The OC Register reports that a California judge has struck down a new law allowing as many as four units on a single lot:
“The Legislature finds and declares that ensuring access to affordable housing is a matter of statewide concern and not a municipal affair,” SB 9 states. “Therefore, … (this law applies) to all cities, including charter cities.”
But the law does nothing to guarantee more affordable housing, Kin wrote. At the same time, he rejected the state’s argument that SB 9 promotes housing affordability at lower income levels by increasing the overall housing supply.
” ‘Affordable’ refers to below market-rate housing,” Kin wrote. The state gave “no evidence to support the assertion that the upzoning permitted by SB 9 would result in any increase in the supply of below market-rate housing.”
Redondo Beach City Attorney Michael Webb hailed Kin’s ruling, saying SB 9 amounts to a “kind of trickle-down economics applied to zoning.”
In fact, the single best way to provide more affordable housing is to build more unaffordable housing. And contrary to the claims of Michael Webb, housing is a textbook example of trickle down economics in action.
Consider the following analogy. Suppose you are worried about high used car prices. Low wage workers are struggling to afford the few used cars that are available on the market. Would you suggest that the car companies start building some crappy junkers, which sell for $5000? Obviously not. The optimal solution would be to build more “unaffordable” new cars. The affluent people that buy those new cars would then sell their old cars, which would put downward pressure on the price of used cars. Eventually the benefits would “trickle down” to those people who are unable to afford new cars. Not only does trickle down economics work, it’s the key to understanding important markets such as autos and housing.
In any advancing society, new houses should be better than existing homes. That means that new houses will be “unaffordable” to the median purchaser of houses of that size. That’s good. That’s how living standards improve over time. If new houses were no more expensive than existing homes, then we’d all still be living in log cabins.
Judge Kin doesn’t seem to understand the laws of supply and demand. He speaks of building houses at price points below “market rate”, whereas the whole point of the policy is to make housing more affordable by reducing the market price of housing. Build more mansions, and the benefits will trickle down to the working class.
I don’t even like the phrase ‘trickle down’, as it suggests the process is slow. The benefits of housing construction will flood down onto the lower end of the market.
PS. The judge’s decision applies to the state’s 121 “charter cities”, but not the much larger number of “general law” cities that lack a charter.
READER COMMENTS
Craig
Apr 29 2024 at 12:13am
Is it the housing itself or is it the land that is the issue? Let’s take the good ole Leavitt which has existed from WW2 and was the affordable home of yore. They still exist and there are the modern day equivalents of course. The issue isn’t so much that they aren’t affordable to build the issue is WHERE you place it. Put it in many areas of TN and its cheap, put it in North Jersey and its decidedly more, put it in Laguna Niguel and its $2mn.
Scott Sumner
Apr 29 2024 at 1:36am
Yes, that’s why we need to abolish zoning laws that restrict density.
Jeff
Apr 29 2024 at 9:38am
I’m not opposed to this, but it perhaps oversimplifies the basic nature of this problem in California, which is that nearly every aspect of the built environment there—most notably the transportation infrastructure but other facets as well—was seemingly deliberately constructed so as to not be scalable. Which is fascinating considering that the lion’s share of California’s immense wealth has derived from hyper-scaling, namely in the digital technology and mass media distribution industries.
Scott Sumner
Apr 29 2024 at 12:17pm
This is why zoning restrictions near rail transit lines are especially unfortunate.
Dylan
Apr 29 2024 at 8:42am
The below blog goes into a lot of detail on what makes housing so expensive and it is a more complicated story than just land and zoning.The cost of land only makes up about 20% of the cost of a new home, and for existing homes it is maybe more like 30-40%.https://www.construction-physics.com/p/what-makes-housing-so-expensive
Jeff
Apr 29 2024 at 9:23am
That’s not at all the message I got from that article, especially not for California.
“for many zip codes, over 70% of the value of the house is due to the cost of the land on which it sits.”
“more than 16 million people live in a place where the land share is greater than 70%”
Floccina
Apr 29 2024 at 10:01pm
It isn’t even the land but the right to build a housing unit.
Scott Sumner
Apr 29 2024 at 12:19pm
“The cost of land only makes up about 20% of the cost of a new home,”
Maybe in Texas. But not in California, where little ranch houses can sell for $2 million.
Dylan
Apr 30 2024 at 8:58am
For sure. It is highly geographic dependent, but still that 20% is an average across all new construction in the U.S. Obviously, that is skewed by building happening mostly where land is cheap. Which is why the estimate for the percentage of land cost for existing housing across the country is particularly interesting as well. With that it looks like about a third of people live in areas where the value of the land is more than 50% of the value, and 16m live in an area where it is more than 70%. Zoning is clearly important, but it isn’t the dominant factor for over half of the country.
robc
Apr 30 2024 at 4:21pm
But its the dominant factor for the expensive part of the country.
The rest of the country doesn’t need as much help fixing housing prices.
Fixing the bay area:
End zoning, supply bulldozers, wait 75* years.
