Addressing California’s Housing Affordability Crisis: Key Strategies in the Housing Package

California stands out among the 50 states for its strong economy, moderate climate, diverse population — and high housing costs. Indeed, the increasing unaffordability of housing in California has been a central focus of state legislators this year, with over 100 housing-related bills proposed. Governor Brown has also repeatedly cited the housing crisis as a serious threat to the state’s long-term economic well-being.

This week the Legislature is expected to begin voting on a package of bills designed to address the housing affordability crisis. These bills represent an important first step in addressing this critical challenge for the state by pushing on a few key policy levers.

Before getting into the actual contents of the housing package, it is helpful to briefly review the scope of the state’s housing challenges. Housing costs are very high in many parts of California, though they vary significantly across regions. (This will be the focus of an upcoming Budget Center Fact Sheet.) Nearly two-thirds of Californians live in areas where the monthly rent for a modest two-bedroom apartment is $1,500 or more. By comparison, rent affordable to a full-time worker at the state minimum wage is only $546 per month. Home purchase prices are similarly high, with two-thirds of Californians living in areas where the median sales price for a single family home is half a million dollars or more.

However, high housing prices alone do not necessarily indicate a housing crisis, as costs must be considered relative to incomes — if incomes are similarly high, then high housing costs may still be affordable. The US Department of Housing and Urban Development defines affordable housing as that costing no more than 30 percent of household income. Households that spend more than 30 percent of income on housing are considered “housing cost-burdened,” and those that spend more than half of income on housing are considered “severely housing cost-burdened.” Unfortunately, while housing costs vary across regions in California, housing cost-burden is prevalent throughout the state (as will be shown in another upcoming Fact Sheet), because areas where housing costs are lower also tend to have incomes that are lower. Overall, more than half of all renters in California and more than a third of homeowners with mortgages pay more than 30 percent of their income toward housing (see chart). Moreover, nearly 30 percent of California renters and more than 15 percent of mortgage holders are severely housing cost-burdened, spending more than half of their income on housing.

What are the consequences of unaffordable housing costs? At a household level, high housing costs can crowd out spending on other necessities or important investments such as quality child care, health care, education, or retirement savings. Lack of available affordable housing can also limit household mobility, restricting the ability of families to relocate to access jobs or move close to family. When unaffordable housing costs push families to live farther from jobs, commute times increase, resulting in increased pollution and reduced time with family. High housing costs also make it more difficult for employers to recruit workers, and deter individuals from moving to California, thus limiting the available labor force and dampening economic growth.

Recognizing the many serious negative impacts of the state’s housing crisis, leaders in the Legislature and the Governor have been working this summer to reach agreement on a multilayered “housing package” of bills. These must be passed no later than September 15, and the first votes are expected as early as this Friday. Details of the full set of bills that will be voted on are still emerging, but the package overall approaches the housing crisis through the three key policy levers detailed below.

Establishing New Sources of State Funding to Support Affordable Housing Development

Supporting affordable housing development with state funding is a worthwhile investment to facilitate production of housing with rents (or ownership costs) that are required to be affordable to low-income households. This type of housing is generally not profitable to build and therefore is unlikely to be produced at significant scale by the private housing market. Moreover, funding requirements can be used to stimulate production of housing for particularly vulnerable populations or in areas with especially serious affordability challenges. Historically, a primary source of state funding available to support affordable housing development was funding directed to local redevelopment agencies, but these were abolished in 2012 following controversy over how redevelopment funds were being spent. State bonds have also been used in the past to fund affordable housing development, but funds from the most recent housing bonds have now largely been exhausted. And funding affordable housing development through the state’s General Fund is not an attractive strategy because of the large size of the investment required to achieve a noteworthy impact on housing development.

Thus the justification is clear for establishing new sources of state funding to support affordable housing production. At the same time, state-funded housing production cannot come close to addressing the scale of housing need in California. A one-time $4 billion direct state investment, as called for in the housing bond in the proposed package, might support development of about 24,000 affordable housing units (based on an estimated state subsidy of $165,000 per unit) – while the Department of Housing and Community Development estimates that 180,000 new housing units need to be built each year just to keep up with population growth to prevent housing prices from increasing even faster. So addressing the housing crisis requires additional policy strategies to stimulate more housing production by the private market as well, leading to the second strategy included in the housing package.

