Only Big Developers Can Make California Housing Affordable

THE median Los Angeles home sold for $849,000 last year, according to the Assn. real estate agents. Meanwhile, one of California’s signature zoning reforms in recent years, Senate Bill 9, appears to be having a disjointed effect at best on the supply of new homes, the shortage of which is driving up prices.

Los Angeles and other California metropolises need plentiful housing to become affordable, and they can only get it by giving private developers the means to build major projects. The fundamental flaw of SB 9 is that it allows individual owners to add one or at most two units to their properties, and it is not a way to build enough housing to increase affordability.

If California really wants housing to be produced cheaply, it must allow large-scale production of housing by private companies with strong incentives to cut costs. Whether politicians like it or not, housing production is indeed governed by the laws of supply and demand.

Los Angeles is one of the most productive and inherently pleasant regions in the United States, which ensures that the demand for living here remains robust. As a result, in the 1950s and 1960s, Los Angeles’ housing stock grew at a healthy rate of 2.2% per year, adding more than 375,000 units over two decades.

Prices therefore remained affordable. In 1970, the median owner-occupied home in Los Angeles was worth $26,700 – $205,900 in 2023 dollars – and the median monthly rent was $107 – $825 today. Since 1970, the growth rate of housing supply has fallen by two-thirds to 0.7% per year, and prices have soared as demand clashes with increasingly fixed supply.

How do we know that the basic economic principle that tight supply means higher prices applies to housing? In American cities, places that build a lot, like Atlanta and Houston, aren’t expensive, and places that are expensive, like Boston and Los Angeles, don’t build a lot. The housing construction rate is lower and the prices are upper in metropolitan areas where construction is more regulated, according to a investigation by Wharton researchers. Studies to have found that zoning restrictions raised neighborhood housing prices by 29% to 38% in Chicago, 17% to 38% in San Francisco, and 32% to 46% in the United States.

Los Angeles’ exorbitant real estate prices and limited supply growth now place an extreme burden on all but the wealthiest city dwellers. According to some estimates, LA is the second least affordable housing market in the country. The average earner in Los Angeles must spend 83% of their income on mortgages and taxes to afford an average home. Los Angeles’ large homeless population partly reflects high housing costs.

LA’s gentrification battles, such as the battle on Boyle Heights, also reflect the shortage. Wealthier people move to low-income areas in search of cheaper homes, pushing people out of these communities. The cascading effect is visible throughout the city.

That’s why more housing in wealthier neighborhoods would reduce economic inequality in Los Angeles. By analyzing anonymous data on 20 million Americans from childhood through their mid-thirties, Harvard University researcher Raj Chetty and his collaborators found that where people grow up can have a significant impact on their economic results.

Working with the US Census Bureau, Chetty and her team launched the atlas of opportunitieswhich shows that a child who grew up in a low-income household in the affluent Brentwood neighborhood of Los Angeles earns on average almost four times more at age 35 than a child who grew up in low-income central Los Angeles . More homes in affluent areas would give more children a better chance of succeeding.

Building more housing in Los Angeles is also good for the environment. Research conducted with USC environmental economist Matt Kahn found that Los Angeles was the fifth greenest major metropolitan area in the country, measured by the carbon emitted by a standardized household, which is almost entirely a function of relatively mild weather . If Los Angeles built more housing, there would be less construction in areas like Atlanta or Houston that have higher greenhouse gas emissions.

SB 9, signed into law a year ago, created a process to divide lots and put up to four homes on an existing parcel, promising to make it easier to build in California. But we feared that small-scale construction – which could be hampered by local governments – would do little.

A year into the program, our fears have only grown. A investigation by UC Berkeley researchers from 13 cities, including Los Angeles, found that in November a total of 53 new units had been authorized under the law. Less than 1 in 5 applications in Los Angeles had been approved.

California needs hundreds of thousands of new homes, and that requires building on a different scale. A major housing deficit can only be solved by large-scale production, which almost inevitably involves large private developers. When William Levitt built tens of thousands of homes for veterans after World War II, he figured out how to make housing production as efficient as Henry Ford’s assembly line. No landlord adding a “secondary suite” could be remotely as profitable.

Division of labor was at the heart of Ford and Levitt’s economic assembly lines, as each worker focused on one task. But specialization requires scale, and homes today are mostly produced by small companies. California has 5,247 companies with less than five employees building single-family homes, and only 10 companies with more than 500 employees in the same company.

Important new research by Yueran Ma of the University of Chicago and his co-authors shows that over the past century almost all industries have become increasingly dominated by a small number of large, productive firms. These companies invest more in research and development and grow by developing new technologies. Construction, with its preponderance of small businesses, is clearly an exception.

The small scale of home building helps explain what economists Austan Goolsbee and Chad Syverson call “the strange and terrible path to productivity in the construction industry in the United States.” Their data shows that construction value added per worker has been declining since the 1960s.

The timing of the productivity decline reflects zoning changes that exclude large companies. Land use regulations really began to limit large-scale housing production in the 1960s, making the area less conducive to big business. Small-scale housing projects do not benefit from economies of scale, and small housing producers do not have the resources to invest in research and development that can lower costs.

That California’s housing regulations guarantee small-scale housing production is ironic, as the state’s signature industries depend on global markets. What kind of films would Hollywood have created if it had to obtain a separate license for each new film for each theater?

So how can California promote the large-scale development it needs to become affordable?

Since 1969, California has required cities to produce zoning plans that can meet regional housing needs. A year ago, the Los Angeles Times reported that the state found LA needed to add more than 250,000 homes to its zoning plan by last October. LA has complied with Junebut the city is still obligatory to zone for another quarter of a million homes by 2024. The cost of non-compliance is quite small: losing access to public funds for affordable housing. Most NIMBYs who oppose housing development would be happy to lose those funds.

A much harsher penalty is available: the so-called “builder’s remedy” included in the California Housing Liability Act of 1982. The idea is to allow developers to circumvent zoning codes and land use plans as long as more than one-fifth of a project’s units are affordable to low-income households. In practice, however, the strength of the remedy remains not clear. Communities will continue to find ways to deter new construction, as they did under SB 9. Judges will stop new projects because they mistakenly believe that construction in Southern California is bad rather than good for the environment.

To solve its affordability problem, California must ultimately be willing to undo the reflexive local obstruction of large-scale development. Anything less will motivate Los Angeles and other cities to allow badly needed housing.

Edward Glaeser is professor of economics at Harvard University and author, with David Cutler, of “Survival of the City”. Atta Tarki is the founder of ECA Partners and the author of “Evidence-Based Recruitment.”