CALIFORNIA AFFORDABLE HOUSING
Sorry. I’ve had it! I’ve heard the last California politician clamor about affordable housing who unfortunately knows little or nothing about the real causes of unaffordable housing. It’s mostly economics and unfortunately most of our California politicians know little about the subject except how to cash their paycheck from the state.
Here is why housing has been unaffordable in many cities and towns in California:
- Over 95% of the housing in the state is built by for-profit builders. There is nothing wrong with this – it is the way it should be in a free, democratic society. This ensures that housing is built efficiently with the latest designs for today’s markets. Why does the private market of for-profit builders ensure this? Because most of the time (like always) market builders want to make a profit after they risk buying and holding the land, buying expensive building materials, paying skilled workers, paying real estate taxes to the county, sales taxes to the state, FICA taxes to the federal government and hoping to have some room left between their costs and the net sales proceeds in a moving sales market to go home with a profit. Some days they don’t. Non-profit builders, state and local governments don’t take this risk–they place it all on the taxpayer. When was the last time you, as a taxpayer, were consulted on any public housing cost? Really? Non-profit construction is not free. No, everyone gets paid and quite often these costs are not watched as closely as they should be creating square foot costs that often surpass private building costs by several hundred dollars a square foot. If more voters understood the important role that profit plays in building housing, we would have much less clamor about profits in our capitalist system.
- Materials and building supplies are not cheap, particularly so in an expensive housing market. Again, it is supply and demand. When there is great demand as in a tight housing market, like we have had in San Francisco for many years, or when the normal transportation or supply channels are impaired, the price of materials can increase considerably. When there are many suppliers of these materials, the laws of supply and demand tend to keep the costs lower.
- Permit fees and permit time is another important cost that contributes significantly to the unaffordability of housing. Unfortunately, there is no market here where the builder can negotiate for lower fees. The big cost here are the huge connection fees charged by the utilities that will service the new home or homes. Sewer fees, water fees, park fees, school fees, environmental fees, trash and recycle fees can be tens of thousands of dollars per unit. They can equal the cost of the land itself reaching $75,000 to $100,000 per unit. There is no doubt that local building departments are dreaming up new fees to administer new social requirements to make housing “more affordable.” Recently, this has become a big factor in the affordability of even middle market housing. As federal, state and local jurisdictions add more and more requirements for approval, more and more time is needed to design, inspect and approve the plans before anything can be built. In a market like San Francisco, three to four year’s time is not uncommon to obtain building approval. Solar energy, surface water runoff, insulation qualities, water conservation and other environmental issues are all important in today’s quality housing and add to the fee cost or permit time. And there are other issues that can add significantly to the costs in today’s building era, such as historical significance of the area or preserving the existing building façade. These costs are hard to avoid today if we are to build the safest and most environmentally sound housing. And they can add significantly to the finished cost of the home or unit. Permit fees and approval costs can often add 25% or more to a builder’s cost of housing.
- An expensive housing market itself can add costs because the contractors and their employees cannot afford to live in the market in which they build and are forced to live long distances from the building site – commuting each day from many miles away. This takes time away from building and adds to daily transportation costs. Transportation is also a factor in getting materials to the site. If a subcontractor has to drive an hour to get to the building site, that is two hours each working day that he or she is getting paid for commuting instead of working.
- In the case of San Francisco, the natural land configuration adds to land cost because it is surrounded by water on three sides. There is no available new land for new housing.
- Infrastructure costs are seldom thought of by non-builders, but when the number of bedrooms on a street increases by a factor of two or three, sewer upgrades and water service upgrades may become necessary. Fire-sprinkler systems and solar power (which is now required on all new California homes), is another significant cost in a new home.
In short, many factors affect the cost of today’s housing and no one simple answer (or state legislation) can reduce the cost so that it is affordable to everyone like it was ten years ago.
ANSWERS THAT USUALLY DON’T WORK
The latest attempt by California State Senator Scott Wiener and his gang to make housing affordable by eliminating single family housing and requiring dense multi-unit housing all over the state doesn’t make sense once you examine the likely results. It may appear obvious that if you build two homes everywhere you can build one home, you will have doubled the housing stock by the simple use of a pen in Sacramento. This thinking comes out of the “Alice in Wonderland,” school of economics, but as a viable economic policy it fails.
The first thing that happens is the building grows in height from 40 feet to eighty or more feet. This adds the need for high-rise safety costs and stronger material design, plus there may be a need for enhanced utility requirements such as power, sewer, water, trash removal and parking. Yes, parking is a need in spite of the fact that it is deemed not necessary in some of our modern-day cities. However, Covid19 has shown us that while public transportation has many benefits in a normal society, there are situations where it cannot operate appropriately and individual transportation is still necessary, even in the center city. A pandemic is not the only situation where private autos may be needed. Picture a mother pushing a baby stroller with five shopping bags on a bus.
The second thing that takes place is the developers of multi-unit buildings start buying up the single family homes for sale and planning multi-unit projects where markets indicate good profits. The land cost goes up quickly, as they can afford to pay much more for multi-unit lots than single family lots. This doesn’t happen overnight, but soon enough, a block of single family homes now offers the builder perhaps twenty new units of construction. This is real money folks, but does not provide housing that is affordable. It goes to the previous landowner.
Finally, the families that were happy living in a neighborhood of predominately single family homes now recognize the danger that the state-forced mixed-use condos or apartments will create for the older single family homes on their block. They now understand why the earliest-to-sell neighbors moved when they did. Single Family sales values, which were higher when this all started, may now be even higher and families that want the benefits of SF neighborhoods with backyards or lawns realize that they won’t find these here in this city. They have to look elsewhere. The market of new buyers has grown smaller. Families or young professionals that plan to have families now are looking elsewhere.
California and some other states are now experiencing a negative population growth that is significant enough to reduce San Francisco rentals by 10% or more in 2020. It has been a while since anything has bent the supply-demand line that meaningfully.
It may likely turn out that housing assistance from the California Senate is not really needed and they can concentrate on the virus-affected economy, killing the high-speed rail boondoggle, developing a sustainable model for good schools, or even balancing the new budget with lower taxes – all of which are still big issues requiring their fullest attention.
Geoff Wood 12/2021