Have you ever wondered why California’s housing crisis seems to have no end in sight?
Politicians of all stripes have made the issue a pivotal platform point. Tech companies are investing billions to tackle homelessness. Yet, millions of Californians continue to suffer through tremendous hardship while developers question whether high-density residential real estate is a prudent investment. What gives?
The lack of affordable housing emanates from a simple economic principle in action. The supply and demand formula dictates that the quantity of available goods determines the price their suppliers can set. When the supply falls behind the demand, the price of goods inevitably soars. In real estate terms, skyrocketing prices of housing stock directly result from a short supply of housing units.
In California, two factors upset the economic equilibrium. On the one hand, too few units are being built; on the other, the state’s roaring economy is creating jobs and drawing tremendous numbers of people from across the United States. The latter is a byproduct of the booming tech sector that’s set up shop in Silicon Valley. The former stems from decades-long short-sighted governance that’s tailored zoning laws to the whims of affluent neighborhoods and responded to soaring housing prices by stripping developers of the incentive to build.
Few would argue that a single-family home, complete with a manicured front lawn and a backyard pool, is the embodiment of the American Dream. When land is readily available and economic opportunities abound, such a dream can be a reality for most. Today, however, most jobs orbit the state’s metropolitan centers where land is scarce and houses sport price tags upwards of $1 million. With low-density neighborhoods surrounding California’s major cities out of reach for most Californians, increasing population density in these areas by building multi-family residences would seem like an organic solution, wouldn’t it?
Enter zoning laws. Designed to safeguard the “American Dream”, zoning regulations have effectively garroted free-market construction. Initially created to control sun blockage, then expanded to keep factories away from homes, these codes ultimately morphed into a legal vehicle for enforcing the NIMBY sentiment. After almost a century of enforcement, oppressive zoning persists in most of the state, where local agencies have tremendous power over crafting their land use regulations.
That’s not to say that state legislators haven’t tried to change the status quo. After a series of half measures like rent control (more on that later), a sensible law was finally in the works. Senator Scott Wiener’s Senate Bill 50 would have constrained local agencies’ control over zoning, paving the way for multi-family construction in the suburbs, around transit lines, and close to job-rich areas. Before reaching the Senate floor for consideration, the bill was temporarily vetoed and postponed until the 2020 legislative session, while the legislature moved on to focus on priorities like historical preservation. Ultimately, the senate rejected the bill in early 2020. For now, most urban residential land in the state remains zoned for single-family homes, while Californians continue moving into their cars.
As if tough zoning laws weren’t doing enough to stunt the growth of housing supply, Sacramento’s rent control efforts further reduced the incentive to build in the state. While it seems intuitive that unaffordable rent prices should be reigned in through legislation, the side effects of such laws are slashed profits for developers, and their subsequent repugnance toward multi-family projects. The paradox isn’t new - just look at Proposition 13, a measure meant to reduce residential property taxes, which slashed tax revenues and led local governments to favor non-residential developments in their jurisdictions.
Californian homeowners, who make up a sizable chunk of the electorate, watched their home values increase for decades. They are in no hurry to get behind bills promoting higher-density developments in their backyards, and that’s entirely understandable. If these folks are to support any credible legislation aimed at easing the crisis, it must be one that gives them an incentive too.
In their quest for a moderate solution to the housing shortage, it seems that state legislators found just such a compromise. Easing restrictions on Accessory Dwelling Unit (ADUs) construction has been Sacramento’s most sensible answer to the crisis so far. These tiny units give homeowners a chance to make a steady rental income while boosting their property’s resale value and increasing the density of the lot. Promoting ADU construction and facilitating permitting is a win-win for homeowners and renters alike.
While they’re only a small step in the right direction, the recently enacted ADU laws have seen an overwhelmingly positive response in the state. In Los Angeles alone, ADU construction grew exponentially immediately after the bills’ passage into law.
While affordable options like ADUs are slowly emerging on California’s real estate market, don’t expect housing prices to tumble any time soon. If you’re a developer or investor, building or buying a custom home will always be a stable investment that yields a healthy ROI.
If you’re a homeowner and are wondering how to play the current market to your advantage, ADUs may be just the thing for you. There are several types of these dwellings. If your home has a large footprint on a smaller lot, you may consider converting a garage into an independent unit. If your lot has plenty of yard space, a detached unit away from your own home may be the better option. If your small home has an unused room, you may be able to expand it into a junior ADU by adding a bathroom, kitchenette, and a separate entrance. The options are plentiful, and with the new laws in place, ADUs are easier-than-ever to build.
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