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March 8, 2021 - Epoch Times
40:32
Why Real Estate and Housing Prices in California Continue to Rise | Lee O'hanian
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So California has implemented a lot of regulations at the state level and also at the local level that makes it very difficult and very expensive to build new housing.
And the fundamental reason is we just simply don't build enough.
And what we do build is very, very expensive.
Why we have such high housing prices here?
The first mistake is to allow virtually anyone to file a lawsuit against any development if it has or allegedly has adverse environmental consequences.
Do the parties that file them, do they make money from these lawsuits?
They absolutely make money.
There are some legitimate environmental lawsuits, but they serve to further the interests of these environmental organizations.
Have we reached a point where a city like San Francisco is not livable anymore?
We have reached that point.
And what can people do to change this?
I think the message is don't let them kick the can anymore.
Force them to face up to what the realities are.
California is incredibly expensive.
It's become unaffordable.
Nearly 40% of Californians are living at or near poverty.
And as a humane society, this is something we just shouldn't tolerate.
California is facing a housing shortage as the median price of real estate exceeded $700,000 for the first time in the state's history in 2020.
My guest today is Leo Hanian.
He's a professor of economics at UCLA and senior fellow at Stanford's Hoover Institution.
Today he discusses the root cause of California's housing shortage and the high cost of real estate.
Welcome to California Insider.
Lee, it's great to have you on.
Welcome.
Thanks so much.
I'm happy to join you.
We want to talk to you about real estate.
Everyone in California sees that real estate costs are going up, and it costs a lot more to buy a home here.
You've done a lot of research on this.
Can you explain to us what's going on, why we have such high housing prices here?
Yes, California has a legitimate housing crisis where lack of supply has really driven up prices.
Currently, according to the California Association of Realtors, the median priced home in the state is almost $700,000.
And the median priced condominium is about $530,000.
And for most people, buying that home or even that condominium is really out of reach.
One needs a household income into six figures to afford that medium-price condominium, as well as a down payment of over $100,000.
So this is putting the idea of or the dream of ownership of a home in California out of reach of almost all households.
There are some who have had homes for decades and they're fine.
But when you look at young people, young families, those who are moving into California from other states, they're just going to have a really, really difficult time for the most part.
And why is that? - Yes.
So California has implemented a lot of regulations at the state level and also at the local level that makes it very difficult and very expensive to build new housing.
So to give you an idea of how this has occurred over the decades, let's go back in time, back to the period immediately after World War II, 1945-1946.
And in the 30 years after World War II, 1945 to 1975.
California's population more than tripled.
It increased from 7 million to 22 million.
During this time, the price of California housing relative to the rest of the country really didn't change.
Despite all these people moving into California, That huge increase in demand did not push prices up because California built a lot of new housing.
After 1975, California home prices started to skyrocket.
And the reason is because the amount of housing that was built After that period was only about 40% of what was being built before that.
So from the standpoint of just simple economics, supply and demand, Demand growth was strong.
People wanted to move to California.
They wanted to have the weather.
They wanted to have the beautiful environment.
They wanted to be part of the California dream.
People continued to move in, but not enough housing was built.
And when demand growth outstrips supply growth, prices rise.
And so for the last 30 years, California has become more and more unaffordable, up to the point where Buying the median priced home in San Francisco is now about $1.6 million, requiring a household income of over $300,000 per year to qualify for a conforming mortgage, not to mention an over $300,000 down payment.
And when we look at most households in the country, The number who can write a check for $300,000 to qualify for that 80% loan-to-value mortgage is tiny.
And the fundamental reason is we just simply don't build enough.
And what we do build is very, very expensive, reflecting both regulations that delay the building process And that increased costs through compliance regulations and also regulations that raises the pure cost of construction.
Can you explain to us some of these regulations, what they are?
Yeah, yeah, absolutely.
So at the state level, for the last 50 years, California has had...
The acronym is called CEQA. C-E-Q-A stands for the California Environmental Quality Act.
