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The California Cargo Cult Shilling for Real Estate Speculators

PLANNING WATCH-The South Pacific cargo cults are gone, but we have plenty of modern cults, and the one I regularly encounter is the Supply-and-Demand cult.

Like the Cargo Cult, (photo above: Mock Cargo Cult P-52 airplane built on Melanesian Island) which built mock airplanes to lure back the riches left by Japanese and Allied flyers during WWII, our modern cultists imagine that zone changes are the market magic the will create real estate fortunes. It will not only make investors and their champions rich, but also solve the worsening housing crisis and turn car habituated Angelenos into regular bus and subway riders. 

We can dismiss the Cargo Cults as an imaginative effort by Neolithic communities to get more goods airdropped on their islands. But the Supply and Demand cults that thrive in the California State Legislature, LA’s City Hall, and in lobbying groups nurtured by pro-development interests, need to be thoroughly demystified. 

First, those who rattle on about supply and demand treat it as a natural law, akin to gravity. They could not be more wrong.  If they had stayed alert in their introductory economics courses, they would know that this “law” only applies to financial transactions where investors make acceptable rates of profit. If the profits are not there, investors look elsewhere. Real estate developers will not meet the massive unmet demand for affordable housing by going broke. Unmet demand does not automatically trigger an increase in supply, and excess supply does not automatically usher in price cuts. 

Second, like automobile and fine art markets, the housing market is segmented. If Toyota produces more low-price Corollas, the cost of an expensive Lexus will not drop. Or, flooding the art market with $35 paintings of dogs playing poker will not reduce the price of a Claude Monet masterpiece. It will still set you back $50 to $100 million.  

A series of recent studies confirm that the misunderstood law of supply and demand invoked by the real estate industry and their followers to extract upzoning gifts from elected officials -- has no bearing on LA’s segmented housing market. More luxury apartments have not and will not create low-income housing for the homeless and the rent burdened. For that matter, rising vacancy rates in luxury housing have barely caused rents to decline, while vacancies in middle-income apartments have not had any impact on rents. In fact, some tenants are facing rent increases in complexes, like Park LaBrea, with empty apartments. 

A key tenet of the Supply-and-Demand cult is that upzoning -- the deregulation of zoning and environmental laws -- will produce a housing boom. Market magic will cause housing prices to fall and transit ridership to rise. What these cultists deliberately overlook is that according to the City Council-certified General Plan Framework Element EIR, Los Angeles has an abundance of underdeveloped commercial parcels.  They allow the by-right construction or apartment houses in every Los Angeles community.  As Move LA wrote in CityWatch, LA’s long commercial corridors, like Ventura and Pico Boulevards, have ample bus service, high commercial vacancy rates, and zoning that already permits apartments.  Any developer who wants an in-fill building site has the “pick of the litter.”  Plus, the bus and rail lines on these corridors allow density bonuses. The new apartment buildings could reach six stories.  In some corridors, like Wilshire Boulevard, they could even build 42 story luxury skyscrapers.  

The most important study is The Vacancy Report: How Los Angeles Leaves Homes Empty and People Unhoused. Prepared by the UCLA Law School, Strategic Actions for a Just Economy (SAJE), and the Alliance of Californians for Community Empowerment (ACCE), its findings discredit the Supply-and-Demand cult’s explanations and solutions for the housing crisis. The report explains why building more (expensive) housing will not solve LA’s housing crisis: 

  • “With more than 36,000 unhoused residents, Los Angeles simultaneously has over 93,000 units sitting vacant, nearly half of which are withheld from the housing market. 
  • “Over 22 square miles of vacant lots are owned and kept vacant by corporate entities. 
  • “The pattern of development occurring all across Los Angeles further contributes to the vacancy and houselessness crises, as new units are priced beyond the reach of most Angelinos, leading to an excess supply of high-rent housing that fails to lease, and therefore fails to house people, coupled with a crisis of unmet need for housing for the most vulnerable. 
  • “High vacancy rates in expensive luxury housing developments are a core symptom of a broader speculative housing system . . . Speculative practices yield an unbalanced production of vacant luxury development at a time when evictions are fueling a loss of affordable rental units, increasing numbers of corporate landlords are unaccountable to low-income tenants. 
  • “We are failing to build enough covenanted, deeply affordable housing. 
  • “Beyond the immediate need for shelter, the economic devastation that has resulted from the pandemic has put hundreds of thousands of renters at risk for eviction and houselessness, magnifying the already desperate need for new permanently affordable and stable housing. 

These findings are reinforced by two additional studies. In June 2020 LA’s Department of Housing and Community Investment (HCID) reported to the City Council on vacant housing units in Los Angeles. They found that LA’s housing shortage is concentrated in mid and low-end units. Since so many of the city’s vacant apartments are in high-end buildings, this excess does not address the housing crisis faced by lower income Angelinos: 

LA’s citywide vacancy rate is between 6% to 7%, amounting to approximately 85,000 to 100,000 empty units. . .Higher-end, 4 or 5-star-rated dwelling units are disproportionately vacant while mid-and low-end units have especially low vacancy rates. In addition, neighborhoods with a greater proportion of new, high-end units have some of the highest vacancy rates in the City. . .while those areas experiencing less residential development have vacancy rates consistently below 5 %.”  

In UCLA’s Hotel California: Housing the Crisis report, we also learn that increasing poverty, not a housing shortage, is the key factor leading to homelessness. 

“The 2020 Greater Los Angeles Homelessness Count asked more precise questions than in the past about chronic homelessness and found that out of the 66,436 people experiencing homelessness in Los Angeles, 25,460 are chronically homeless. . .The vast majority of these are unsheltered.  We anticipate that Los Angeles will soon have to contend not only with chronic homelessness, but also with a growing first-time homeless population and a much higher proportion of unhoused families with children.  As indicated earlier in this report, even prior to COVID-19, . . .a majority expressed economic hardship as the cause of homelessness. . . These numbers will grow rapidly as job loss and housing insecurity combine to displace rent-burdened tenants facing unemployment without replacement income and eviction protections.” 

While it is difficult to collect hard data on those leaving Los Angeles because of the pandemic and/or hard times, For Rent signs are popping up in every apartment district. At the same time, homelessness is increasing despite rising vacancy rates. While we wait for hard data, at least one thing clear. Landlords are not slashing rents. Either they are boxed in by loan conditions, or they expect to soon rent their empty apartments to tenants paying top dollar. 

For the Supply-and-Demand Cult none of this makes the slightest sense. In their world investors should respond to the unmet demand for low-priced apartments by building them. Likewise, landlords should respond to high vacancy rates by dramatically lowering rents. But none of this is happening.  When magical thinking forms your understanding of the world, facts and analysis do not cloud your thinking, especially when generous real estate developers subsidize you.

 

(Dick Platkin is a former Los Angeles city planner who reports on local planning issues for CityWatch.  He serves on the board of United Neighborhoods for Los Angeles (UN4LA) and is co-chair of the new Greater Fairfax Residents Association. Previous Planning Watch columns available at the CityWatch archives.  Please send comments and corrections to rhplatkin@gmail.com or via Twitter to @DickPlatkin.