More than 90 percent of California families earning less than $35,000 a year spend more than 30 percent of their income on housing.
This isn’t new; that percentage has been stubbornly high for years. This isn’t an exclusively Californian problem, either; the national figure is 83 percent.
What is new and disturbing is that California’s housing crisis is spreading to middle-income households earning between $35,000 and $75,000 per year. In 2006, 38 percent of the state’s middle-class households used more than 30 percent of their income to cover rent. Today, that figure is more than 53 percent, compared to 31 percent nationally. It is even worse for those who borrowed to buy a home; more than two-thirds of middle-class households with a mortgage are cost-burdened in California, compared to 40 percent in the nation.
The social costs of this middle-class housing crisis are not sufficiently appreciated. Middle-income families have less money to spend on other goods and services, and that creates huge losses across the economy. It forces California employers to pay higher wages than elsewhere in the nation, raising costs for consumers and diminishing the state’s competitiveness. Some middle-class households leave California in search of affordable housing, depriving the state of young, skilled workers who represent the future.
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The housing crisis is a classic problem of supply and demand. The state doesn’t build enough housing to accommodate its population. California is home to roughly 13 percent of the nation’s population and has slightly greater than average population growth. Yet, over the last 20 years, the state has accounted for only 8 percent of building permits in the United States.
California would need to expand its housing stock by between 6 percent and 7.5 percent – that’s between 800,000 and 1 million additional residential units – just to reach national norms for housing, vacancy rates and crowding.
These figures dwarf the meager efforts policymakers are proposing to fix the problem. Assembly Bill 35, vetoed last year by Gov. Jerry Brown, would have raised $1.5 billion over five years – to build a mere 3,000 affordable housing units.
Why is it so hard to build? The state has stiff construction regulations, high labor costs, higher land costs and higher fees charged to developers by local governments. But taken together, these obstacles do not provide a complete explanation for the housing shortage.
If you compare the same new house in California and Texas, the California house would typically sell for twice as much. The additional costs of building that house in California – land, permits, construction code – do not fully explain the gap in prices. Builders make more profit in California than in Texas.
But the big difference is that California has erected two giant barriers: Proposition 13 and the California Environmental Quality Act.
Proposition 13 limits the value of housing to local governments by keeping property taxes much lower than in other states. So local governments – at least the fiscally wise ones – do not encourage residential development, since it produces less in taxes. CEQA forces developers to spend money to offset disruptions they might create in the natural or urban environment.
Is there any conversation in Sacramento about reforming CEQA? None. Any chance of reforming Proposition 13? Very little.
And so California families face a very real housing crisis.
Christopher Thornberg is founding partner of Beacon Economics LLC and director of the UC Riverside School of Business Administration Center for Economic Forecasting and Development. He wrote this for Zócalo Public Square and can be contacted at Chris@BeaconEcon.com.