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Fact check: Does California face a historic housing crisis?

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October 4, 2016
By Cory Eucalitto

California’s 2017 budget included an increase of $400 million for affordable housing to address “a housing crisis of historic proportions,” according to Ben Metcalf, director of the state Department of Housing and Community Development.[1] Is Metcalf correct about a “housing crisis of historic proportions” in California?

Close, but not entirely. Housing prices are near, but have not yet matched, record-high 2006 levels, nor are they the highest in the nation. However, homeownership rates and rental vacancy rates are both at historic lows, indicating that many Californians in the most popular metropolitan areas face great difficulty buying a home or renting an apartment.

Background

Metcalf and others describe the “crisis” as a lack of affordable housing, driven by a housing shortage.[1][2][3]

The U.S. Department of Housing and Urban Development defines “affordable” as housing that costs less than 30 percent of a family’s income.[4] The state Department of Housing and Community Development defines affordable housing for policy purposes as “housing units developed in whole or in part with public subsidies and reserved for low-income residents.”[5]

A variety of legislative remedies for high housing costs have been offered over the years. Most recently, lawmakers and Gov. Jerry Brown appropriated an additional $400 million for affordable housing programs in FY 2017, with conditions. The funds are available for housing development only if the state requres municipalities to adopt “by right” permitting and developers set aside one-fifth of the units for low-income residents. (“By right” permitting refers to an expedited approval process for projects that meet existing zoning requirements.)[6]

Brown argues that expedited permitting will reduce costs and other barriers to development, such as lengthy project reviews required by the California Environmental Quality Act. Officials hope that low-income set asides and streamlined permitting will help to increase the supply of affordable housing.[7]

Lawmakers are also considering an increase in property valuations used to calculate property taxes. Current law caps the amount a property value can increase at 2 percent per year, which keeps property taxes relatively low until the unit is sold. (The sale price resets the property value.) Advocates contend that long-time homeowners would be more likely to sell if their property taxes weren’t kept artificially low, and more properties on the market would ease the shortage of homes for sale and help to constrain prices.[8]  Others advocate imposing new fees on real estate transactions to increase funding for affordable housing subsidies.[9][10]

But is there actually a housing crisis that warrants these or other government actions?

Ballotpedia examined home prices, rental rates, and housing permits to assess the market. We determined that California housing prices are among the highest in the nation - a ranking largely driven by the costs in the state’s largest and most popular cities. Homeownership and rental vacancy rates are both at historic lows in the state.

Home Prices

Home prices reflect both the supply of and demand for properties. The Federal Housing Finance Agency calculates a Home Price Index that tracks price changes for repeat sales or refinancings of representative properties. [11]  By this measure, California has the 4th highest home prices in the country, trailing Massachusetts, New York, and Hawaii.[12]

Does this represent a historic crisis? Not on its own. As the figures below indicate, California housing prices reached a record high in 2006 (at the height of the housing bubble), but remain below that level at present.[13]

California homeowners, on average, spend the highest percentage of their income on housing in the country (25.4%), below the Department of Housing and Urban Development’s affordability standard. Renters spend 36 percent of their income on housing, the third highest in the country.[14]

Home Ownership

Homeownership rates reflect the cost of credit, the available housing stock, and the employment picture. The U.S. homeownership rate recently fell to 62.9 percent, the lowest level in more than 50 years, a function of limited supply, tight credit and stagnant wages. [15]

California’s homeownership rate is second lowest among states, at 53.4 percent in the 2nd quarter of 2016, just below 53.6 percent in 1989. This is the state’s lowest rate in the available data, which dates to 1984.[16] Currently, only New York has a lower homeownership rate.[17]

Of course, California is a large and diverse state, with coastal metropolitan areas that command housing prices far greater than inland areas of the state. According to data from the U.S. Census Bureau, five of the seven metro areas with the lowest homeownership rates are in California. They are Los Angeles-Long Beach-Anaheim (46.5 percent), San Jose-Sunnyvale-Santa Clara (51), San Diego-Carlsbad (52.1), Fresno (52.3) and San Francisco-Oakland-Hayward (53).[18]

Rentals

Rental vacancy rates likewise reflect supply and demand, but also the affordability of property. Low vacancy rates signal high demand relative to supply.

