SPUR believes it is essential that every person have a place to live, just as it is essential to have food to eat, clean water to drink and power to provide heat in the winter. To consider housing as fundamental a human right as water and food, California needs to treat housing as infrastructure.
If we treat housing as infrastructure, the same way we treat electricity and water delivery, our housing delivery system will need to change. Governor Gavin Newsom recognized this when he called for the creation of a Marshall Plan for Housing last year in order to build a sufficient amount of housing in California. Even his most recent budget, which grapples with the deep cuts brought about by the pandemic, recognizes the critical importance of housing to the health of our state. As California and the Bay Area face the urgency of economic recovery, we can — and must —take immediate steps to support renters and homeowners and address the housing affordability crisis.
As SPUR has written about in our most recent housing report What Will it Really Take to Create an Affordable Bay Area, the region needs to produce 2.2 million units over the next 50 years to keep up with population growth while preventing income inequality from getting worse. In order to achieve this goal, we will need to build housing all the time, just as we build other critical infrastructure — that is, according to need and regardless of where we are in the economic cycle. Under our existing system, housing, particularly market-rate housing, requires rising rents (or falling construction costs) in order to be financially feasible. Therefore it’s commonly built only when housing prices are moving upward as more people join the labor market while housing remains constrained. But what if we were able to “smooth out” our housing delivery system and build at both the bottom of the economic cycle and the top?
There are numerous benefits to figuring out how to smooth out the housing delivery system, including the following:
1. Building affordable housing during a downturn enables public resources to be used more efficiently and effectively. Land and construction costs typically drop during the downturn when there is less competition.
2. Spreading out demand for construction labor and preventing job loss for workers during a downturn helps workers and stabilizes housing costs. At the height of a housing boom, demand for construction labor is high and leads to high costs. Between 2014 – 2019, construction costs rose by more than 40 percent. Subcontractors and others tend to charge higher prices during an economic boom to weather down markets. Lastly, many construction workers lost their jobs in the last downturn, and were not replaced during the most recent boom. By enabling construction to continue during a down-market, workers can remain employed and price spikes could become less severe.
3. Enabling market-rate housing production to continue during a downturn ensures that when the economy recovers, housing is available for new workers and price spikes will be less stark as the state adds more jobs. Between 2011 and 2017, home prices in the Bay Area rose nearly 60 percent, in large part because the region added 658,000 jobs but only 140,000 housing units.
What needs to happen to build housing counter cycle?
SPUR believes the following policy changes need to be made.
1. Pass funding measures for the production of low, moderate and middle-income housing when the economy is hot, but ensure that these funds are available during a downturn.
Passing funding measures when financial times are tough can be challenging. During boom periods, funding measures are more likely to be successful. Recent examples include Alameda County Bond Measure A1 (2016), San Francisco Proposition A (2019), and San Jose Measure E (March, 2020) However, during these boom periods there can also be enormous political pressure to spend the funds as soon as possible. On one hand, this makes sense – during boom cycles housing costs rise and the housing crisis reaches a fever pitch. But reserving funds for a downcycle is incredibly important, so that those funds can quickly be used to purchase land or apartments that might become newly available at lower prices as well as to construct new affordable housing at times that labor may have become more readily available. Creating a “rainy day fund” as part of future affordable housing measures, where 10-15% of funds are set aside to be used in a downturn, can help make these funds available when they can stretch the furthest. Some places such as New York City Housing Development Corporation, have created sophisticated financial structures to support the creation and preservation of affordable housing while simultaneously growing the funds they have available to create more affordable housing over time.
2. Find ways to support the creation of market-rate housing during a downturn while ensuring that a portion of this housing retains permanent affordability in an upcycle.
The production of market rate housing is impacted during a downturn by drops in rents and the inability to secure investors when the economic outlook is uncertain. But yet California needs market rate housing to be built during a downturn so that when the economy heats up again, there are places for all the new workers to live. Moreover, housing production itself can help stimulate the economy by creating or sustaining good paying jobs for construction workers, architects and engineers and property managers.
There are many things the public sector can do to support the construction of housing (both market rate and affordable) that don’t cost anything, including making it faster for housing to get entitled and to create more certainty in the process. There are also financing mechanisms that the public sector and/or philanthropy can put in place to encourage market rate housing to be built, including loan guarantees (where the public sector or philanthropy reduces the risk to an investor of lending money for housing development by guaranteeing the repayment of that money) or even providing lower cost loans.
During a downturn, market rate projects will be less able to pay for inclusionary housing or community benefits due to lower rents and sales prices. Developing programs where those fees and requirements are lower during the downturn, but increase over time as the market recovers and rents rise are another way of spurring housing construction while capturing public benefits when projects are more able to pay for them. Alternatively, the public sector could develop programs that share both risk and reward based on market conditions. For example, as described above, the public sector could guarantee a certain return to investors in housing (making up the difference between the guaranteed rate and the actual rate during bad times) but receive a portion of the upside if the market does better than anticipated. This program could function a bit like an interest rate “collar,” but for public benefit.