Facilitating Private Housing Development by Streamlining Review Processes for High-Priority Projects

Multiple and lengthy processes to review proposed housing development projects for consistency with local land-use plans and development priorities, and for environmental impact, can cause delays, increase costs, result in changes to projects that reduce the number of housing units built, or block projects completely. State policies that limit the type of discretionary reviews and time allowed for local review processes for particularly high-priority housing projects, while preserving a process for ensuring that projects comply with established local zoning and environmental requirements, can reduce these types of barriers in order to facilitate more private housing production. At the same time, such state efforts create tension with local governments and some constituents because they reduce local authority to change or block specific housing developments and could potentially allow greater environmental trade-offs in order to increase available housing. Last year, Governor Brown proposed a “by right” housing policy that would have required significantly streamlined permitting and review for many multi-family housing developments in already-developed areas if the projects included a specified level of affordable units. The Legislature rejected that proposal, but this year’s housing package includes consideration of more narrowly constructed policies that would similarly streamline review for certain types of developments.

Increasing Local Accountability for Producing a “Fair Share” of Housing

Given housing affordability challenges throughout California, there is a need for more housing in all parts of the state. While more housing production statewide benefits California’s economy as a whole and is needed to limit further escalation in housing costs, some local jurisdictions are reluctant to allow development of new housing out of concerns that adding housing locally will increase congestion and demand for local services, lead to school crowding, or change the less-urbanized character of their communities. Overcoming these local concerns for the benefit of the broader community and economy requires putting in place processes to fairly allocate the responsibility for taking on new housing development among local jurisdictions. And in fact, California has such a process in place already. Based on projections for population growth at different income levels in different regions, the Department of Housing and Community Development regularly produces a Regional Housing Needs Allocation (RHNA) that identifies the number of housing units that will need to be developed in each region to meet projected housing demand. California’s regional councils of governments then allocate responsibility for these units among local jurisdictions, which are then required to outline plans for where they could accommodate development of their allotment of needed new housing units through the “housing elements” of the General Plans for their city, town, or county. This established process represents a reasonable approach to allocating a fair share of housing to each locality and results in specific local plans to accommodate housing development. However, local jurisdictions have very little accountability for producing realistic plans to accommodate new housing, and virtually no accountability for actually developing the housing units they have been allocated. In fact, it is quite common for actual housing development in local jurisdictions to fall far short of the number of new units planned for according to the RHNA. Thus the third strategy included in the housing package under consideration is increasing penalties or incentives to push local governments to produce their fair share of housing as determined by the RHNA process.

The final housing package voted on by the Legislature will include multiple different bills that adopt one or more of these three core strategies. Two key bills would establish new state funding sources for affordable housing development: Senate Bill 3 (Beall) would provide for a $4 billion dollar housing bond to be submitted to voters at the November 2018 election, and Senate Bill 2 (Atkins) would establish a new permanent source of state funding for affordable housing by implementing a $75 recording fee on real estate transactions (excluding new home purchases). A third key bill, Senate Bill 35 (Wiener) would address both streamlining and local accountability, by requiring a significantly streamlined review process for multifamily housing projects that include a certain percentage of affordable units in urbanized areas, but only in jurisdictions that have not met certain of their RHNA-specified fair share housing goals. SB 35 would also require that construction workers on these projects be paid prevailing wages. Other bills that may become part of the final package would implement streamlined review for other types of high-priority projects or would provide other incentives or penalties related to local fair share housing allocations. An additional bill, Assembly Bill 1505 (Bloom, Chiu, and Gloria), would reaffirm the authority of local jurisdictions to implement “inclusionary zoning” policies – which require developers of market-rate housing to also include units of affordable housing in their projects (or pay fees in lieu) – for rental as well as ownership housing, superceding a court ruling which had found these policies could not be applied to rental housing.

All three policy approaches embedded in the housing package represent valid strategies to address the critical challenge of housing affordability throughout California. Even if the full housing package passes through the Legislature, however, the policies under consideration cannot be expected to solve California’s housing affordability crisis. Steps need to be taken to begin to address the housing crisis, but the state’s limited ability to directly and dramatically increase housing production means that California will still remain an expensive place to live. Given this fact, policies outside of the housing arena that help families make ends meet will continue to be critical to protecting the well-being of California’s residents with lower incomes.

— Sara Kimberlin