California has the second lowest rental vacancy rate in the country, at 3.6 percent. The state posted its two lowest rental vacancy rates in 2016, below the previous record of 4.2 percent in 2001.[19] The current national median is 7.1 percent.[20]

Four of the seven metro areas with the lowest rental vacancy rates are in California. They are Fresno (0 percent), San Diego-Carlsbad (1.4), San Francisco-Oakland-Hayward (3.1), and Los Angeles-Long Beach-Anaheim (3.2).[21]

Causes

New housing units have failed to keep up with growth in the state’s population. Since 1988, the population has grown by about 11.4 million people,while the state has authorized only about 3.4 million new private housing units.[22][23]

A March 2016 report by the nonpartisan group Next10 shows that from 2005 to 2015, California issued just 21.5 residential permits per 100 new residents, the second fewest in the country, and well below the nationwide average of 33.4 units.[14]

Multiple public policies contribute to high prices and low homeownership rates. According to a recent report by the state Legislative Analyst’s Office, the cost of building a typical single-family home in California’s metro areas “likely is between $50,000 and $75,000 higher than in the rest of the country.” Causes include:

  • high material costs, driven by environmentally-focused building codes;
  • the cost of construction labor, which is 20 percent higher in California metro areas than in the rest of the country;
  • development fees levied by local governments;
  • time to approve rezoning, which is 3 months longer than a typical US metro area.[24]

Conclusion

California’s 2017 budget includes an increase of $400 million for affordable housing to address “a housing crisis of historic proportions,” according to Ben Metcalf, director of the state Department of Housing and Community Development.[1]

Is Metcalf correct? Close, but not entirely.

California’s housing prices are among the highest in the nation, second only to New York. These prices are approaching their peak high, but have not yet exceeded it. However, homeownership rates and rental vacancy rates are at historic lows, indicating that owning a home or finding an apartment are very costly and difficult to accomplish in California.

See also

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Sources and Notes

  1. ↑ 1.0 1.1 1.2 Sacramento Bee, “6 things to look for when the legislature returns,” July 31, 2016
  2. ↑ Sacramento Bee, “Jerry Brown’s housing fast-track plan stumbles as shortage worsens,” August 22, 2016
  3. ↑ Santa Monica Daily Press, “Bloom bills pass Assembly,” September 3, 2016
  4. ↑ Portal.HUD.gov, “Affordable Housing,” accessed October 2, 2016
  5. ↑ California Department of Housing and Community Development, “Release of the 2014 California Affordable Housing Study,” accessed October 2, 2016 (page 9)
  6. ↑ eBudget.CA.gov, “California State Budget - 2016-17, Housing and Local Government,” accessed October 2, 2016
  7. ↑ Los Angeles Times, “Gov. Jerry Brown’s sledgehammer fix to California’s housing crisis,” May 27, 2016
  8. ↑ Ballotpedia, “California Proposition 13 (1978),” accessed October 2, 2016
  9. ↑ California Legislative Information, “AB-1335 Building Homes and Jobs Act (2015-2016), accessed October 2, 2016
  10. ↑ California Legislative Information, “AB-2734 Local Control Affordable Housing Act (2015-2016),” accessed October 2, 2016
  11. ↑ Federal Housing Finance Agency, “House Price Index,” accessed October 2, 2016
  12. ↑ Federal Housing Finance Agency, “House Price Index, States (Not Seasonally Adjusted), 2nd Quarter 2016,” accessed October 2, 2016
  13. ↑ FRED, Federal Reserve Bank of St. Louis, “All Transactions House Price Index for California,” accessed October 2, 2016
  14. ↑ 14.0 14.1 Next 10, “Current State of the California Housing Market,” March 3, 2016 (page 5)
  15. ↑ Bloomberg, “Homeownership Rate in the U.S. Drops to Lowest Since 1965,” July 28, 2016
  16. ↑ FRED, Federal Reserve Bank of St. Louis, “Homeownership Rate for California,” accessed October 2, 2016
  17. ↑ U.S. Census Bureau, “Housing Vacancies and Homeownership, 2nd Quarter, 2016,” accessed October 2, 2016
  18. ↑ U.S. Census Bureau, “Housing Vacancies and Homeownership, Quarterly Vacancy and Homeownership Rates by State and MSA, Homeownership Rates for the 75 Largest Metropolitan Statistical Areas,” accessed October 2, 2016
  19. ↑ FRED, Federal Reserve Bank of St. Louis, “Rental Vacancy Rate for California,” accessed October 2, 2016
  20. ↑ U.S. Census Bureau, “Housing Vacancies and Homeownership, Quarterly Vacancy and Homeownership Rates by State and MSA, Rental Vacancy Rates by State, 2nd Quarter, 2016” accessed October 2, 2016
  21. ↑ U.S. Census Bureau, “Housing Vacancies and Homeownership, Quarterly Vacancy and Homeownership Rates by State and MSA, Rental Vacancy Rates for the 75 Largest Metropolitan Statistical Areas, 2nd Quarter, 2016” accessed October 2, 2016
  22. ↑ FRED, Federal Reserve Bank of St. Louis, “New Private Housing Units Authorized by Building Permits for California,” accessed October 2, 2016
  23. ↑ FRED, Federal Reserve Bank of St. Louis, “Resident Population in California,” accessed October 2, 2016
  24. ↑ Legislative Analysts’s Office, “California’s High Housing Costs, Causes and Consequences,” March 27, 2015

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