A deeper dive into California’s housing crisis

When it comes to California’s housing crisis, policy makers have often taken the narrow approach of throwing money at efforts to boost supply of sub-market rate units, with comparatively little focus on the dynamics that are driving demand for low income housing.

According to the California Budget and Policy Center, more than one in five Californians face “severe housing cost-burdens.”  In other words, their incomes are too low to be able to afford market rate rents.

Over half of California’s annual low-income housing production is fueled by $3.5 billion in tax subsidies called Low Income Housing Tax Credits (LIHTCs).

Based on Department of Housing and Urban Development standards, among those most likely to face this predicament are 370,000 California construction worker households — the very people we are depending on to build our way out of this crisis.

Recent Bay Area data shows housing cost burdens for carpenters and construction laborers are similar to that of janitors, and generally worse than it is for distribution center workers.

A deeper dive into state housing policy helps to explain why.

Over half of California’s annual low-income housing production is fueled by $3.5 billion in tax subsidies called Low Income Housing Tax Credits (LIHTCs).  LIHTCs are paid to wealthy investors in exchange for financing the construction of sub-market rate housing units.  The governor’s last three budgets boost LIHTCs by $500 million.

However, research shows that LIHTC investors are receiving as much as $26,000 more in credits per unit than the state ever gets back in the form of project financing.   It also shows that investors, bankers, developers and construction firm owners keep an average of 35% of every LIHTC financed project budget dollar for themselves — while the disproportionately housing burdened blue collar construction workers they employ receive just 14%.

Unlike other types of publicly financed construction, LIHTC projects are not required to pay their workers prevailing wage.  This is the local-market based minimum wage for different types of skilled construction work.

Most peer-reviewed research has concluded that project costs are not affected by prevailing wage because labor comprises such a low share of project budgets,

So when LIHTC financed projects are allowed to subvert this standard, it all but guarantees that California’s go-to policy tool for creating sub-market rate housing units creates even more workers who need them.

Balanced housing policy can’t just deal with supply.  To prevent an endlessly repeating cycle, it has to deal with factors that are driving demand.

Requiring Caliornia’s LIHTC financed affordable housing projects to pay prevailing wage would help to do just that.

Over the years, armies of academics have examined how prevailing wage laws affect overall construction costs and the livelihoods of construction workers.

Most peer-reviewed research has concluded that project costs are not affected by prevailing wage because labor comprises such a low share of project budgets, and higher wages tend to be offset by improved safety outcomes and other spending efficiencies — including reducing the number of construction workers living in poverty and reliant on other forms of public assistance, such as housing subsidies.

Attaching prevailing wage requirements to the receipt of LIHTC credits would not mean less or more expensive building.  Instead, it would ensure that as we work to expand our affordable housing supply, we do not also create even more demand in the bargain.

It’s the same reason why our national response to COVID-19 is not limited to building more ICU beds.  We employ a range of preventive measures:  we wear masks, wash our hands, and take vaccines to reduce demand for hospital care in the first place.

When it comes to California’s housing crisis, we should use a similar approach.  This is not a choice between building more units or reducing the poverty that drives housing insecurity.   If we hold LIHTC projects to the same standards as other types of publicly subsidized construction, we can do both.
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Editor’s Note: Scott Littlehale is a research contributor to Smart Cities Prevail, a California-based, non-partisan construction industry research and education organization.  Click Here to read his latest report on the LIHTC program and the housing crisis.