2016 CA Summit - If You Lived Here, You'd Be Home by Now: Addressing California's Housing Shortfall

Current State of California Housing Crisis:

• California ranks 49th out of 50 states for housing units per capita.
• There is a 50 billion dollar financial gap for individuals and a 140 billion dollar loss in economic output due to housing unavailability.
• Approximately 50% of middle-income households cannot afford housing, a shortage affecting every county and income segment.
• Single-family home construction lags significantly behind population growth, creating a massive unserved demand gap since 2000.

Cost Drivers and Market Economics:

• Construction costs have risen from $57/sq ft in 2009–2010 to $85/sq ft currently.
• Land acquisition costs have tripled in some areas, with one parcel rising from $34/ft in 2011 to $102/ft today.
• Professional fees, government fees, impact fees, and mitigation costs have increased astronomically, compressing developer margins.
• Developers are reducing project counts due to uncertainty; one developer reported fewer deals in the current cycle than at any previous point.
• Financing constraints have tightened; private equity capital partners now require 20% equity contributions (up from historical 5–15%), and co-investment is rare.
• Labor shortages have shifted leverage to trades, allowing framing costs to increase by 35% due to rush fees and scarcity.

Policy and Regulatory Challenges:

• The state-level Regional Housing Needs Allocation (RHNA) lacks enforcement teeth, allowing cities to delay compliance indefinitely without financial penalty.
• Local NIMBYism and "Buy Right" dynamics frequently delay projects by years; one project in Orange County was reduced from 58 units to 37 units after a neighbor appeal.
• Political opposition often favors maintaining status quo zoning, with constituents opposing density despite acknowledging high housing costs.
• Measure J and similar local initiatives threaten to increase costs by 35% through union requirements and force developers to include affordable components, potentially stalling residential rezoning.
• The "Not In My Backyard" sentiment often results in developers abandoning residential projects for commercial use, which generates more sales tax revenue for municipalities despite community desire for housing.

Innovation and Potential Solutions:

• Accessory Dwelling Units (ADUs) could add up to 800,000 units to the housing stock but require broader adoption.
• Modular and offsite construction is identified as a necessary innovation to lower production costs, though currently underutilized.
• Tandem parking garages have shown market acceptance among buyers without significant discounting, yet local codes often mandate side-by-side parking.
• Oakland and other cities are beginning to lower parking requirements near transit hubs, though lender hesitation regarding market viability remains a barrier.
• State intervention is suggested to standardize impact fees, as costs vary wildly (e.g., $100k vs. $20k per unit) between jurisdictions without clear nexus justification.

Demographic and Behavioral Shifts:

• Millennial renters show high dissatisfaction (86%) compared to homeowner satisfaction (81%), signaling a potential shift in voting power and political demand for housing.
• There is a strong preference among millennials to live in neighborhoods near transit rather than in the Inland Empire, reducing the viability of distant affordable housing.
• Transit usage is rising in areas like Pasadena and Highland Park, with many millennials avoiding car ownership due to cost and convenience of services like Uber and Lyft.
• Investment-driven buyers from the last cycle have exited the market, leading to a healthier but less mobile lending environment with stricter underwriting (3–3.5% down payments required).

Forward-Looking Statements and Risks:

• If interest rates rise from the current 3–4% range to 5–6%, housing affordability will exacerbate significantly, potentially drying out the buyer pool.
• Current demand is unsustainable due to price inflation; the market risks a correction if prices continue to outpace wages, potentially dropping affordability thresholds below 20%.
• Developers are pivoting toward underutilized urban land (e.g., former churches in Highland Park) and industrial conversions, though entitlement timelines remain a critical risk factor.
• Future policy must balance local control with state mandates to ensure production targets are met, potentially offering expedited processing in exchange for meeting RHNA goals.
• The housing supply gap will not self-correct; explicit political will and structural changes to the "rules of the game" regarding fees, parking, and land use are required to make projects economically feasible.