CommentsPLANNING WATCH-Each day there is more compelling evidence that Great Recession II is on its way, supplemented by parallel indicators that trickle-down economic gimmicks cannot keep the current housing bubble inflated for much longer.
The supply-side claim that simply building “more housing” will end the housing crisis is in free fall, soon to slam into a pile of deflated assets.
The “build more housing” mantra to keep the real estate bubble alive has become a regular ritual for the Los Angeles Times. For example, the paper's October 21 front-page housing story repeated a long list of supply-side rationalizations for handing out tax-free gifts to real estate investors:
- California State government must spur (by jettisoning zoning and environmental laws) the biggest wave of homebuilding in its history, constructing 3.5 million new houses by 2025.
- The State of California must impose its authority over local land use decisions.
- California Governor Newsom failed to support Senate Bill 50, and, therefore, the right of developers to build (unplanned) fourplex apartments in neighborhoods whose existing zoning only permits single-family residences.
- Governor Newsom failed to persuade tenant groups to withdraw their 2020 ballot initiative to establish stricter statewide rent control regulations.
- Sacramento must oppose efforts by local governments to block state-mandated increases in local zoning.
According to geographer Samuel Stein, author of the “Real Estate State,” the looming housing collapse is central to the approaching financial crisis: “The force behind these (financial) trends is the growing centrality of urban real estate to capital’s global growth strategy. . . Housing becomes a globally traded financial asset, creating the conditions for synchronized bubbles and crashes. Government, particularly at the municipal level, becomes increasingly obsessed with raising property values and redistributing wealth upward through land and rents.”
What Stein describes is exactly what is happening in Sacramento and LA’s City Hall. Upzoning (“to build more housing”) instantly increases commercial property values, which investors benefit from by flipping their properties or building expensive apartment complexes.
Evidence we are living through the terminal stages of a housing bubble. Anyone who tracks local, statewide, and nationwide home prices immediately realizes that we are in the midst of a housing bubble comparable to, or even greater than the one that led to 2008’s Great Recession. A decade later, in Los Angeles, the Case-Shiller Homes Price index is now higher than it was at its 2007 peak, immediately before home values plummeted 42 percent.
While past trends cannot precisely predict the next financial crisis, these indicators suggest what is likely to happen. And, based on the research of Aaron Glantz, in his new book “Homewreckers,” we can assume that large real estate enterprises are already figuring out how they can gain from the coming real estate bust, just as they got rich speculating in high end real estate during the boom.
Evidence for another imminent trough in the business cycle, similar to the Great Recession. On average capitalism produces a recession or depression every seven years in the United States, indicating that the current boom has defied the odds by lasting a decade. But, in addition to the repetitive business cycle, the economic website Wolf Street has identified seven other financial conditions that are accelerating the next economic collapse.
- Stock market bubble.
- Credit market bubble with $17 trillion in bonds producing negative yields.
- Commercial real estate bubble.
- IPO bubble, with billions in losses and no realistic chance for new companies to ever turn a profit.
- S. Treasury market offering record low returns of 1.9%.
- Declining business investment.
- Trade and tariff wars.
Evidence that the housing crisis is driven by a lack of affordable housing, not an overall lack of housing supply. According to Councilmember David Ryu’s recent Council Motion on the housing crisis, LA’s housing crisis results from a lack of affordable housing, not an overall lack of housing.
“In the last four years the City permitted 207 percent of the eight-year demand for Above-Moderate Income housing. Clearly the supply of housing is not the issue; it is the unit mix. The 207 percent (figure) contrasts with a dismal 20 percent supply of our desperately needed Very Low and Low Income housing, which is all covenanted affordable housing built through housing incentives and requirements.”
I would also add two friendly amendments to his argument.
First, there is no hard evidence that the permitted low-income units actually exist. Many issued building permits do not result in construction, and the City does not physically inspect built low-income units to verify their affordable rents.
Second, Los Angeles has more than enough zoned capacity to accommodate enormous amounts of new by-right housing. Unlike LA’s rickety infrastructure, zoning is not a barrier to housing construction. But since Los Angeles largely relies on private investors to build housing, their need for profits ensures that new housing is priced far above the income levels of those living on the streets, in cars, or the couches of friends and relatives.
This is why, following the logic of Councilmember Ryu’s motion, letting real estate investors evade planning, zoning, and environmental laws in the hopes these gifts will encourage them to “build more housing” makes homelessness, worse, not better.
Los Angeles Magazine explains why. The Bureau of the Census reports that Los Angeles city has 100,000 vacant homes, compared to 36,000 homeless people on any given day. The magazine notes, “At about four percent, the overall vacancy rate in Los Angeles is actually quite low, but as luxury development has exploded in areas like the downtown, the city has gained an oversupply of high-end units. Often seen as an “investment properties” for developers, who have little financial incentive to rent them at market rate, these vacant condos and apartments remain unaffordable to L.A.’s most vulnerable populations.”
What LA Magazine does not report is that reducing luxury apartment rents to market rates does not meet the housing needs for those who have been priced out of existing housing. This large group includes the 600,000 Angelenos lining up for Section 8 subsidized housing because they cannot afford to rent a typical Los Angeles two-bedroom apartment, which now costs $2,700 per month.
Open questions. If supply-side approaches to the housing crisis, largely using State and local government to incentivize the private sector’s production of unnecessary market housing, are nothing but a short-term ruse to feather the nest of real estate investors, are there alternatives? The answer is a resounding yes:
1) Restricting rent increases, evictions, and demolitions will help preserve the existing stock of affordable housing, whether or not LA’s Rent Stabilization Ordinance protects these units.
2) Eliminating top-down incentives that allow real estate investors to evade zoning and environmental laws, especially the misnamed Transit Oriented Communities Guidelines (TOC) and the Purple Line “Transit Neighborhood Plan” (TNP), will substantially help resolve LA’s housing crisis.
3) Restoring former HUD public and affordable housing programs, dormant since the Reagan and Clinton administration, will be costly, but much less than the $1.2 trillion per year that the U.S. government spends on its military. Many of the Democratic presidential candidates, especially Senator Bernie Sanders, have offered detailed housing proposals, but most voters realize that the gaps between lofty campaign promises and adopted Federal legislation is enormous.
When the real estate bubble pops, the need for initiatives like these will be even greater, but there is no need to wait for this to happen. The public sector can and should act now.
(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 of Los Angeles (UN4LA) and welcomes comments and corrections at [email protected]. Selected previous columns are available at the CityWatch archives and the Plan-it Los Angeles blog.
