Is Middle-Class Housing Obsolete in CA?

Timothy L. Coyle
Consultant specializing in housing issues

Recently, California homebuilders delivered to the state Legislature a healthy dose of reality.  At a special hearing of the Assembly’s Select Committee on Housing Affordability (the Committee), representatives of the California Building Industry Association (CBIA) illustrated why housing in the state is so expensive.

In fact, CBIA may have made a case at the mid-August hearing why now it’s impossible to build new housing in California that’s affordable to middle-class buyers; due not to basic construction costs but to the more invisible – and insidious – expense of the local approval process.  

To start with, CBIA in what was impressive, detailed testimony described some of the factors that every homebuilder must overcome in setting out to build in California.  While the land developer is the one who negotiates these issues, ultimately the costs of meeting the various demands fall on the builder and, ultimately, buyers.  Among these factors are CEQA, which can bring a housing development to a screeching halt, and the very costly inclusionary zoning.

CBIA showcased four development projects – all in different parts of Northern California.  Two showed the price sticker of detached, single-family homes – one on the coast and one inland.  The other two were in more urban settings.  In fact, one of the latter two was a classic infill project in Sacramento and which included use of the now-defunct community redevelopment funding.

To illustrate the distinct characteristics of building in the state’s coastal areas, CBIA initially profiled a project of 18 detached, single-family homes in Pleasant Hill.  Two things jump out at the viewer (not to mention the minimum $1 million-dollar sale price) after analyzing the project:  1) high land costs; and 2) relatively high development fees ($70,000), although the lowest – in percentage terms – of all four projects.  Surprising, too, was the relatively low profit margins of the development that the builder enjoyed, although this project delivered the most amount of money per home as the four reviewed.

Land costs for the Pleasant Hill homes – at 10% of the house price – reflect not only the market and the hard cost of sub-dividing the lots, but the “softer”, more hidden costs of zoning.  Indeed, when combined with “site improvements” – most of which are directed by locals in the approval process – the entitlement expense and permit fees, locals controlled about 1/3 of the project cost.  That’s almost $400,000 per single-family home there.

Interestingly though, the other project featuring single-family homes, which occurred in the Central Valley – a Sacramento-area master-planned community – showed heavy local costs driven by substantial permit fees.  Fees alone represented over 16% of the project’s total cost – which must help explain how and why the builder – even at a staggering near-$500,000 sale price – lost money on the deal.  It’s doubtful also it was a successful, middle-class project.

The infill development in Sacramento might have explained why so few downtown projects are being pursued in California.  Construction costs alone accounted for an average of 80% of the project cost.  Not surprisingly, the unit prices ranged from a low of $450,000 to high of over $1 million – far from the range of most middle-class buyers.  And, this project was partially subsidized!

Similarly, a mixed-use development in Livermore cost a lot to build – nearly 40% of the home sale prices – but, again, the local government there, well-known for its high permit fees, didn’t disappoint:  nabbing about 40% of the project revenue.  Furthermore, government got half the profits, after taxes, the builder earned on an $800,000 home sale price for this desirable, townhome development that began as a middle-class project but became affordable only to upper-income individuals.

Regrettably, the CBIA testimony showed just how expensive it is to build in California and until things change locally, little can be done to make newly constructed housing meet the needs of the middle class. Indeed, it seems like the only one profiting from new development is local government.  In some cases, it’s making a killing.

What sort of impression did the aforementioned testimony have on legislators?  First, the hearing was sparsely attended.  The chairman of the Committee, Assembly Member Todd Gloria, Democrat from San Diego, was joined only off and on by four of his Committee colleagues.  While the reception of the Committee members who attended was positive, the hearing was unfortunately held during the Legislature’s summer recess, when few lawmakers are around.

Secondly, it wasn’t a standing committee that heard the testimony and the Committee is, therefore, virtually powerless to act on what it heard and saw.  The hearing made for good theatre, though.

Finally, Committee panelists all seemed to be (sympathetically) focused on one issue:  labor.  The payment of prevailing wages and whether or not there was or was not a project labor agreement (PLA) – both staples of a very politically active and connected trade-labor lobby in Sacramento – was on every member’s mind.  They all hoped to find the developer paying these significantly higher wages.  Too bad for them, though, the hearing was held to unearth all the extraneous costs of development – of which the threat of paying higher organized-labor wages is a major one.

If lawmakers really want to help the middle class in California, then CBIA’s very compelling testimony will mean something.  It’s doubtful, though.  With all the prompting in the world, it rarely does.

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