California Housing: Costs May Be Greatest Threat

Timothy L. Coyle
Consultant specializing in housing issues

Amid the tempest and tumult brought on by the Coronavirus is a troubling issue for housing:  rising costs. High costs, so prevalent in California communities, are already swamping markets – threatening affordability, particularly for households with lower incomes.  Nevertheless, high housing costs will likely go higher.  

Lingering just below the surface of the current statewide health calamity is an economic recovery, and with it will come a super-charged demand for housing.  Increased demand will only put pressure on prices and rents and make affordable housing in or near the state’s job centers a lot scarcer.   

Will producers meet the demand or will rising costs and greater project-approval complexities chase them from housing markets?  What is the impact on lower-income families already struggling to find affordable housing?

These are the underlying questions of a just-released study by Carolina Reid, a scholar at U.C. Berkeley’s Terner Center for Housing Innovation.  The good news of the study is it found that excluding land most of the costs associated with building affordable apartments, under the federal Low-Income Housing Tax Credit (LIHTC), are controllable.  The bad news is the study estimates the average statewide cost of constructing that apartment to be just less than $500,000. 

In the high-cost San Francisco Bay Area the number is closer to $600,000 – where it’s $81 more per square foot to build than the rest of the state.  And, in the coastal town of Solana Beach, just north of San Diego, leaders there recently approved 10 units of affordable housing – each apartment costing $1.1 million.   

Crazy, you say?  Not in California, where the cost of building affordable housing has hovered over $400,000 per unit since recovering from the real estate collapse in 2008, and where the same amount of public subsidy is needed to build two units as was needed for three units just 10 years ago.

As you will see in the Los Angeles Times story about Solana Beach, the “Pearl Apartments” project was first proposed over a decade ago – 10 years before being approved.  Back then the per-unit cost was over $400,000 – about average. But 53 underground parking spaces and two lawsuits later the cost had more than doubled.  The project also was reduced in size – from 18 to 10 units.

The saga of the “Pearl Apartments” is repeated over and over again in just about every one of California’s communities.  Regardless of whether their developments are being proposed for market-rate consumers or lower-income renters, state housing producers face the same consequences:  extremely high costs. 

In addition to always-pricey land acquisition, high housing costs come in the form of sky-high fees, senseless parking requirements, public school construction, other deferred infrastructure and seemingly endless lawsuits – all of which are man-made and controllable.  

Adding insult to injury, more and more city councils are demanding union-friendly project-labor agreements accompany project applications.  These agreements almost always require construction workers are paid higher, prevailing wages. (The Terner Center says prevailing wages alone can add as much as 20 percent more than market wages.) These also are controllable costs.

 Can California’s infamous housing woes get any worse, you ask?  They can and will is the likely answer. The Terner Center estimates the housing need for the state’s lower-income households – 80 percent of the area median income or below – to be the equivalent of 1.7 million units.  If it’s lucky, it will take the state 20 years to build that much affordable housing. If it builds that many, expect the costs associated with their construction to go ever higher.

For those of you hoping for a market correction you may be waiting a long time – it looks like high-cost housing in California is here to stay.  But, it is reasonable to ask: “What lower-income family can afford to rent an apartment that cost million dollars to build?”

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