Terner Center Blog: No Limits

Why Does It Cost So Much to Build in California? And Why It Still Matters in the Current Crisis.

Posted on by Carolina Reid
AUTHOR: CAROLINA REID, FACULTY RESEARCH ADVISOR OF THE TERNER CENTER FOR HOUSING INNOVATION AND ASSOCIATE PROFESSOR, DEPARTMENT OF CITY & REGIONAL PLANNING

A month ago, when the Terner Center team first discussed releasing two new studies on the cost of building housing, we weren’t focused on the coronavirus pandemic and its impact on families’ economic security and housing stability. That has changed. Today, emergency measures to supplement lost income, to provide health care benefits, and to keep people in their homes should be an absolute priority of lawmakers at the local, state, and federal level. Our recent blog post, Lessons from the Great Recession for Today: Housing Aid Now!, argues that emergency assistance is critical, and that in fact, lawmakers should go bolder than just temporarily “stopping the clock” on rent and mortgage payments. We strongly believe the federal government should use its authority under FEMA to provide housing vouchers for all who need them, as well as provide stimulus funding for the preservation and construction of affordable housing.

But, we also can’t let the current crisis prevent us from planning for what will be needed six months or a year into the future. California’s affordable housing crisis is partly the result of longstanding policies and systemic problems that have led to an inadequate supply of housing during both expansionary and recessionary times. The coronavirus pandemic will only make the stresses on the housing system worse, adding urgency not only for new funding, but also for policies that can help to lower the costs of housing and ensure that we don’t end up with an even greater mismatch between supply and demand as the crisis ebbs. While it is true that certain costs may drop if we enter a sustained economic downturn, it is misguided to think that a recession would solve our affordability crisis. In fact, unemployment and/or declining wages are likely to exacerbate the lack of affordability significantly more than any benefits we might see from a slowdown in development costs or the broader housing market.

So while the costs of building housing may not be forefront on people’s minds today, reducing the costs of housing should remain an important part of the government’s response. Today, we released two reports, The Hard Costs of Construction: Recent Trends in Labor and Materials Costs for Apartment Buildings in California and The Costs of Affordable Housing Production: Insights from California’s 9% Low Income Housing Tax Credit Program, each of which explores different pieces of the high cost puzzle. The goal of these studies is to spark discussion on how California can take a leadership role in not only responding to the immediate crisis, but also reforming the housing system so every household in the state has access to quality, affordable homes.   

Understanding what is driving costs isn’t easy, in part because comprehensive data on the different dimensions of development aren’t readily available. And you need a lot of data, because each development is different: a high rise in downtown Los Angeles will entail a different set of costs than a two-story walk up in suburban Sacramento. Subsidized or supportive housing may also have different cost drivers than market-rate developments, due to funding or other regulatory requirements. 

Each of these papers relies on significant data collection, entering, and cleaning activities to lend insights into two key questions: First, what are the trends in the hard costs of construction—the labor and materials that go into a building—and how are these affecting both affordable and market-rate developments?  Second, what is influencing the overall costs of affordable housing development—including land, hard costs, and soft costs (such as fees and financing)?  It is important to emphasize that while both of these papers provide important insights into these questions, there’s a lot we still can’t explain or quantify.  

While focused on just two pieces of the larger puzzle, the reports share some similar themes. For one, hard costs have risen sharply for both market-rate and affordable projects. A significant share of the increase in costs has to do with the lack of labor supply and contractor capacity in the construction industry, as well as rising materials costs (especially for wood, plastics, and composites). Labor shortages are most acute in coastal cities—and especially in the Bay Area—where the growth in new construction projects is outstripping the supply of labor.

Yet, labor and materials increases alone cannot explain the entirety of the cost increases, leading us to explore other factors that may be influencing costs.    

For example, we find evidence that many cities are making it harder rather than easier to build more housing at different price points. Cities contribute both directly and indirectly to rising costs through local regulations (like parking or local design requirements) and entitlement delays. In addition, local development fees that raise the cost of every unit. What is more, the majority of land in California remains zoned for single-family developments, making more cost-effective apartments a challenge to build.    

When it comes to affordable housing production, these regulations, delays, and requirements can be even more onerous and costly. On average, affordable projects in California include six separate sources of funding, which means six approval processes and six opportunities for additional requirements to kick in. And despite providing a much-needed public good, many cities are still charging affordable projects high development fees—in effect, robbing Peter to pay Paul. NIMBY opposition to affordable housing also remains a significant barrier to more efficient production, and often leads to design and project-size concessions that increase costs and reduce the number of affordable units produced.

There are no easy answers to lifting these barriers, but it is critical that policymakers start to consider ways of addressing the inefficiencies in the system, increasing the transparency and accessibility of data on costs, and reducing the price of development. The current costs of developing a unit—be it affordable or market-rate—represent a direct barrier to the state’s ambitious goals to build enough units to reduce rent burdens and homelessness. And without that supply, the affordability crisis will only continue to get worse.


Lessons from the Great Recession for Today: Housing Aid Now!