It was signed into law by then Governor Ronald Reagan.
It was passed in response to growing concern that we weren't being good stewards for the environment.
That was the time when air pollution was much higher than it is today.
It was immediately after an infamous incident in which Oil production derricks in the Pacific Ocean leaked, creating an enormous oil slick off the Santa Barbara coastline that created worldwide attention.
And the environmental movement was really born at that time.
California passed the Environmental Quality Act.
And in 1970, the understanding of how economics should inform and guide regulatory policy really wasn't integrated very, very, very well.
And what the California Environmental Quality Act did was really make two mistakes.
The first mistake is to allow virtually anyone to file a lawsuit against any development if it has or allegedly has adverse environmental consequences.
And what's happened by allowing literally anyone to file a lawsuit for environmental purposes is that many organizations and individuals file lawsuits to prevent construction or to extract And I won't say extort,
but what it boils down to is lawsuits are filed to try to extract some of the returns from the investment for their own gains under the auspices, which are often false, of environmental concerns.
And these types of, I'll call them false environmental lawsuits, range from labor unions, We're good to go.
Other lawsuits that are filed, a really interesting one was filed at LAX, which is doing a large renovation, and that lawsuit was filed by a group that was really a remote parking lot.
About five or ten minutes outside of LAX, the shuttle goes and picks you up and brings you back to the parking lot.
Why was that filed?
Because in the LAX Reconstruction of the airport, they were putting in more onsite parking, which was potentially going to take business away from this remote parking lot.
So these lawsuits are filed time and time again, many times not have to do with the environment.
And the more these lawsuits are filed, they require more reports, they require more attorneys and court time, and this drives up costs enormously.
My favorite example of this is a development called Newhall Ranch, which is about 35 miles outside of Los Angeles near Valencia, Magic Mountain.
And Newhall Ranch was a planned 60,000-person community.
It was going to be essentially a new town with parks, schools, recreation areas, hiking trails.
The plans for Newhall Ranch were submitted in 1994.
Final approval, including the disposition of all lawsuits, did not come until 2017.
So it took 23 years of lawsuit after lawsuit to achieve passage and to allow the developers to begin construction.
And interestingly enough, in 2012, after 25 different government agencies had reviewed the development plans and the environmental impact report, 25 different government agencies, it was passed.
And then another environmental group came and filed another environmental lawsuit challenging the already accepted environmental impact report.
And that took another five years to finally dispose of that litigation.
So all of those costs get packed into the price of housing.
And it's consumers, homeowners, who end up footing these bills.
Do the parties that file them, do they make money from these lawsuits?
They absolutely make money.
There are some legitimate environmental lawsuits, but they serve to further the interests of these environmental organizations.
So, for example, the Center for Biodiversity was one of the plaintiffs in the last lawsuit on the Newhall Ranch development.
They advertised to those who give them tax-deductible donations that they had a major victory in beating a huge developer and saving an endangered species and making sure that a particular river was not going to be harmed.
So do they make money on that?
Not directly from what is being mitigated, but indirectly because they can go to their benefactors and say, look at the great job we just did.
Others make money directly, such as that remote parking lot.
If they can stop development of additional parking garages in LAX, they make money from that.
A labor union that files a lawsuit under the guise of an environmental reason, and they get hired in return for dropping the lawsuit.
And again, I don't want to use the word extortion, but people can put those ideas together and see where it goes.
They make money.
They get hired.
They drop the lawsuit.
So, yes, this is very self-interested.
And again, the idea that it's filed under the auspices of environmentalism is so misleading.
And most Californians, you know, we love.
We love the natural.
We love the fact that we have been good stewards of the environment.
Drive up and down the coast and see the unique beauty of our state.
And sadly, whenever we hear environment and save any environment, you know, that's a halo effect.
Yes, isn't that wonderful?
We have to look beyond that.
