit is not his primary motivation. To me, Holliday is one of the many heroes in Doughtery’s story.  So are Steve Falk and Sonja Trauss. So are many of the politicians who are trying as hard as they can to solve this seemingly unsolvable problem.

YIMBY Movements and Anti-Gentrification Movements

Numerous organizations have arisen in recent years to fight NIMBYism and the trends towards gentrification. These organizations have even begun to hold annual conferences. They also work with many non-profit NGOs, including religious-based organizations, to deal with the problems. Many of the costly battles take place in the courts. Some of these non-profit organizations are in the business of purchasing apartment complexes, and then act as benign landlords in order to protect poor tenants—done at great cost to whoever donates money to these organizations. (This is a modern version of “public housing.”) These organizations work with corporate leaders and banks to obtain funding in the form of either donations or loans. They also work with the developers and city managers.

In California there are many city officials who are trying to grapple with the idea of building more affordable housing, but they don’t really have the resources at a local level. During Jerry Brown’s second governorship (2013-2019), he worked with the state representatives to try to pass legislation, but at that time the NIMBY groups were too strong to overcome politically. Since Gavin Newsom became Governor in 2019, the politics has begun to shift more in favor of the YIMBYs (Yes In My Backyard). In October of last year Newsom signed 18 bills designed to jumpstart housing production, including one bill to overcome NIMBY resistance. $331 million in state funds was allocated to the National Mortgage Special Deposit Fund to provide funding for borrower relief and legal aid for renters and vulnerable homeowners. It remains to be seen how much of a dent this money will make, but more importantly it shows that the political tide is beginning to shift in favor of the YIMBYs, albeit at a snail’s pace.

Speaking For Myself

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Stanford University

Speaking for myself as a Californian, as my state emerged from the 2008 recession, it felt as though having the fifth largest economy in the world was something to be proud of. I felt that California must be doing something right. When Donald Trump was elected by the Red States in 2016, I began to realize just how much those states had failed to recover and were suffering from the global economy. But I also began to realize that an economy on steroids is not a good thing. The stock market has been rising since 2009 and California housing costs rose in lock step with the stock market. The fact that the rate of increases accelerated when Trump was elected is not his fault. But the fact remains that the suffering in the Blue States is possibly worse than the suffering in the Red States, in spite of California having the fifth largest economy in the world. I have always been anti-growth, like Governor Jerry Brown. That anti-growth attitude is what led me to become a NIMBY. I wish the government could marshal all of the wealth that is now in the hands of people like Jeff Bezos to solve real problems like global warming and the housing crisis, rather than trying to build self-driving cars or to colonize Mars. I wish we could displace Stanford graduates, or Stanford itself. But if Stanford must continue to plague California—or if California must continue to have the fifth largest economy in the world—then I need to resist my own NIMBY inclinations.


Saphire, a collie, eating out Jeffrey Berger's hand

Jeff Berger and Saphire

Jeff Berger (Author) – Tech writer, public speaker, and engineer. He earned Masters degrees in statistics and operations research from the University of California, Berkeley, and was employed by IBM for more than 30 years. He developed an interest in history and economics during the 1990’s and now wonders if he might have chosen the wrong career.


 

2 Comments on The California Housing Crisis

  1. Anonymous // May 28, 2020 at 1:19 pm // Reply

    Excellent post!

    Like

  2. A most interesting account of how capitalism systems can define & control access to basic human needs. Is it fair to say that those who “have” write the rules for themselves; others who mostly are “don’t quite haves” or “have nots” end up having to scrap for leftovers?

    In a largely consumer-based society, a chosen or imposed lifestyle can range from blessing to curse. In the California (& other) large city situations, as you detail, Jeff, residents are kind of cursed by their blessings. Here in the humble working class East Side of Madison WI, the similarities are thankfully minimal and the contrasts marked. Folks hereabouts can live comfortably in 1100 square foot homes valued around $180-200,000 with nice yard & garden space. Yes, the home prices have more than quadrupled over three decades, but overall generally inflating values still make this as close to a bargain as one can get these days. Madison, at around a quarter-million population, offers a smorgasbord of quality of life without the stresses enumerated above. Within such an environment, people can choose to live simply & frugally and still maintain more than adequate standards of living. California, keep realizing your progressive & life-affirming values and policies, but no thanks on West Coast lifestyles.

    Liked by 1 person

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