*It would be faster than that, but it may take that long to truly get back to a free market equilibrium.
Scott Sumner
Apr 30 2024 at 6:43pm
It’s keeping people out of the most productive parts of the country.
Dylan
Apr 30 2024 at 8:06pm
I get that, but even in flyover country, building a new modest house of 1500 square ft is about $250K, and that doesn’t include the cost of a well, septic tank, electric hookup, etc. That can add quite a bit to the total cost.
Peter
Apr 29 2024 at 2:36am
So Hawaii is the poster child here. All laws like this do is increase ghetto mega mansion (I.e. eight bedroom shacks) and provide more houses for foreign Chinese investors simply trying to hide their money. Sure in theory the increased supply decreases cost and I’d concede that at the margins, the problem is the margins are still unaffordable. I.e. it’s nice more rich people can fight over the spoils, it’s not change a damn thing in practice for everyone else.
Scott Sumner
Apr 29 2024 at 12:23pm
“foreign Chinese investors”
Their share of California homes is very small. In any case, they’ll buy houses here whether we build new ones or not. More supply leads to lower prices. It’s that simple.
Peter
Apr 29 2024 at 2:03pm
Lower prices don’t matter if all it does is open up additional units for more rich people to buy them. I get the rule of supply and demand but market failures exist too when you have outside constraints beyond zoning such as geography or a housing demand that vastly outstrips supply at any level still way above affordability for the masses.
If there is a policy goal to let poor people live in Manhattan, increasing condo availability by only reducing zoning simply allows the near rich, not just the rich, to enter the market while still not allowing poor people too because there is no world where their will be enough new construction in Manhattan to drop units down to $60K. And yet there is societal value in not making Manhattanite’s sub minimum wage Filipino nannies not commute in two hours.
I’m not generally a fan of “affordable housing” programs as they are often games and not what they claim but equally, removing all zoning laws aren’t going to fix the problem either in some places as often the problem isn’t vacancy rate but local availability. I’ve long thought the better fix is simply making laws to penalize people from squatting on properties, i.e. strongly encourage occupancy. When you got vacancy rates above 50% with the other half living twelve people in a one bedroom, we got problems zoning isn’t going to fix.
Jon Murphy
Apr 30 2024 at 7:59am
In my short 35 years on life, I’ve seen condos in Boston that were originally being priced at $1m end up being sold for $190k because of an increase in supply.
Furthermore, we’re seeing home prices drop in Texas as supply increases.
Housing prices have cratered where I live now due to increased supply.
You better start believing in such a world. You’re living in it.
robc
Apr 30 2024 at 4:25pm
The Single Land Tax.
My 3 housing proposals:
End zoning (effectively, I would allow two zones, “heavy industrial” and “everything else”)
Single Land Tax
25-year time limit on deed restrictions
Scott Sumner
Apr 30 2024 at 6:47pm
Peter, Your comment has some basic errors, such as this one:
“Lower prices don’t matter if all it does is open up additional units for more rich people to buy them.”
That’s not how things work. The rich can find homes in any regulatory framework. Building more houses doesn’t make the rich go from homeless to housed. It’s the lower and middle classes that benefit the most from ending zoning.
The Manhattan comment is also off the mark. If you build more condos in Manhattan, then people that move there will free up units in Brooklyn, Queens and the Bronx.
john hare
Apr 29 2024 at 4:31am
To some extent, I disagree. It would be possible to build a functional vehicle to sell for $5,000.00 at a profit absent the massive regulatory issues. I don’t think it would be “crappy” to have a vehicle without airbags, radios, and sensors for everything from tire pressure to turn signals. Just basic transportation.
Whether that would be a viable business is a question when golf carts are selling for more than that.
MarkW
Apr 29 2024 at 5:56am
Even if the judge is correct that ‘affordable’ is defined as ‘below market rate’ in the bill, he’s still wrong. If greater supply results in lower market prices, then lower subsidies will be required to make housing ‘affordable’ and the government will be able to supply more affordable housing for the same amount of subsidy spending.
Lizard Man
Apr 29 2024 at 7:21am
Interesting about California law. It seems like municipalities can opt out of much of state law by merely adopting a charter. My expectation is that if this ruling holds, most municipalities in California will try to do that.
BS
Apr 29 2024 at 11:23am
I’ve wondered. If there isn’t enough luxury housing to satisfy demand in the top 10%, do they start shopping in the next “decile” down; does their relative affluence allow them to bid higher and thus push up prices; does the effect cascade down? If so, maybe saturating markets with supply from the top down is surely the best approach.
Peter
Apr 29 2024 at 4:05pm
It doesn’t work in practice because in the markets where this is failing, there is an effective infinite supply of the top 10% as the world is a big place and they just buy, don’t inhabit, and let it sit as either a long term inhabited investment property or a tax shelter. The entire world can’t inhabit the same ten mile area. And it doesn’t really trickle down as they aren’t living there anyways hence they aren’t freeing up a lower quality house for others.