Because beyond that are self-interested groups that have no interest in saving the environment, but that are indirectly taking money out of your pocketbook.
There has been some efforts to build more housing, and it seems like the governor tried to do that.
And have they thought about this side of it?
And I think the governor has also faced challenges with the CEQA, right?
Has that been a challenge?
Yes, I think everyone now, both on the political left and right, understand that CEQA is leading to delayed housing, more expensive housing.
A lot of reports and analyses that are just driving up the cost of housing.
Governor Brown in 2011 attempted to rewrite CEQA. He had an entirely democratic state legislature, both in the state Senate and the state House.
He wasn't able to get that done.
Governor Newsom understands that CEQA is driving up costs.
Many Democratic legislators have introduced bills typically every year.
There's a new bill that's introduced to try to either deal with CEQA or rewrite it or try to bypass CEQA in some way.
Senate Bill 35 was passed a few years ago that allowed fast tracking of development.
But It was only for what is called below market rate housing or affordable housing.
It wasn't applied widely to every type of building.
And this was only going to be in locations where the community wasn't deemed by the state to be building enough housing.
Now, the problem with this is that, okay, developers are delighted that they can bypass Much of CEQA or CEQA entirely.
But on the other hand, ironically, building below market rate housing is extraordinarily expensive because of additional regulations and additional court costs and enormous amount of attorney time.
For example, construction costs below market rate housing in San Francisco are about $740 per square foot.
Ask any builder outside of California, what type of housing can you build for $740 a square foot?
Maybe a side of Midtown Manhattan.
But anywhere else in the country, they'll say $740 a square foot will buy you over-the-top luxury, not below-market-rate housing.
So what's been done so far hasn't adequately addressed the California Environmental Quality Act.
And it really needs to be rewritten and updated to 2020.
If I go back just for a second to the Newhall Ranch development, one of the requirements that the developer had to agree to in order for the other side in the lawsuit to drop the lawsuit Was to install 25,000 electrical vehicle charging stations in a community of 60,000 people.
Which is a community of probably about 30,000, 20,000 cars.
1% of California's automobile stock is an electric vehicle.
So, by requiring them to put in 25,000 electric charging stations, you know, 1% of those are going to get used.
And the others will just sit there and depreciate.
So, this is the kind of inefficiency that's going on.
And I don't think people understand this.
People who are buying housing in California, they're just saying, you know, what are you going to do?
It's California.
People want to live here.
The price is high.
What can you do?
Well, it's not what you can do.
It is doable if regulations are reformed and building is made cheaper.
It'll still be more expensive for the country, but there's simply no good explanation for why it should take nearly a quarter century to get a development, not even built, just breaking the ground and get it started.
Nor is there any good economic explanation for why housing for people at the least affordable part of the income spectrum should cost the same amount as, you know, five-star hotel luxury.
There's just no good economic explanation for that.
It's all about regulation.
And this is the regulation that exists at the state level.
I'm sorry, go ahead.
So you mentioned the cost of developing affordable housing that is so high.
Can you give us some examples of that?
How would the regulations impact that?
Yeah, so when we look at these Housing developments that are focused on affordable housing.
And you put the words affordable in quotes because it's not affordable.
It's incredibly expensive to build.
But when we look at that, the community, the local government, either city government or county government, is intimately involved with that.
And on those types of projects, there almost always is what's known as a prevailing wage requirement.
And prevailing wages means that the director of the Department of Industrial Relations in the state of California tells you how much you have to pay for different types of construction workers.
For example, a carpenter in Northern California, the director of industrial labor relations will tell you must be paid $85 per hour.
That's, according to the Director of Industrial Relations, that is the prevailing wage.
Where does that number come from?
Almost always it comes from union construction labor, which is much more expensive than non-union construction labor.
A couple of years ago, the LA Times did a piece on these prevailing wage requirements, and what they found was about a 50% to 80% pay premium between Union labor and non-union labor for the same occupations.
