Four Tools for Stimulating Economic Recovery Through New Homebuilding

Authored in collaboration with Sarah Karlinsky, SPUR

High housing prices threaten California’s future. Today, over three million California renters spend more than 30% of their income on rent, with an additional 1.7 million paying more than 50%. These cost burdens continue to push people, particularly people of color, out of neighborhoods, cities and, in many cases, out of California entirely. COVID-19 will make this situation even worse. 2.3 million households in California are likely to be impacted by the economic fallout from this new crisis, and half of those households were already struggling to pay rent.

There are many reasons for this crisis. Economic and racial inequality have only grown over the last several decades. The state’s lack of affordable housing funding and limited social safety net are pushing households to the financial brink. Compounding all of this, not enough housing has been built in California, and this shortage has been several decades in the making.

In 2008, homebuilding in California ground to a halt in the face of the worst economic crisis since the Great Depression. Between 2008 and 2012, the state permitted an anemic 50,000 new homes a year, far below the 200,000 built annually before the crash. A recent SPUR study showed that the Bay Area alone has a housing shortage of 700,000 units. This lack of production led to exorbitant rents during our last economic recovery, exacerbating inequitable racial outcomes and creating an even more economically bifurcated society. These conditions continued to grow even worse as the recovery turned into a boom.

California cannot afford to continue to underbuild housing. As we prepare for another prolonged economic crisis from the COVID19 pandemic, we need to take steps to ensure that housing construction does not follow the same trend it did 10 years ago. We are already experiencing slowed growth, with April housing permit activity reaching its lowest levels since 2012. Nationally, 53% of multifamily builders report construction delays. And while rents have softened somewhat, these price dips are likely temporary and are not enough to create sustainable affordability over the long run. To accomplish long-term stability and affordability, we need a comprehensive set of policies that is rooted in a 3Ps framework: housing protection, preservation and production. The first two Ps are imperative for stabilizing our communities and maintaining the affordability that exists today. And the third P, new housing production, is critical for creating homes for all who want to live in California. This includes leveraging affordable housing resources and emphasizing high opportunity areas, meaning neighborhoods with amenities and characteristics that improve resident outcomes, such as good schools. Supporting continued and expanded construction will also be a key driver in accelerating California’s eventual recovery, maintaining critical construction jobs and supporting hard-hit local tax bases.

The good news is that California’s legislature and administration are already taking steps to support the production of new housing. While many new housing bills, particularly ones that introduce new spending, have been shelved for the year as a result of both the truncated legislative timeline and new budget realities, many important bills are still under consideration, with several specifically earmarked as part of a housing production legislative package by Senate President Pro Tem Toni Atkins.

The California Assembly also has several significant housing bills moving forward. In addition, Governor Gavin Newsom has signaled through the budget process that housing production remains a key priority for his administration, explicitly calling out the need for “streamlining, upzoning and producing new housing units, especially on excess and surplus lands, in transit-oriented infill areas and on public land.”

These commitments and proposed production policies are a good start and deserve the continued support and attention of legislative leaders and the Governor. As these proposals advance, it’s also important to assess this work in the context of our true housing needs: To what extent do these proposals rise to the challenges of the moment, and what more can and should be done to keep the pipeline of new housing open through this crisis and recovery?

To that end, we propose the following framework for assessing no- to low-cost policy levers to facilitate economic recovery through new homebuilding. We envision this framework as a near-term guide for the next year. It should be considered in concert with protection and preservation policies, as well as advocacy at the federal level for renter support. We acknowledge that over the long term, more comprehensive and structural changes will be needed to truly stem the tide of our housing challenges. What we offer here is a starting point toward broader housing reform.

FOUR PRINCIPLES FOR NEW HOUSING PRODUCTION

In the next year, new production policies should be guided by four principles:

• Maintain homebuilding momentum — Keep new housing projects moving forward and give localities more tools to do so.
• Expand where homes can be built — Allow more homes in more places, including more types of homes at greater densities in certain locations.
• Build homes faster — Create certainty in the homebuilding process through straightforward rules and processes.
• Build homes more affordably — Lower the cost of building to make rents and home prices more affordable.

1. Maintain homebuilding momentum

As we grapple with the best policies to ensure new housing continues to be pursued and developed, we must act quickly to maintain homebuilding that is already in the development queue. Because of today’s uncertainty, many projects are facing delays in breaking ground as financial partners pull back in the short term. On top of this, a looming shortage of planning and inspection staff at local levels may lead to further setbacks. To this point, it is imperative that policymakers continue to ensure that we do not fall further behind on our housing goals.

As in previous downturns, there are simple strategies to provide a much-needed bridge to projects that require more time to move forward. One of these strategies is to simply extend permit and entitlement timelines for projects that are already approved and underway. Builders are granted a window of time between receiving development approvals or building permits. When those approvals expire, builders may have to restart the process, putting new homes in jeopardy of significant delays, or being shelved altogether. Extending these timelines is a straightforward way to provide more time to projects as they regroup.

