Empowering Developers Will Not Solve LA’s Housing Crisis

AFFORDABLE HOUSING--The folks in Sacramento are in a frenzy right now trying to pass legislation to ease the housing crunch.  They realize that housing costs are becoming an extreme burden for Californians, and there's an avalanche of bills cascading through the state legislature that purport to address the crisis.  While some of these bills are thoughtful, reasonable attempts to create solutions, others are poorly conceived and could end up doing more harm than good.


One of the latter is SB 35, which takes planning authority away from cities and allows developers to skirt public review.  The bill was introduced by Senator Scott Wiener, and he seems to genuinely believe that it will help ease the housing crisis.  But like so many others who think that relaxing regulation will solve the problem, Wiener hasn’t taken a good look at the forces that have actually created this situation.

First, let's look at what SB 35 actually would actually do.  The bill would require a multifamily housing development that satisfies certain standards to be handled with a streamlined, ministerial approval process. 

The goal is to speed up approvals of urban infill projects that contain a certain number of affordable units, and to prevent challenges that could slow or stop the process.  Public review would be conducted by the local planning commission, and would be limited to 90 days if the project contains less than 150 units, or 180 days if it contains over 150 units.  Certain areas are exempt, such as coastal zones, wetlands, fire hazard zones and hazardous waste sites.  It’s also important to note that the bill’s provisions would only apply to cities that haven’t met state mandated housing goals, but since that’s true of almost every city in California, you can pretty much assume it’ll apply to the town you live in.

And let’s start with that.  We haven’t been building enough housing in California, and that’s certainly a problem.  No doubt it's true that many of California's cities have outdated and inadequate zoning codes, and this needs to be addressed.  But speeding up approvals and limiting public input isn't going to make things better.  We’ve been doing plenty of that since the beginning of this century, and all we’ve got to show for it is higher housing costs and more homelessness.

The problem here is that the bill’s authors don't understand the true causes behind skyrocketing housing costs.  Is there a shortage of affordable housing stock?  No question.  But rising costs have less to do with short supply than with the onslaught of speculative development that’s been encouraged by government at the federal, state and local levels for over 15 years now.  

The law of supply and demand is considered a basic economic truth, and there are plenty of cases where you can show a direct relationship between short supply and high prices.  But those who insist on the supply side argument when talking about housing in California are making a grave mistake.  They aren't looking at the whole picture, and they don’t understand that the market is severely distorted right now for a number of reasons.  

First, there's an avalanche of investment capital flowing into real estate these days.  With interest rates at historic lows, returns on traditional investments have become negligible.  Real estate, on the other hand, offers a high rate of return, and since the US economy began to recover there's been a massive flow of money into development.  This has driven a speculative frenzy that has pushed property prices higher than ever.

Second, there’s been a huge shift in the people shaping the market and their motives for getting into it.  Fifty years ago multi-family housing was considered a safe bet for people who wanted a reliable source of income.  Most apartments were owned by individuals or families.  Even if the owner didn’t live on site, chances were the tenants knew the owner, and generally speaking if you paid your rent and didn’t set the place on fire you didn’t have to worry about getting kicked out.

Those days are gone.  Nowadays multi-family buildings are being snapped up by anonymous LLCs that do everything they can to keep the tenants at arm's length.  Providing decent housing is the last thing on their mind.  The property is just an asset that they've determined they can cash in on.  Here in Los Angeles, if the building is covered by the Rent Stabilization Ordinance (RSO), they usually evict the tenants in order to build something bigger.  In LA alone we've lost over 20,000 RSO units since 2001.  Often these investors buy a building at a higher price than it’s assessed for, knowing that the city will almost certainly grant whatever entitlements they request.  This means there's a good chance they can drive up the property’s value before the bulldozers even show up on the site.  The new generation of real estate investor is only interested in maximizing their return, so those who do build are mainly catering to the high end of the market.  This has resulted in a glut of pricey units, and a shortage of affordable ones.  

So shouldn't empty units mean lower prices?  Not anymore.  The third factor here is the rise of short-term rentals.  It used to be that a landlord who couldn't rent units would eventually lower the asking price to attract tenants.  But now the landlord can just post the units on Airbnb and in some cases make more than they would on a standard rental.  In fact, there are reports of landlords who simply turn their buildings into hotels.  (City Attorney Files Charges Over Illegal Hotels, LA Business Journal, June 2016

So those who argue that we just need to build housing, any kind of housing, are ignoring significant economic forces that are skewing the standard supply and demand formula.  In the world of California real estate, the old rules don't apply any more.  If you want evidence, take a look at "Impacts of the Widening Divide: Los Angeles at the Forefront of the Rent Burden Crisis" (Ray, Ong, Jimenez, UCLA Luskin School of Public Affairs, July 2014).  The authors evaluate housing data going back four decades, and they conclude that rental price increases have outpaced income growth even when vacancy rates were relatively high.  They find that neither a tight market nor increased housing quality explain the widening gap.

Senator Wiener, and many others, argue that zoning codes in a number of California cities are too restrictive, and they have a point.  There's no question that in some cases homeowners have pressed for low-density zoning in order to protect their property values.  This has resulted in bad planning that limits growth in order to serve the interests of a minority.  But SB 35 tries to fight bad planning by avoiding planning, and that will only make things worse.  In today's speculative environment, developers are always looking for ways to rush their projects through.  This bill allows them to do that just by tacking on a certain number of affordable units.  

Though Senator Wiener's intentions seem to be good, he must realize that development interests have been showering Sacramento legislators with cash in recent years.  Lobbyists have been pushing hard to loosen regulations and roll back CEQA.  They want the quickest approvals and the least public scrutiny possible.

SB 35 plays right into their hands.  From Senator Wiener's public comments on the bill, it seems he buys the simplistic supply/demand argument and believes this piece of legislation will ease the problem.  But he's counting on the people who created the problem to solve it.  No question many cities have tried to limit housing construction with restrictive zoning, and that needs to be addressed.  But by allowing a streamlined approval process, SB 35 promises to make the problem even worse.  We already have streamlined approvals in LA.  

City Hall calls it "expedited processing", and it's been used repeatedly to rush bad projects through and deny the public a voice.  This bill will only lead to less planning and less public oversight.  It's the same cure developers and politicians have been prescribing for years now, and the disease just keeps getting worse.  


(Casey Maddren is a blogger who writes about Los Angeles at The Horizon and the Skyline. He is an occasional contributor to CityWatch.)