So there's no economic reason in a free market that you should have to pay $85 for a carpenter if the free market price for a carpenter is $45.
Or $100 for an installation engineer if the free market price is $50 to $5 per hour.
So again, this is inflating the cost of construction.
Who pays for it is the consumer, is the person who buys the home.
Because developers are going to earn, you know, their rate of return, 10% or whatever.
So that ends up getting passed on to those who buy those homes.
And so what people really need to understand is if you're buying one of these new houses, you're paying a lot for it.
You don't need to pay that much for it.
And part of the premium that you're paying is going to subsidize certain groups who are political affiliates.
With state and local government.
So this is one factor that's driving up costs a lot.
A consulting firm that specializes in California housing economics called Beacon Economics has estimated that construction costs are 46% higher because of these prevailing wage requirements.
That's an easy one in principle to get rid of.
We just say, you know, you hire competent people, and you build it, and we'll come and inspect it, and we'll figure out if they did a good job or not.
That's as easy as it gets.
But politically, unions are incredibly strong political supporters of many politicians, and they're not going to go along with getting rid of these prevailing wage requirements.
Constituents should start asking their elected representatives, hey, this is driving up costs.
Where do you stand on this issue?
Those are the questions that we as voters really need to be asking people.
There's such a layer of obfuscation that people just don't know what goes into these costs.
Construction housing prices in California, it's not like the weather where you can't do anything about it.
There's a lot we can do about it if people begin to put pressure on their legislators and elected representatives.
Do you think the elected representatives know the root cause of the high housing costs?
I think they understand this is my problem.
I think they understand it's a construction cost problem.
They're certainly aware of their political interests.
The reason we haven't had more legislation passed that relaxes some of these regulations is not enough for willing to vote for it.
So I think at a big picture level, they understand what the issues are.
They will also say, for example, in response to something like these prevailing wage requirements, they will say things like, Gosh, morally, we can't be paying our workers on these construction jobs less than a living wage.
It just wouldn't be right.
We're doing our best to support these workers.
Well, that sounds kind of good, but when you think about it, there's a market out there.
There's demand and supply, and demand and supply come together, and that's what the price is.
So whenever you're paying above the market price, it's a subsidy, and that cost is gonna be paid by someone, And what these people should be saying is, I'm making this decision on how you're going to spend your money on this house.
You're going to spend potentially 46% of the cost of this house on paying these people extra to build your house.
How often do we have people come in our home and fix the refrigerator Or fix the garbage disposal.
And they quote us a price.
We've shopped around.
How often do we say, hey, let me give you a 46% tip on that?
People don't do that.
That's not how life works.
But these legislators are doing this.
They're spending your money.
And that's what people really need to understand.
And that's what they need to start fighting about.
You're mentioning for these affordable housing for the development, we have to pay, the developers have to pay the union workers a premium.
And this is causing the housing costs to go up.
And the same union workers have to pay a lot more to get housing.
Does that make sense?
Yes.
Yes, there is a bit of a catch-22 there in this circular argument.
By driving up the cost of construction and the cost of housing, the price of housing gets high.
That drives up the cost of labor, because to get people to live here and work here, we have to pay them more.
So, yes, it does become a vicious circle where it costs more and more to live here.
People require more and more pay.
And one way that workers are getting around this is by living in more affordable areas, such as, say, the Central Valley.
And working in areas such as San Francisco or Silicon Valley where there are many high-paying jobs.
And those workers will drive an hour and a half, sometimes two hours to their job, and then drive home an hour and a half, two hours.
They leave at six in the morning.
They get home at seven or eight at night.
They're able to access the paying jobs and be able to afford a home in Stockton for $350,000 that would be over a million dollars in San Francisco.
And what are they doing?
Well, they're creating congestion on our roadways and they're creating more carbon emissions and air pollution.
So this is indeed a very, very difficult, challenging problem in California.
And for those who aren't able to find affordable housing and also be able to access those high paying jobs in Silicon Valley or Los Angeles or San Diego, they're really struggling.