Shoring up local capacity for reviewing, approving, and inspecting projects should be another priority. As cities grapple with budget shortfalls, planning and building service staff are likely to face furloughs and layoffs. To cope with this new reality, planning departments must reimagine day to day work by migrating to on-line reviews and virtual inspections, for example, or investing in business processes to streamline existing timeframes. The state should redirect existing technical assistance toward these kinds of system reform changes by repurposing unused 2019–2020 planning dollars (i.e., LEAP and REAP grants) or SB 2 funding to focus specifically on capacity building at the local level. Emergency Community Development Block Grant funding from the federal government should also be considered for this purpose.

Cities must also continue to be held accountable for implementing their existing land use plans, which includes approving projects that are consistent with their general plans and housing elements.

2. Expand where homes can be built

In order to reach our housing goals, we must continue expanding where new homes are allowed, as well as the kinds of homes that are allowed to be built. The legislature has introduced a number of proposals that speak to this need, all of which represent positive movement forward, such as allowing more homes in single-family areas and incentivizing more “missing middle” housing typologies.

Some types of reforms hold particular promise. For example, there is a unique opportunity to significantly expand homebuilding capacity by allowing homes to be built in commercial and retail areas given how much land is currently dedicated to these uses, and given the changing landscape created by COVID-19. Many cities have balanced their need to accommodate more homes with maintaining neighborhood composition by focusing new homebuilding along key corridors where strip malls and large parking lots are becoming obsolete. This has been particularly true in Los Angeles, where the Transit Oriented Communities program has led to a significant amount of new housing in these areas. The COVID-19 pandemic and subsequent economic fallout may leave many retail and commercial centers reeling. This reform offers an opportunity to reimagine these areas as vibrant, mixed-use communities.

But not all cities currently allow for residential development in commercial and retail zones. There are a handful of legislative proposals that would require California cities to allow for residential development in these areas, though care must be taken to ensure that any zoning changes to retail and commercial property are flexible enough to ensure that they actually result in new housing and that critical job centers in industrial areas are maintained. This means limiting local requirements for ground-floor retail and calibrating affordable housing requirements to work with every market.

A key element missing this legislative session is a bill to significantly increase density in residential neighborhoods, particularly in high opportunity areas and in areas near transit. This was a key feature of SB 50, the controversial upzoning bill that drew intense backlash earlier this year. Despite disagreement on the appropriate way to achieve the policy goals of SB 50, there remains a strong need to increase the number of new homes allowed throughout the state. While SB 50 failed, there may be other ways to meaningfully achieve the same goals, such as increasing density on single family lots, or building off of the success of 2018’s AB 2923, which created minimum densities around Bay Area Rapid Transit (BART) stations. Another idea worth exploring is to require cities to adopt zoning that is at least as flexible as that contained within their region’s Sustainable Communities Strategy (SCS) plan. When originally conceived in SB 375, the SCSs were designed to bring cities together at the regional level to better focus housing growth in a manner that would reduce greenhouse gas emissions. Unfortunately, SCSs are created without any requirement for local governments to align their local zoning with these regional land use plans. The time may be right to reexamine this link and require greater conformity.

We can also stimulate new housing construction by recalibrating the state’s density bonus law. Today, the state density bonus is not widely used, largely because the affordability requirements and density incentives do not align with market realities in most cities and neighborhoods. Time is past due to revisit this law to entice more developers to voluntarily incorporate affordable housing in their projects.

Other ideas to explore in the coming year include opening up more underutilized land for housing, such as surplus property controlled by schools, cities, counties and state agencies.

3. Build homes faster

Zoning reforms and incentive programs are ineffective if not accompanied by certainty that projects can get built. Uncertainty in the homebuilding process leads to delays, raising the overall cost to develop and making it difficult to secure financing for both affordable and market-rate projects. The legislature has introduced some proposals in this area to broaden existing streamlining mechanisms so that they may be more widely used. Governor Newsom has also signaled his support for such changes. These are important reforms and deserve strong support.

This conversation would not be complete without mentioning the California Environmental Quality Act (CEQA). To be sure, CEQA is an important tool for mitigating environmental impacts, and simple, commonsense reforms to CEQA could largely uphold this law’s spirit and remove unnecessary barriers to homebuilding. Some CEQA reforms, such as extending streamlining to certain types of housing plans and projects and speeding up CEQA lawsuit timelines, have been proposed in this session and deserve consideration. But more can and should be done, such as removing the anonymity of lawsuit filers and requiring legal fees be paid out on losing cases, both of which can deter frivolous lawsuits that are not based on environmental impacts. Expanding the applicability of existing CEQA streamlining tools, such as SB 35, is another option that could be explored. Currently, SB 35 provides streamlining for housing that is at least 50% affordable to low-income households, in most cases. This high affordability requirement effectively renders the streamlining unusable for market-rate housing, even when it meets local inclusionary standards. A stronger version of SB 35 should work in tandem with projects that meet local inclusionary policies, so long as that inclusionary policy is sufficiently strong (i.e., it requires 10% or more of units to be affordable).

