October 7, 2017
As September 2017 wound down, state legislators in California rushed to pass a series of bills to deal with its rapidly worsening housing crisis.
The housing crisis in California is a stark one for those seeking to buy a house and is shocking to many who see the state as the place where people go to make their fortunes. According to online housing site Zillow.com, the median price of a California home in July 2017 was $505,800, about twice the national average. And for those wanting to rent, things are also not encouraging. Zillow showed a median monthly rent of $2,452 for the state, compared to the national average of $1,434. That means that California’s renters are paying about 70% more per month for rent than the national average.
These median numbers include values from across the state, including places such as California’s Central Valley, where the economy is nowhere near as “hot” as elsewhere. They are far worse in places like San Francisco, with a median housing price of $1,104,000 at one end of Silicon Valley and $822,700 in San Jose at the other end. In Oakland, across the bay from San Francisco, the median price is “only” $619,800, but that is still a big number for most people to handle.
A recent analysis showed that rent prices in Silicon Valley’s Santa Clara and San Mateo counties are also up in the clouds, with $2,783 as the median rent. In San Francisco, the median rent is $3,888.
Farther south, Los Angeles clocks in with a median housing price of $585,100 and San Diego with $540,500. Sacramento, the state capital, is considerably lower at $278,600, as is Fresno at $197,100.
The hottest markets – in San Francisco, Los Angeles, San Jose and San Diego – have also seen prices go up by 75% in the past five years. They are expensive by just about anyone’s standards, but many still wonder precisely how expensive these numbers really work out to be, especially if one considers the so-called “hot” economies present in those same areas where the housing prices are going up.
The truth is sobering.
In San Francisco, the median price of a house is $1,104,000. A recent McKinsey study showed that anyone even dreaming of affording such a house would need to earn a minimum of $140,000 per year as well as somehow come up with the down payment and other expenses necessary to live in such a house. That $140,000 per year works out to 179% of the area’s median income, which means that the clear majority of those living in San Francisco cannot afford to buy a house.
The situation is not much better in the rest of Silicon Valley. A May 2017 report, Silicon Valley’s Housing Crisis, prepared by the Center for Continuing Study of the California Economy (CCSCE), says that only 40% of first-time homebuyers in Santa Clara County (where Google and Apple reside) can afford to purchase 2016’s median-price homes. In San Mateo County, only 29% of first-time homebuyers can afford their county’s median-price offerings.
In Los Angeles, where the median housing price is lower – at $585,100 – the situation might seem easier to handle. Unfortunately, though, the incomes there are nowhere near as high as they are in San Francisco. There, according to the McKinsey study cited above, the cut-off point for the total household income required to afford to buy those $585,100 houses is $69,800 per year, which works out to be 115% of the area’s median income. In that region, there is a little less pain to find a place to live, but housing is still out of reach for most residents in the area.
One consequence of this is the rising tide of what the CCSCE behind the Silicon Valley analysis refers to as the “housing cost burdened.” That kicks in when people end up paying more than 30% of their income toward housing costs, with housing costing less than 30% of total income considered “affordable.” Those paying more than 50% of their income toward housing costs are considered “severely housing cost burdened.” In San Francisco County, which covers the city’s metropolitan area, an estimated 40% of those who live there are in that “severely burdened” category. In Santa Clara and San Mateo counties, more than 50% of those who live there are similarly financially constrained.
Others who work in those very expensive cost-of-living areas solve the problem in other ways, sometimes living as much as two hours’ commute time away from where they work in order to afford a house and earn the income necessary to pay for it. Many rent and/or share a space to save expenses. There is even a rapidly growing group of people who buy vans or recreational vehicles and then park them – full-time – at the places where they work, as their “homes.” To save expenses, they then use on-site facilities at their offices to shower and change.
Because so many people spend so much on housing and related expenses in the state, the lack of affordable housing costs California over $140 billion every year in total lost economic output. That covers lost construction investment if people could afford to build houses. It also includes spending discretionary income for all kinds of things simply because the money is not available. There are also lost taxes of many kinds for the state because of lost spending opportunities.
Many people in California cannot afford to pay the high costs of living at all, which is why the state currently shows a total effective poverty rate of 20.6% as calculated by the U.S. Census Bureau in its Supplemental Poverty Measure Data Tables. That number identifies California as the state with the highest poverty level in the United States. Many of those people end up homeless, either living with others or on the streets, which is why California is also seen as having one of the worst homeless crises in the country.
This housing crisis is not just about California, however. In The GAP: A Shortage of Affordable Homes, a March 2017 study by the National Low-Income Housing Coalition (NLIHC), there is a national shortage of 7.4 million affordable and available rental homes for extremely low income (ELI) renter households.
ELI renter households are defined as those with a total income of less than the poverty guideline, or 30% of their area’s median income (AMI), whichever is higher. According to the study, 71% of ELI renter households are cost burdened to an extreme extent and pay more than half their income on housing.
The NLIHC estimates that there are only 35 affordable and available rental homes available across the country for every 100 ELI renters. The supply varies from state to state, with California having the worst situation (only 21 affordable homes are available for every 100 ELI renters in the state), followed by Arizona (26/100), Oregon (26/100) and Florida (27/100).
The NLIHC estimates that in California alone there is a total affordable housing shortfall of 1.1 million.
The bills brought to Sacramento to address these issues just a few weeks ago may offer some help with the complex mess California has found itself in.
The two that seem to have strong support from California Governor Jerry Brown are Senate Bill 2 (SB2) and Senate Bill 35 (SB-35).
SB-2, proposed by state Senator Toni Atkins, D-San Diego, adds a fee of $225 to some real estate sales, with the goal of raising $1.2 billion over the next five years. Half of the money raised by that statute, if approved, will go to local governments to help with housing construction. The other half of the money will go toward solutions to aid the homeless. SB-35, put forth by state Senator Scott Wiener, D-San Francisco, requires cities to meet certain goals for affordable housing.
Other related bills include the following: SB-3, from state Senator Jim Beall, D-Campbell, authorizes the funding of a $4 billion state fund. It will go before voters in November 2018. If approved, it will replace the monies for existing affordable housing agreements that were wiped out by the dissolution of redevelopment agencies. It will also – and importantly – provide $1 billion to the CalVet Home Loans program to help veterans and their families find housing they can afford.
Already lobbying to make his case for SB-3, Beall says his bond measure could produce an incremental $23.5 billion in economic activity for the state. He also estimates that $8.5 billion will be pulled in for income as a direct result of the bill, plus another $1 billion in other revenue gains for the state.
Other bills take a more punitive approach to the problem, punishing cities that do not deliver on their mandate to properly ensure the availability of affordable housing in their communities.
State Senator Nancy Skinner, D-Berkeley, has had two bills like this already pass in the senate. SB-167 fines cities if they miss affordable housing quotas, with specific steep costs for them if they willfully fail to build affordable housing on approved sites to avoid possible negative impacts on existing communities and their voters. Skinner’s SB-166 requires cities to have formal plans for making affordable housing available.
Another bill, SB-540, submitted by state Senator Richard Roth, D-Riverside, gives cities the authority to determine where housing could most effectively be built and thereby speeds up the approval process for affordable building projects.
Will these bills make a difference? They are a start, at least, and, more importantly, they represent an important recognition by lawmakers that something must be done to deal with an increasingly messier housing situation – and high cost of living – throughout California.