Posted on by Carol Galante

Author: Carol Galante, Faculty Director of the Terner Center for Housing Innovation and I. Donald Terner Distinguished Professor of Affordable Housing and Urban Policy As I personally hunker down, work from home, and get better at virtual technology as we work to slow the spread of COVID-19, I am well aware of how privileged I am to be able to do so. The enormity of what is upon us for working families across America has hit me hard. I am also having déjà vu from the early days of 2009, when I was with the Federal Housing Administration and confronting…


Factory_OS and Terner Center host Ivory Prize Advisory Board

Posted on by Terner Center

Factory_OS and the Terner Center hosted the Ivory Prize Advisory Board deliberations this month to select the top 10 finalists for the 2020 Ivory Prize. Now in its second year, the prize recognizes companies, non-profits, and government entities making measurable and scalable strides in housing affordability across three distinct categories: finance, construction and design, and public policy and regulatory reform. Factory_OS won the prize in 2019 in the construction & design focus area, in recognition of their national leadership in industrialized construction techniques. The company offered to host this year’s advisory board meeting to showcase their recent advances as the board selects…


Built-Out Cities? How California Cities Restrict Housing Production Through Prohibition and Process

Posted on by Paavo Monkkonen, Michael Lens, and Michael Manville

By Paavo Monkkonen, Michael Lens, and Michael Manville, UCLA This paper is part of a working paper series that utilizes the Terner Center California Residential Land Use Survey to assess the implications of California’s state and local policies for housing. Read the full paper here. Despite high housing prices and rents in California, housing production is stagnant. A body of evidence credits this contravention of expectations in large part to land use regulations, finding that local restrictions limit new development and push housing prices up. If this is the case, the next question for researchers and policymakers aiming to lower…


Residential Land Use Regulation and the Spatial Mismatch Between Housing and Employment Opportunities in California Cities

Posted on by Noah Durst

This paper is part of a working paper series that utilizes the Terner Center California Residential Land Use Survey to assess the implications of California’s state and local policies for housing. The working paper series is published jointly by the CALIFORNIA ASSOCIATION OF REALTORS®’s Center for California Real Estate and the Terner Center for Housing Innovation at UC Berkeley. Read the full paper here. by Noah Durst, Michigan State University When workers can’t afford to live near where they work that often translates into longer commutes and more time spent in traffic—an increasing reality for many Californians amid the state’s housing crisis. Low-income and racial or…


Key Remaining Questions Following New Amendments to SB 50

Posted on by Terner Center

Senate Bill 50—San Francisco Senator Scott Wiener’s high-profile effort to reform local zoning in transit- and job-rich areas—is back for its second year in the California legislative session. Amendments introduced on January 3rd include new language on local flexibility, among other revisions. The bill now faces a January 31st deadline to be voted out of the Senate and into the Assembly. Major land use reforms, such as those proposed by SB 50, are essential if California is going to alleviate its ongoing housing affordability crisis. Yet, while new financial commitments, tenant protections, and other reforms have all moved the state…


How Housing Supply Shapes Access to Opportunity

Posted on by Elizabeth Kneebone

In the past few decades, as housing production has slowed, albeit unevenly, and new ownership production has shifted toward larger format, single-family homes, a tightening housing market has seen increasing price pressures, particularly for entry-level homebuyers and renters. To better understand the impact of trends in housing production on who can buy a home, particularly at the entry level, and the barriers renters face in gaining access to higher opportunity neighborhoods, the Terner Center for Housing Innovation undertook an analysis of how characteristics of housing production have shifted over time in the nation’s 100 largest metropolitan areas. Today, the Terner…


Leading Housing Researchers Challenge Proposed Fair Housing Rule Change

Posted on by Terner Center

The NYU Furman Center and the Terner Center for Housing Innovation at the University of California at Berkeley submitted public comments today arguing that a proposed rule from the U.S. Department of Housing and Urban Development (HUD) ignores the demonstrated harms inflicted by segregation, fails to account for the basic structure of local zoning and land-use decisions, and imposes obligations on fair housing plaintiffs inconsistent with the basics of social science.  In light of these major flaws, the university researchers urge HUD to withdraw the proposed rule. Read the joint public comments. The “Disparate Impact” standard is a legal concept at…


2019 California Housing Legislation Round Up

Posted on by David Garcia

The 2019 California legislative season recently came to a close, and several promising housing bills have now been signed into law by Governor Newsom. But the road to this year’s “housing package” was not easy and, at various points, it seemed as if the legislature would fail to pass any key housing reforms.  The session started optimistically, buoyed by a new governor who made bold housing solutions a staple of his campaign. Sure enough, the session got off to a fast start, with the introduction of several sweeping and ambitious pieces of legislation, on issues as varied as land use reform,…


Land Use Politics, Housing Costs, and Segregation in California Cities

Posted on by Jonathan Rothwell

This paper is part of a working paper series that utilizes the Terner Center California Residential Land Use Survey to assess the implications of California’s state and local policies for housing. Read the full paper here. By Jonathan Rothwell, PhD, Gallup It is striking that, at a time when a lack of housing affordability is a highly salient issue for the public and elected representatives, California uses its land so inefficiently. While less than a quarter of the land in the state’s municipalities is zoned for multifamily housing, more than half is set aside for single-family detached homes. Density is closely related to housing affordability,…