38% of Californians live within 10% or below of the census definition of the poverty line.
Bureau of the census makes these determinations.
So, as a state, we should be really concerned that almost 40% of people are really, really struggling.
And a big reason why we have so many people living close to or below the poverty line is because living costs in California Are 50% higher than the US average.
And the big reason why they're 50% higher is the cost of housing.
Is there a point?
Have we reached a point where a city like San Francisco is not livable anymore?
For a lot of people that have a teaching job, for example, or they work at a restaurant.
Have we reached that point?
Yeah, we have reached that point.
So, Many of the people living in San Francisco don't work in San Francisco.
San Francisco is trying to build housing for teachers, for those who don't have a household incomes of $300,000 to be able to afford one of those homes in San Francisco, but they can't build enough.
So San Francisco could go one of two ways.
10 or 15 years from now, San Francisco might just be populated with incredibly high-income households and being serviced by a relatively small number of people who commute in from other areas and where a lot of jobs are being replaced by machines and robots.
I've been told that within San Francisco now, It's getting to the point where it's almost as common to go to a coffee kiosk or a lunch kiosk and have perhaps one person, one human that actually is working there to make sure everything goes well and everything else is done by robots.
So that could be a future vision of California.
Another vision is that much more housing is built there to drive down costs and make it affordable for a larger group of people.
Right now, we don't see any movement on that.
There is a great example just a couple of years ago just to illustrate how difficult it is to build housing and what the political impediments are, including the phenomenon of what people call Not My Backyard.
There was a fellow who owned a laundromat in a neighborhood in San Francisco that was relatively low-income.
And the laundromat had been around for a long time.
And he had plans to turn that laundromat into an apartment building.
I believe it was going to be like 40 or 50 units.
And this is ostensibly what San Francisco wants.
They want high-density housing, and they've agreed to fast-track proposals for building high-density housing.
Well, fast-track in this case meant six years to approval and over $2 million that the owner of this laundromat had to spend in legal fees and various types of environmental and historical reports One of which was whether his laundromat, which was a building that was built sometime in the early 1970s, nothing special about it.
By 2015, it was pretty run down.
He had to hire an architect and a historian, an architectural historian, two times to assess whether the building merited historical preservation.
And I think everybody in the Sun would know that no, it's not like Paul Revere swept here.
The first round...
The architectural historian architect came back and said, no, we've researched this and this is not in any way a historical preservation candidate.
Well, then another lawsuit was filed saying that a community activist group used this location in the 1980s for their meetings.
Well, he had to go hire...
Another historian to dig this up.
Each one of these things costing $30,000, $40,000.
And again, this lawsuit was determined in favor of the developer, but again, he's being delayed.
He's spending tens of thousands of dollars.
And then another complaint was that his development was going to cast shade during the afternoon on an adjacent preschool and playground.
So just think of that for a minute.
We're going to prevent development because it will cast a shed two hours a day when the sun shines in San Francisco.
It's a pretty foggy city.
So that was another complaint.
So six years, I think it was $2.2 million before he was approved.
And we could have just bypassed all of this.
We could have done this in six months without, you know, maybe at the cost of $50,000 in terms of total environmental impact report and development fees, instead of $2.2 million in six years.
So San Francisco has a governance problem in that Their board of supervisors tacitly went along with these delays, including, you know, what I will just call crazy things, such as the building cast shade on a neighboring preschool.
So I don't see any sign that this point is going to break soon.
San Francisco voters have got to vote in a different board of supervisors who are much more sensible and who are willing to fast track these types of developments and to develop San Francisco so more people can live there.
I don't see signs of it yet.
And until voters make that decision, I don't think really much is going to change.
There was some efforts recently on building fourplexes in San Francisco.
One of the Board of Supervisors members brought a proposal to allow fourplexes built in San Francisco.
What are your thoughts on that?
That would be a great idea.
