The Housing Crisis
Jan 06, 2020 03:36PM
● By Pam Kessler
The more it costs to build residential projects, the fewer you get. And the fewer that are built, the more expensive they are to buy or rent. Eventually, this leads to a housing crisis. Some of the reasons for how we got here are complicated, others are unmistakable—rising material, land, and labor costs. Add to these regulatory hurdles and developer impact fees—close to three times the national average in California—and it adds up to San Francisco being the second most expensive place to build in the world.
WHAT CAUSED IT?
Tech companies are widely blamed for causing the housing crisis with an avalanche of Bay Area IPO’s that created thousands of new millionaires, flush in cash and ready to spend it, ultimately driving up home values and rents. However, policy experts say that it’s rooted in decades of resistance by local communities to build new housing. “Over the past six years, Bay Area rents have skyrocketed so high, two people working full-time minimum wage jobs cannot afford housing in the nine-county Bay Area," says Margot Ernst, housing program manager for the City of Walnut Creek. “Beginning in 2007, we were not permitting enough housing to be built in the state to meet the projected need. This trend continued for several years, hitting crisis mode in 2015 as the population and job market continued to grow, but housing inventory did not keep up with the demand. It continues to unfold today—1.5 million more affordable rental homes are needed in California to meet the current demand.”
BUILDING MORE HOUSING
While constructing more housing seems like an easy solution, multiple layers of lengthy government reviews, local growth controls, community resistance, land shortage, and CEQA (California Environmental Quality Act) inhibit the process and contribute to the high price of rental development.
As it stands, the housing situation is getting worse, with homeless counts rising in cities like Los Angeles, San Francisco, and Oakland, despite efforts to ease it. The pace of California's development is slowing, with some developers suspending projects because costs are so high that even multimillion-dollar condos and $4,000-a-month one-bedrooms won’t yield a profit. Construction of a single subsidized unit of affordable housing in California is estimated at $450,000—a figure that jumps to $650,000 in Walnut Creek.
Despite surging demand, cities across the state continue to fight against state-mandated housing development citing infrastructure constraints and increased congestion. “Housing is fundamental to a good quality of life and a strong local economy. People need places to live,” says Mayor Cindy Silva. “Walnut Creek is growing but at a very slow pace. Over the last 20 years, our growth has averaged about 0.5% per year or 325-350 people. To minimize local impacts, through the General Plan process, the community made an informed decision to focus new housing near the downtown and sustain Walnut Creek's 2,700-acres of open space and protect the character of single-family neighborhoods.”
In October, Governor Gavin Newsom signed Senate Bill 330, dubbed the “Housing Crisis Act of 2019” which takes effect January 1, 2020. Aimed at boosting home building in California, the bill caps fees, slashes the time it takes to get new developments approved, forbids density reductions, and bans local governments from imposing population and housing caps. “The state requires more housing to be built,” says City Manager Dan Buckshi. “The number of units built in Walnut Creek will be going up perhaps as much as 100%.”
RENTS AND WAGES
According to the New York Times, the Bay Area has added 676,000 jobs over the past eight years, but only 176,000 additional housing units, a ratio far from the 1.5 jobs per housing unit that planners consider healthy. “San Francisco remains the most expensive county to reside in,” says Ernst, “with average one-bedroom rents at $3,626 per month. In Dublin, renters are paying $2700 a month for a one-bedroom, and in Walnut Creek it’s closer to $2500.”
As demand in the Bay Area continues to outpace new supply, rents are forecast to rise by 2.2% in the coming year. “In order to afford housing in Walnut Creek, a minimum wage earner must make $32.68 per hour, which at current rates equates to a 148-hour work week,” Ernst explains. In order to pay rent, middle-income earners, like teachers and police officers, are living with roommates while others are working full-time jobs, taking on multiple part-time jobs, eliminating doctor and dental visits, and forgoing eating out or purchasing non-essentials.
“Senior citizens are the most severely rent-burdened,” says Ernst. “Poverty in this population is growing fastest in the East Bay suburbs as middle-income renters compete with seniors for housing. Currently, 56.8% of seniors are spending more than 50% of their income on rent.”
Another factor contributing to the housing dilemma, she says, is a labor shortage. “Since 2005, there has been a 45% decrease in the number of construction workers under the age of 25. In 2003, there were 400K people employed in construction jobs, in 2016 that number dropped to 300k.
Currently, Walnut Creek has about 500 units of affordable housing in its portfolio. New developments like the 135-unit NOMA project on the former Fuddrucker’s site will add 11 affordable housing units, while St. Paul’s Commons on Trinity will add 44 units—a mere drop in the bucket to meet the rising demand.
Based on current state AMI levels, a single person earning $43,000 or less in annual income or a family of four earning combined annual income of $61,000 or less qualify for affordable housing in Walnut Creek. This translates to rent at $1000-$1500 per month as opposed to $2300-$3000 per month for studio, one- and two-bedroom market-rate units.
According to a widely cited figure that originated in a 2016 report by the McKinsey Global Institute, California needs to build 3.5 million housing units by 2025—more than three times the current pace—to address its shortage and regain any semblance of affordability. Cities across the state are facing the hard reality that making sacrifices—upzoning, raising height limits, increasing density—are the only paths forward to housing their growing populations.
Sources: Yardi Matrix, CoStar, Federal Reserve Bank of St. Louis, California Association of Realtors, San Francisco Business Times, Mercury News