As new market rate housing is being constructed, programs and policies to stabilize neighborhoods will also need to be pursued. These include programs that take rental housing out of the speculative market and make it permanently affordable (described more below), building more permanently affordable housing and creating policies that protect tenants.
3. Develop programs to take property out of the speculative market during a downcycle.
During a downturn, the price of land and property tend to decline. Owners of multifamily buildings that house low-income people may be more likely to be interested in selling those properties, either because tenants are less likely or unable to be able to pay rent, or because owners are more financially constrained for other reasons. Development projects that may have received permits for construction may no longer be feasible. Commercial properties such as retail centers may no longer be economically viable. It is during these times that it would be particularly useful to have programs established to enable non-profits or other socially motivated entities to purchase land and/or properties to be used for permanently affordable housing. This is important for two reasons. First, private investors may be better positioned to out-compete socially motivated buyers and acquire these properties with an eye towards profitability rather than permanent affordability. The second is that public funding for acquisitions is likely to go much further during a downturn than during a boom when prices are much higher.
Programs at the state and federal level to enable the acquisition of property for affordable housing should be more heavily funded during the downturn and flexible enough to ensure that non-profits and other socially motivated entities can move quickly and compete effectively with private investors. In this current downturn, the federal government should consider a large appropriation of funding from existing federal programs such as the Community Development Block Grant Program or HOME Investment Partnership Program to facilitate acquisitions of existing property for affordable housing as well as new affordable housing construction.
4. Legalize housing, including “missing middle” housing types to ensure that housing can be built at a variety of price points.
San Francisco continues to be the most expensive place to build housing in the world, and the rest of the Bay Area is not far behind. Land and construction costs are both contributing factors. But so is the region’s restrictive zoning and the numerous ways that the state’s regulatory system makes it easy to stop new housing construction.
In recent years legislation at the state level has made easier to build housing, but there is more work to be done. The California legislature is currently considering several bills that would help improve the situation. These include 1. allowing housing to be built on sites zoned for commercial and retail use, 2. making it easier and faster to create duplexes and other small projects throughout the state, 3. Extending an already existing CEQA streamlining law and 4. incentivizing developers to build more affordable housing. Lastly a Senate budget proposal focuses on keeping renters housed while ensuring that landlords can pay their mortgages.
These are all important parts of the housing equation. But there is still work to be done. Even if all these measures pass, California is still not zoning for enough housing to make the region or the state affordable. And even with the right zoning, California’s onerous development process makes it too easy for opponents to sue projects to slow down the process. California needs to be looking to what other states do to make it fast to construct housing that conforms with existing zoning while expanding the amount of housing that is allowed in cities large and small.
5. Retain and expand the construction labor force during a down market.
During the last market downturn, the construction industry shed 365,000 jobs, leading to a labor shortage that has been acutely felt during the most recent boom. By 2017, construction employment remained 25 percent lower than 2006 levels. In the most recent boom, the construction industry has suffered from a lack of experienced workers to manage and train those newer to the workforce (a trend that will most likely continue without intervention), and from a short supply of experienced subcontractors competing for work.
Finding ways to grow the local construction labor force is critical to creating greater cost and time efficiencies. Building counter cycle helps to keep construction workers in the workforce, making construction a more stable, and hopefully therefore more attractive, career. The state can also help support and expand programs to train new construction workers and keep them in the workforce.
6. Create and sustain programs that support renters and prevent foreclosures so that we don’t take one step forward and two steps back.
Since the pandemic started, local, state and federal governments have taken critical actions to keep people in their homes. These have included eviction moratoriums, mortgage forbearance for homeowners, providing cash assistance to households that can be used for rent or other expenses, and finding ways to temporarily house people experiencing homelessness. As the United States transitions to a longer-term recession, more work will be needed to keep people housed. At the State level, Governor Newsom has included $600 million of funding in his budget to fund the acquisition of motels and hotels to become permanently affordable housing. More work to expand this program is needed. And the House of Representatives recently passed the HEROES bill, which includes $100B in emergency rental assistance for low income renters at risk of homelessness, a $75B fund for homeowners assistance, as well as other funding for affordable housing. Other housing experts have called for stabilizing rental property owners that keep their tenants housed, even if the tenant’s ability to pay their full rent declines during this crisis period. Action by the federal government is critically needed to keep both renters and homeowners in their homes during this period. At the same time, the state could expand the protections outlined in the Homeowner’s Bill of Rights, which was passed in the wake of the last recession.
Trying to address a housing crisis in the midst of a pandemic is difficult and painful. But by changing the way we think about housing, California can address some of the underlying challenges and create a more affordable region for everyone.