I mean, that would expand housing considerably in areas with just single-family zoning.
It should be acceptable.
It didn't go through.
Not enough supervisors would have supported it.
And the reason they didn't support it is because some of their constituents were very vocal in saying, I don't want a fourplex next door to me.
If we allow people to be able to say what is or is not done on someone else's property that might be within a block or two of them, this problem is just going to continue.
So I think some of the Board of Supervisors, their hearts are in the right place.
Thus far, they haven't figured out the political solution to get enough support behind these proposals.
I hope they do, but thus far that hasn't happened.
You mentioned the voters, and what can people do to change this in California?
I think the first step is being informed.
And nine times, not even nine times out of ten, I'll say 99 times out of 100 in terms of the people I meet, I do a lot of public speaking through my position at UCLA and through my position at the Hoover Institution.
I do a number of media presentations.
So I meet a lot of people on this topic and they will say, Lee, I just didn't know.
I didn't know how much...
These regulatory issues that drive up costs and how development can be blocked by special interest groups.
I just had no idea because they're spending their lives working one or two jobs, trying to pay the rent, trying to keep their families fed.
They just don't have time to really think about this and understand this.
If I go back to my weather metaphor, they sort of seem to think, yeah, California housing is just crazy, out of reach, expensive.
You know, what are you going to do?
We'll just have to keep saving and saving and just hopefully pay the price.
Well, there's a lot we can do.
And the first step is really becoming informed.
And then the second step is going to your elected representatives and saying, I've been renting for the last 10 years.
I want to buy a home.
I want to know where you stand on making it less expensive to build so that I can afford to buy a home.
I want to know where you stand, how you voted.
Because this is my primary interest.
So that's what people have to be asking their representatives.
Where do you stand?
What bills have you introduced?
What bills have you supported?
Because my vote goes to someone who's going to actually do something about reducing regulations, making it easier to build, and getting more housing built and pushing down the price so that I can afford a home.
That's what people have to say.
And the first step is becoming informed.
Do you have any other thoughts for our audience?
Well, another issue that is at the local level is zoning.
And much of California has single-family home zoning.
And a lot of the debate within the state legislature, again, which is not to be partisan, but we have Democratic supermajorities in both the House and And the Senate.
So this is not a partisan issue.
They should have the votes.
A lot of the debate is over whether single family zoning should be changed.
And what I would say there is that this is a politically difficult issue.
And it's really another catch-22 because people who live in these single-family zoned areas, they've saved up.
They've bought a home.
90% of their wealth is invested in their home.
They're trying to protect their property interests.
You know, I understand that.
And they're fighting.
Oftentimes, they're fighting development.
They are part of this not-in-my-backyard group.
So the longer this goes, the more difficult it is to build more housing and to try to get past single-family home zoning.
So I think elected representatives are going to have to have the courage to say, you don't get to decide whether...
The rest of us can't afford to buy a home.
And I think people would be open to things like a duplex or triplex built so that they look like single family homes and built so that we can get broader buy-in developments that include more recreation space, more parks, more interesting shops.
What legislation thus far has failed to do is to provide an attractant of enough package to get the NIMBYs to buy into the idea.
It's going to be more expensive, but it will still be far, far cheaper than not building in these areas.
And in a lot of these NIMBY types of situations, there are hearings regarding, Relatively few people go to these hearings.
But people who have a strong interest in getting more housing built will have to start attending these hearings and making sure their voices are heard.
So again, a big part of this comes down to the voters because politicians, in my experience, politicians won't make a move unless we let them know it's in their interest to make a move.
And if they think you're going to continue to vote for them without them having to make potentially politically provocative decisions, they're just going to kick the can down the road.
So I think the message is don't let them kick the can anymore.
Force them to face up to what the realities are.
California is incredibly expensive.
It's become unaffordable.
Nearly 40% of Californians are living at or near poverty.
And as a humane society, this is something we just shouldn't tolerate.
Well, thank you.
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