In addition to legislative approaches, the state should also consider leveraging its existing policy toolkit to compel cities to speed up development. Specifically, the state could require cities to increase the amount of approvals allowed “by right” through their oversight of the housing element process. Currently, when a city updates the housing element of its general plan, it may choose to remove conditional uses allowed in existing zoning designations by allowing future conforming projects to be approved at the staff level “by right,” meaning without need for discretionary review by an elected body. Not only does this certainty speed up the planning process, it also insulates these conforming projects from CEQA litigation. The state, in its review and approval of cities’ housing element processes, can require cities to zone a greater share (or all) of their multifamily zoning by right as a mitigation for other housing constraints or in the face of a track record of previous poor past performance in homebuilding.

4. Build homes more affordably

The cost to build new homes in California is exorbitantly high, devaluing our affordable housing funding sources and making it nearly impossible for developers to deliver new market-rate housing that is affordable to middle-income households. Over the past 10 years, the per-square-foot hard costs for constructing multifamily housing in California climbed 25 percent. Despite the clear need to lower building costs, few legislative proposals directly address this issue.

One idea to lower costs is to reform the way impact fees are calculated and imposed. California cities charge housing impact fees at an average of three times higher than cities in other states, with some cities charging fees in excess of $150,000 per new home. These high fees raise the cost of building and, ultimately, the cost to rent or buy a home. While some good ideas have been proposed in the legislature, significant reform remains elusive. Fees could be reformed without removing cities’ ability to cover project impacts by restructuring how they calculate their fees. This could be done by creating stronger ties to actual project impacts in nexus studies, the calculations cities must make to determine legally defensible fee amounts. Other solutions could include requiring state-level feasibility standards to ensure that fees are not set at a level that suppresses new construction. These should include an analysis of the entire “fee stack” of all fees administered across applicable local agencies (e.g., school, utility and special districts).

Property tax incentives are another way to bring down costs and catalyze affordable housing development without direct subsidy. Tax abatement programs are relatively common in other states, but they are limited in California because of the state tax structure. Here, property taxes are exempted on projects where all the units are affordable to those making 80% or less of the area median income. Increasing this threshold to include housing that is affordable to middle-income earners could be a way to incentivize more affordable housing. However, attempts to extend exemptions to properties with a percentage of affordable housing have stalled, as have efforts to extend the eligible affordability to deed-restricted units at levels well below market rates but still affordable to moderate-income households. This idea should be reconsidered not only as a way to create sorely needed middle-income housing, but also as a strategy for stimulating more homebuilding and local revenue generation through the impending recession.

California could also look to other states for successful examples of using the property tax system to catalyze more housing of all types. For example, in the state of Washington, developers who include a certain percentage of affordable housing in new developments pay no additional property taxes above the preexisting value of their land for eight to twelve years (depending on the level of affordability and guidelines set by cities). This tool has proven effective in creating both market-rate and affordable housing, with more than 31,000 units (including over 6,000 deed-restricted units) approved in the City of Seattle alone since 2008. A similar program exists in New York City, creating an estimated 2,500 affordable units annually in market-rate buildings.

While impact fees and tax reform can bring down some costs, the largest costs of any home are the hard costs that go into its physical construction: labor and materials. Roughly two-thirds of the price to build are composed of these costs, meaning that any strategy to bring down costs must meaningfully examine this area as well. One way to address this cost is to reexamine building code requirements that have accreted rapidly over recent years, driving up the complexity and cost of projects. Because building codes are intricate and change every three years, time should be taken to unpack this issue and uncover a reasonable path for restructuring code back to a cumulative cost level in line with where we were prior to the Great Recession. All of this must be done in a way that does not adversely impact our health, safety and environmental standards. Furthermore, while the state has a uniform building code, cities can layer their own requirements on top. This discretionary process can be particularly problematic from a cost perspective. The state should consider reviewing and approving these local code additions prior to enactment. In the interim, the legislature could consider “scoring” new legislation and regulation for how it may raise housing costs, in the same way we score bills for impact on the state’s budget and regulations for their overall economic impact.

Action, Not Apathy

With staggering inequality in housing outcomes, California does not have time to wait. Thoughtful and bold ideas are needed now across the spectrum of housing issues. What we have laid out here is a starting point that we believe can catalyze important progress in the near term. We also understand that broader structural change is needed in the long run to adequately address California’s long-standing housing inequities. To get there, our leaders must take a stand today. Some of these ideas may be perceived as “third rail” proposals that will not withstand the political process in Sacramento. However controversial these ideas may seem, our continued apathy towards a broken housing system should spark far greater concern — even outrage. We hope that our leaders will take the necessary and sometimes difficult steps to create safe, stable and affordable housing for all.

About the Authors

Ben Metcalf is the managing director at the Terner Center for Housing Innovation at UC Berkeley and the former director of the California Department of Housing and Community Development. David Garcia is the policy director at the Terner Center. Sarah Karlinsky is SPUR’s senior advisor.