California's Housing Crisis
How California got to this point and what's being done to solve the problem.
(You’ll find the text version of “California’s Housing Crisis” below this embedded video)
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This is the most expensive city in America.
In Atherton, California, the median price of a home is $8 million.
Atherton is a very small, very exclusive community. It only has 7,200 residents, many of whom are famous athletes, CEOs and venture capitalists.
But for all their wealth, residents of this town haven’t been very happy recently. Here’s why.
You see, Atherton has extremely strict zoning rules.
There are no sidewalks and no commercial spaces, which means there’s no restaurants, shops or grocery stores.
Atherton is predominantly made up of single-family homes which are required to be built on a minimum of one acre.
These requirements are part of the reason why it’s such an exclusive and expensive place to live.
There’s only around 2,500 housing units in the town and it’s been that way for decades.
But that could be changing soon, and Atherton residents are really upset about it.
A couple of weeks ago, the town’s city council approved a plan to build 348 new housing units over the next eight years.
That plan caused an uproar in the community.
Residents complained that the new units would cause Atherton to lose its character, become denser and cause horrendous traffic.
One resident summed it up by saying, “That's not what we all paid to be here for. It's not fair. It's attacking everyone's own values and their lives."
One of Atherton’s most famous residents, Steph Curry, point guard for the local Golden State Warriors NBA basketball team, also chimed in.
Curry wanted the Atherton city council to adopt a plan that didn’t include a property that neighbors his own.
That property is owned by arguably Atherton’s most despised man, who wants to convert his 1.5 acre single-family home into 16 three-story townhouses.
Curry is worried that the townhouses will loom over his home, reducing his privacy.
The Atherton city council pretty much agreed with all the complaints that Curry and other residents made.
But they still went ahead with their plan for 348 new housing units, including the 16 that Steph Curry’s neighbor wants to build.
Why’d they do it? Well, it’s because of a state law called the housing-element law. This law requires California cities to create plans for the building of new homes in their communities every eight years.
This includes making sure there’s enough areas zoned for housing construction and making commitments to assist in housing development through incentives.
The housing-element law has been around for over five decades, but it hasn’t really had teeth. Cities would submit plans for new housing, but for various reasons—including resistance from local residents— that housing wouldn’t end up getting built.
Now the state is taking a tougher line.
California Governor Gavin Newsom has said that “NIMBYism is destroying the state,” a reference to people who don’t want new houses built in their communities.
Newsom has made tackling the high cost of housing in the state one of his top priorities.
He’s sued cities and helped pass laws to encourage the development of more homes.
Newsom and many other Californians believe that the state is facing a housing affordability crisis. The median price for a home in California is more than double the national median and Californians spend an average of 28.5% of their income on rent, the second-highest percentage in the nation.
These high housing costs create economic hardships for many Californians.
Only 55% of Californians own their home (the second-lowest home ownership rate in the nation) versus 66% for Americans as a whole.
Meanwhile, 30% of the homeless people in the U.S. live in California despite the state having only 12% of the country’s population.
There are many reasons for California’s high housing costs. The most obvious reason is that a lot of people want to live there.
You wouldn’t have high home prices if there wasn’t any demand.
Good weather, a long coastline and a lot of job opportunities have attracted people to California for decades.
The demand has been particularly strong in California’s two major regions, the Greater Los Angeles Area and the San Francisco Bay Area, where two-thirds of Californians live.
But demand is only one side of the equation. If there was enough supply to meet that demand, then home prices probably wouldn’t be shooting through the roof.
The problem is there hasn’t been enough supply. California has been building just over 100,000 new homes every year for the past several decades. But that’s half the number of houses that the state needed to meet population growth.
So why haven’t enough homes been built even in the face of high home prices?
Well, there’s two main reasons.
The first is what I talked about earlier: community resistance to new housing.
A study by the Legislative Analyst’s Office (LAO) found that activities and rules that prohibit new housing development are more prevalent in California’s coastal communities than elsewhere in the country.
They found that over two–thirds of cities and counties in California’s coastal metros have adopted policies explicitly aimed at limiting housing growth.
The second reason homes aren’t getting built is because there just isn’t a whole lot of land available to build them on in the desirable parts of California that a lot of people want to live in.
According to the LAO, two–thirds of the area surrounding the urban centers on California’s coast is unsuitable for housing development because of mountains, hills, and various bodies of water.
By comparison, in a typical metro area elsewhere in America, geographical constraints affect only a quarter of the land.
Meanwhile, of that land that is suitable for development around California’s coastal urban centers, only 1% is vacant.
In other words, there’s not a whole lot of land in either the Greater Los Angeles Area or San Francisco Bay Area to build houses on and what land there is has largely been developed.
So the story could end there. You could say, ”There’s a ton of people wanting to live in those areas, but there’s not enough land available for them. Therefore, ever-higher home prices are the only way to balance supply and demand.”
Well, not necessarily.
You can offset a scarcity of land with higher density. What that means is taking the same plot of land and building more housing units on it—duplexes, townhomes, condos, etc.
This is essentially what was proposed in Atherton to satisfy the state’s requirement that it build 348 new housing units over the next eight years.
But that faced backlash because existing residents don’t like how multifamily housing structures change the character of their neighborhoods.
And remember, there’s very little vacant land in California’s coastal metro areas, so to increase density, cities would have to redevelop established neighborhoods by replacing older, lower–density housing with new higher–density housing.
That’s not something that’s easy to do. It’s expensive, it’s time consuming and locals often don’t want it to happen.
So you’re left with the current situation where the state is increasingly strongarming the cities to do this.
In 2021, Newsom launched the Housing Accountability Unit, which has a mandate to stringently enforce state housing laws and make sure that local governments are doing what they need to do in order to meet aggressive new home targets set by the state.
California currently has a goal to build 2.5 million new housing units by 2030.
To help make that happen, Newsom has signed a number of bills that make it easier for homes to be built, in some cases by reducing the authority of cities and neighborhoods in housing development matters.
One of the bills (SB-9) allows homeowners with single-family zoned land (which constitutes 75% of the developable land in the state) to split that land into two separate lots, where they can build up to four housing units. And assuming certain conditions are met, they can do this without any local government approval.
Meanwhile, another bill (AB-2011) makes it easier for developers to build homes in areas currently zoned for commercial use.
Together, these bills increase the number of homes that can potentially be built in the state and they reduce the influence that cities have on new home development.
A Unique Time
This is interesting. On the other hand, the state has good intentions in trying to alleviate things like high home prices and the homeless crisis.
But on the other hand, the cities have a legitimate point of view as well. There’s simply a limited amount of land in California’s major metro areas.
Sure, you can take power out of the hands of cities and local communities and force them to accept higher density housing. But is that the right thing to do?
It’s also worth noting that these big changes are happening at a unique time in California’s history. For the first time ever, the state’s population isn’t growing anymore.
Some of that has to do with deaths from the pandemic and less immigration from overseas, but some of it also has to do with the high cost of housing.
You could make the case that this is a problem that needs to be solved by building more housing and increasing the density of California’s cities.
Or you could take a more hands off approach and say that this is all self-correcting. If California’s population stops growing, then that reduces the demand for new houses and diminishes the upward pressure on housing prices.
This is a very complex, multifaceted topic that not only California, but a lot of states with high housing costs are dealing with.
We’ll see what happens.