Housing: Low inventory, high prices, too much regulation

An aerial view of an affluent suburban housing tract in California. (Photo: Lightspot, via Shutterstock)

Either reduce the torrent of regulatory burdens on California home builders or face a future of high housing costs and stunted economic growth. So concludes Loren Kaye, president of the California Foundation for Commerce and Education, who penned one of several articles issued last month through the Center for California Real Estate (CCRE).

In Fostering Growth and Opportunity in California for a Strong Middle Class, Kaye nails it when he says policymakers have not adequately addressed permitting, zoning, and litigation burdens, most notably reforming the California Environmental Quality Act, and eliminating its use as a political tool to prevent much needed housing projects from being built.

Overregulation and a sea of red tape are root causes of California’s current housing supply crisis.

Consider: For the first time, California’s median home price surpassed $550,000[i] in May, according to a report issued by the California Association of REALTORS®. At the same time, California’s home ownership rate of 54 percent landed it last in the nation.

The perfect storm – lack of inventory and skyrocketing prices – has arrived and continues unabated. During the current legislative session, California lawmakers have sent Governor Jerry Brown a series of bills that raises money in a variety of ways for affordable housing projects, to provide tax breaks to renters and potential home buyers. And while that’s a nice start, the real key as Kaye’s piece illustrates, is to unlock supply by reducing the cost of building a new home.

Overregulation and a sea of red tape are root causes of California’s current housing supply crisis. Protecting the environment is certainly important, but regulatory overweight has suffocated rental and for-sale housing production: During the last decade, California built approximately 80,000 new housing units a year, at a time when the need was 180,000 new units a year.[ii] Now, we’re a million homes short, and counting.

Including local land-use fees, regulatory costs can add between $35,000 and $60,000 to the purchase price of each new home built in California, even before the first slab of cement is poured. Moreover, these fees become part of a buyer’s mortgage and assessed property value, increasing their property taxes and monthly mortgage. Kaye’s report offers a five-part, no-nonsense solution that includes the following:

Investment in transportation and water infrastructure; advancing affordable energy policies, updating labor laws and reducing litigation, and further investments in education and a skilled workforce. As Kaye writes, “the only solution to the high cost and severe shortage of housing is to increase supply, but California’s environmental and land use laws undermine this imperative.”

There is overwhelming evidence to support Kaye’s conclusions. In San Diego County, for example, up to 40 percent of the cost of a newly-built home can be attributed to vast layers of government regulation[iii], contends Lynn Reaser of the Fermanian Institute at Point Loma Nazarene University.

And, forcing builders to comply with government-determined prevailing wage rates (currently proposed by the Legislature), local set-aside mandates, and a host of other regulatory cost drivers on construction equipment, materials, fuels and climate change mitigation through CEQA would produce a price increase over the 2016 median price of new homes by well over $197,000, says a report issued by The California Business Roundtable’s Center for Jobs & the Economy.[iv]

Bridging this chasm is much more than a ‘supply and demand’ issue. Local governments must rethink and revamp their regulatory policies to bring down the up-front costs of building new homes. Just as a shopkeeper will put items on sale to increase sales, California must put building permits on sale so that builders can increase capacity of all kinds of housing.

The time for action is now. For their part, home builders are employing an array of creative and innovative engineering technologies and products that are revolutionizing the industry. From creatively-designed, energy-efficient accoutrements to durable exterior finishes that can withstand intense sunlight and heat, new homes today are built and designed much better than their predecessors.

Relieving the regulatory burden, together with the explosion in homebuilding technologies would go a long way toward unlocking supply and restoring the American Dream for a generation of potential California home buyers.

Geoff McIntosh is President of the California Association of REALTORS®. The Center for California Real Estate is an institute from CAR dedicated to intellectual engagement in the field of real estate. 


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