California Market SnapShot – May 2017 – Housing Affordability

Housing Affordability: Causes and Consequences The consequences of California’s mounting affordability crisis are large in magnitude and far reaching. Not only will this affect individuals and their families by diminishing homeownership, wealth accumulation, and quality of life, but it is also driving our middle class out of the state and inhibiting California’s ability to grow its economy by depriving it of much-needed skilled workers.

This affordability problem largely stems from the state’s inability to build housing on a scale anywhere even close to commensurate with its population or economic growth. California needs a deliberate and concerted effort to address this challenge and ensure that it remains a driver of economic growth nationwide. The problems didn’t spring up overnight and are the result of decades worth of structural issues and policy incentives, so this will not be an easy fix. However, there are some actions that can be taken now to begin chipping away.

First, California needs to begin to remove state and local barriers to development. Again, this could serve as the basis for an entire study on its own, but this would include everything from reforming California’s Environmental Quality Act (CEQA) at the state level to root out abuse while maintaining strict environmental standards to loosening the permitting and zoning approval of new developments at the local/municipal level.

Second, California needs to address public opinion as it relates to new housing in their areas. Although it is difficult to quantify, the “Not in my back yard” (NIMBY) attitude underlies much of the resistance to development at the local level. This is perhaps one of the most difficult of the recommendations to implement because, while Californians recognize both the need for new housing, they do not want to see those new units go up in their neighborhood. Connecting the dots between supply, lack of affordability, and a deteriorating quality of life will be paramount in suppressing resistance to housing going forward, regardless of what policy changes get implemented in Sacramento—if local elected officials are going to pay a price at the ballot box for approving new developments, they will have little incentive to support housing.

Third, more education is needed. Although the deteriorating affordability in California has priced many households out of the market, there are some families that are qualified and can afford a home but do not. Our annual Renter Survey showed that 69% of millennials said they would buy a home now if they could get in with a low down payment. However, in that same group of millennials, only 19% knew about FHA and other low-down payment financing options. In these cases, financial literacy and other educational vehicles can pay significant dividends.

Other solutions include developing more creative financing solutions for populations who are unbanked, with no formal credit history, or who operate businesses as independent contractors and sole proprietor without formal employment histories, but who may still be good credit risks to take. This is an area where financial innovation can help many non-traditional households take advantage of the benefits of homeownership. California can also begin to chip away at the barriers to housing turnover by lobbying and addressing some of the unintended consequences of policies that have been enacted. This is the challenge of our time facing the state. And, while it is daunting, it is not insurmountable. California still has a strong economy that can provide a firm foundation to begin to address housing affordability, but it needs to get serious and it needs to act now.

Source: California Association of Realtors / May Market Snapshot / www.car.org