The Housing Crisis: So Much Blame

You will need a truck-load of luck to find a place for less than half your monthly income. How did affordable housing get so scarce? The Mayor and the City Council believe we need more housing for the ever-increasing population in this once livable City by the Pacific. They have adopted a build baby, build attitude to all apartments. Unfortunately, developers that might want to build reasonable housing for the middle class and the less fortunate cannot afford to do so.

In this City when an old building with reasonable rents is torn down it is usually replaced with a high-rise that caters to the upper class. We make this process of ripping apart old neighborhoods sound wonderful by calling it urban renewal or gentrification. This gentrification creates a new crop of inner-city refugees who will have a hard time finding an affordable unit. Many pro build proponents cite the law of supply and demand. More apartments somehow will equal lower rental costs. It is not necessarily so.

Here are some of the reasons why more supply will not make rents more affordable: the high cost of land due to speculation (flipping) and global capital looking for a return on investment. High property taxes, building permits, plan check fees and inspection fees, and traffic studies are expensive for these new buildings. In some cases, the developer will have to file Environmental Impact Reports and Negative Mitigation Declarations. These also will be paid for by the developer. The cost of money is going up as the Federal Reserve seeks to normalize interest rate. The cost of skilled labor is expensive and in short supply. Commodity prices especially lumber prices have gone up dramatically.

Developers need a return on investment. Builders like to build expensive apartments because they believe they will make a bigger profit with them. In many cases, the banks demand the developer keep a certain cap-rate on the new building to protect their investment. The higher the cap rate (cap rate is the ratio of Net Operating Income (NOI) to Property Asset Value).If the developer chooses to sell the building the higher the cap rates the more money they make. Therefore, there is very little incentive to build buildings for the middle and lower end of the market, despite high demand.This means that those who can only afford a reasonably priced apartments are going to compete for an ever-shrinking pool of affordable apartments.

The political economy also has something to do with this. Starting in the late 80’s we started shipping our factories and the good jobs, that went with them overseas. This created a generation or two of unemployed or discouraged workers not counted in the widely touted “miracle” monthly unemployment statistics. We have also created a large group of underemployed workers who can’t support a family on clerking and burger flipping even when they hold down 2 jobs, usually with no benefits. The average wage has gone up roughly 2.7% a year while housing costs are inflating at least 6 to 10% a year. Many millennials are saddled with expensive college loans that they cannot get rid of, which makes it harder for them to pay rent. Too many millennials are relegated to their childhood bedrooms or if fortunate their parents’ basements to live out their debt servitude.

Of course, the State and the City of Los Angeles are always coming up with good ideas to make the unaffordable state of single-family housingeven more expensive. Like Cool Roofs that reflect solar energy back into space when sunlight hits these roofing tiles. This little scheme will add about 20% more to the cost of a roof. Not to be outdone by L.A. the State just mandated solar panels on all new house which will add another, at a minimum $20,000 to the cost of a single-family house. Don’t forget the mandatory water rationing or big fines starting in 2020, see Senate Bill-606 which Gov. Brown recently signed.

However, what is most disturbing, is the absolute megalodon sized case of Cognitive Dissonance our rulers in the State and City are showing when they promote a build baby, build at any cost strategy. Have you noticed Gov. Brown? Have you noticed Mayor Garcetti, City Council and County Supervisors that we are running out of essential services? Maybe they don’t read the papers? Due to record heat, we are experiencing now California’s creaking and dilapidated electrical system is experiencing way too many disruptions of service due to high (who could’ve foreseen?) demand. Instead of fixing our aging electrical grid Pacific Gas and Electric (PG&E) said they will just cut customers off to reduce the danger of wildfires, rather than repair their electrical power lines. Cal Fire, the state's fire management agency, said electric equipment owned by PG&E caused 12 wildfires that killed 18 people and burned hundreds of square miles in the fall of 2017.

Recently PG&E said they may have to go bankrupt rather than deal with this liability. In the winter due to the problems at Aliso Canyon our infamously leaking gas storage facility, we may not have enough natural gas to heat all our homes. SB-606 (the water usage bill) critics suggest that we will not be able to shower or do laundry on the same day due to mandatory restrictions on water use drought or no drought. Most people will heartily agree that we under-policed due to the level of crime we are experiencing.

Much of what I have just mentioned are precursors to a collapse in our City. Crumbling infrastructure, our historic amount of debt being used to maintain the un-maintainable lifestyle on personal, city, county and state levels. Chronic underemployment and unemployment lack of adequate police protection, high crime rates especially burglaries and car break-ins. Lack of affordable housing, the diminishment of our public institutions, from courts to schools, a pension system running on empty and the capture of public power by seemingly unaccountable public servants are all visible signs that the unsustainable will ultimately not be sustained.

(Eliot Cohen works as a Financial Advisor in LA He has been part of the Neighborhood Council System for 8 years. His current position is Planning and Land Use – Chair of his local Council.)

-cw