Jon Murphy
Apr 30 2024 at 7:55am
Then it is still reducing the price of homes because they’re still being occupied by someone, just not the owner.
Unless you’re arguing that wealthy people buy an asset and let it deliberately lose money, in which case I’d have to as “why.”
Scott Sumner
Apr 30 2024 at 6:50pm
If it were true that the rich were buying lots of houses and leaving them empty (and it’s not true), then that would be an even stronger argument for new construction. Imagine a world where houses are being bought up and people evicted, but no new construction is occurring. That would be an even worse disaster.
Dr. Michael E. Gibbs
Apr 29 2024 at 11:39am
In California about 29% of the cost of building new homes and apartments is compliance with federal, state and local regulations. On top of that, builders must contend with steep increases in liability insurance to cover risk during the build. Who in their right mind would participate in that? Even with the so called “builders remedy” the retail price of an “affordable” 800 sq. ft. home in places like Pacific Grove still approaches $1M. It is one of the reasons that California, at 5.3%, has the highest unemployment rate in the nation. Insanity is sending the same people back to Sacramento and expecting different results.
Scott Sumner
Apr 29 2024 at 12:25pm
Yes, regulations push up construction costs. But the big problem is zoning and land prices.
Anders
Apr 29 2024 at 3:58pm
The case above is blindingly obvious by dint of common sense alone. The question is why it plays such a small role.
a few reasons come to mind. We think of greedy developers making rents by focusing on upscale housing for the rich (as if the rich were in infinite supply). Nimbyism is well organised and a range of specious but emotionally effective arguments (think about Londons green belt, most of which is not even green to begin with). And politicians know that concrete, visible action such as rent control and public housing sell more than makings things easier for greedy developers for the rich.
The dems, in my imagination triggered as often by the occasional Bill Maher rant, seem to have turned on this finally and too late. But politically, perhaps the point to start is to make affordable housing, defined as percentage of household income rather than market rate, an attractive option for developers in ways that could be tried and tested in different municipalities. That will create momentum, demonstration effects, and learnings of how best to go about it. Politics matter more than common sense, and we liberals can beat the drum as much as we like to no avail by overlooking it.
vince
Apr 29 2024 at 5:57pm
Why not multifamily apartments and condos? Surely they can be profitable to build.
Scott Sumner
Apr 30 2024 at 6:51pm
Yes, but they should be nicer than existing multifamily units. That’s how society progresses.
vince
May 1 2024 at 11:32pm
Yes, they should be nicer than tents.
Kevin
Apr 30 2024 at 8:00am
I am a stranger here. I moved away from CA in 2005. At the time, small homes in the Miracle Mile area (Just east of Fairfax) were selling for $1.2mil.
I currently live in north Idaho and am seeing housing costs here rival Portland and Seattle. There is an aspect of what’s happening here that is also a potential factor in California, though it may be less of a factor in CA.
North Idaho became, in the last decade, a popular destination for those seeking a better market, people coming from places where ordinary homes can sell for upwards of $1mil. There have been bidding wars, driving up sale amounts. It’s at the point where the house I rent, which sold for $130k ten years ago, is considered to be worth over $400k currently. This is having a lot of knock-on effects, not least of which is that an ordinary buyer would need an income greater than $120k/yr to buy a starter home.
The thing is that, once one person discovers that they can sell for silly money, suddenly everyone else wants silly money too.
While it is true that developers, like car manufacturers, prefer to focus their efforts where there is a bigger margin (the main US manufacturers, like Ford, have axed their small car lines in favour of $100,000 pickups…), the fact remains that we, the buyers and sellers of second-hand cars and houses, contribute the most to this dynamic by being willing to pay stupid money for items that aren’t worth the premium.
We cannot legislate or regulate this issue away. Everyone wants to point at zoning, government, developers and other people in the process, but we also have to accept that the ‘consumer’ plays a role in this too.
Bobster
May 1 2024 at 9:05pm
From 2017- present, after California implemented inclusionary cross subsidies and rent control, median housing prices increased almost 70%.
You can see this on HUD’s fair market rent measure.
If they had simply done nothing, prices would be much lower.
Jose Pablo
May 1 2024 at 9:57pm
‘Affordable’ refers to below market-rate housing,
This sentence does not make any sense / has no real meaning:
* Every occupied house is “affordable” since you can’t live in a house that you can’t afford (just by definition of “affordable”). If you live in a house that suddenly becomes unaffordable to you, you have to move to an “affordable” house. And somebody that can afford your last house will move to it. So, apart from this “friction”, all occupied houses are “affordable”.
* There is an (almost) infinite number of market rates when it comes to houses.
So by “affordable” Kin probably means “cheaper”. But cheaper than what? cheaper than the cheapest house in the market? This doesn’t make any sense. It has to be cheaper than some houses and more expensive than others.
Bobster
May 2 2024 at 12:03am
In blue states, “affordable housing” has come to mean income restricted housing that is price controlled.