A Beginner's Guide to the Bay Area Housing Crisis
Updated: Apr 28, 2020
Four out of 11 state propositions on the 2018 ballot referred to some form of housing issue, reinforcing the dire need to get home prices closer in line with the rest of the country. Prop 10- the rent control initiative that was arguably the most controversial of the 4- inspired opponents to raise over $76 million just to kill the measure. But rent control laws are only the tip of the iceberg when it comes to polarizing proposals, and it seems as if a host of issues will need to be addressed before effective policies can be implemented.
Most experts agree that the problem cannot be fixed without building significantly more housing. A June 2017 report from the Bay Area Building Association showed that, from 2011 until about 2017, local Bay area governments approved construction of 123,801 new housing units, while the region has created approximately 531,400 new jobs.
When it comes to building new homes, though, one of the biggest hurdles real estate developers have to overcome is community acceptance of a new project. The way they are approved and regulated is largely a reflection of the local population’s desire for new developments, and unfortunately, enthusiasm for additional residential buildings doesn’t keep pace with demand in the Bay area. LifeMoves, a nonprofit that provides homeless populations with transitional housing in San Mateo and Santa Clara counties, has found that, while building larger developments for their clientele is much more cost effective, it doesn’t seem to garner as much support from the community.
“There is a tension between economies of scale and neighborhood acceptance. Smaller facilities are more expensive (per unit) to develop and operate, but more readily accepted by the community,” according to Dr. Brian Greenberg, Vice President of Programs and Services at LifeMoves.
Localities have lots of say in whether or not a project gets “penciled”, and this is how opposition groups, such NIMBYs (Not In My Backyard activists) are able to delay or cancel a development’s construction. Property owners argue that they should have a bigger say than developers in what gets built in their neighborhood. But others argue that these property owners are just trying to protect their own investments at the expense of low to middle-income families who are getting priced out. Right now, it’s relatively easy to sue a developer in order to delay or halt construction for new housing. For example, while the 1970 California Environmental Quality Act (CEQA) was understandably meant to ensure buildings were sustainably designed and constructed, it also became a legal path that residents could take in order to object to a pending development. CEQA has undoubtedly ensured all buildings, affordable or not, protect residents and the environment from unhealthy effects, but some real estate firms say it has become a part of the toolkit that is oftentimes used to chip away at potentially new projects.
Due to the inherently local nature of housing markets, though, municipalities all over the country have unique authority over their own zoning and planning policies. While there are federal and state laws that cities and counties must abide by, they are still given a lot of freedom to regulate their own rules as they see fit. Besides, in a massive state like California, one-size-fits-all housing policies hardly work. So, with an extremely attractive economy, culture and geography, it is easy to see why tighter regulations would be put into place in the San Francisco Bay area. But at some point, increased restrictions and resistance to growth may backfire and could stifle the region’s economy. Legal challenges, drawn out approval processes and onerous regulation mean the cost of construction increases, in turn jacking up the costs of rents or home prices. One report cited in a Brookings Institute article estimated that relaxing these regulatory constraints in places like New York and Silicon Valley could increase GDP by 9.5%.
There’s more to a developer’s costs than NIMBY lawsuits and fragmented permitting processes though. An additional burden comes in the form of developer fees, which are costs that local planning departments charge to real estate firms when they want to build a new facility. This increases the cost of constructing homes, and again, if the price to build goes up, so does the rent that must be charged. Virtually all city governments charge these types of fees, but the Golden State makes it even pricier. Between 2008 and 2015, California’s average fees rose 2.5%, despite the national average decreasing by 1.2%. By 2015, California’s developer fees were nearly 3 times the national average, according to a University of California-Berkeley report.
Impact fees are a type of developer fee that’s designed to “fund” the infrastructure that will be needed as more people use public services (i.e, school fees to fund a potentially higher student population). In a national survey across over 30 different states’ localities, California’s average impact fees in 2015 for single-family homes were by far the highest ($23,455), with the second highest state, Maryland, averaging less than half ($11,486). Some housing experts point to Prop 13 as the catalyst for fee increases, as the 1978 state law capped property taxes, forcing counties to look to elsewhere for revenue sources.
A proposed change to Prop 13 just reached enough signatures to be put on the 2020 ballot, but thankfully, we don’t need to wait 2 more years to see new housing legislation. Last year, Governor Brown signed SB 35, which provides an option to sidestep city denials and fast track project approval in places that do not meet their share of housing needs . The new law, sponsored by State Senator Scott Wiener, applies to multifamily residential developments in urban areas, and since virtually none of California’s metro areas are meeting their affordable housing goals, the law would apply to the most affected districts. (Not surprisingly, there is fierce opposition to the bill’s passage, and some insightfully argue that mandating “prevailing wage” for laborers will just bump up the cost of construction anyway).
West Berkeley Investors was one of the first developers to seek approval for a project using SB 35. Local city officials denied a residential and retail project, but in March 2017, the real estate firm tried to bypass the city’s decision and get the space streamlined under the new law, although the project was denied again in September. These maneuvers by local governments and their constituents to block housing development are not new, nor unique, to California. Just take a look at Massachusetts. The New England state had to address this issue by putting Chapter 40B into place almost 5 decades ago. The law allows projects to override local rejection if less than 10% of the city’s housing stock is considered affordable.
Of course, local homeowners and governments are not to blame for this entire housing crisis. While municipality charges and project delays place significant burden on developers, hard costs-how much money is needed to build the physical infrastructure, excluding fees and overhead-is often twice the amount of soft costs (i.e, legal fees, consultants, etc.). Since hard costs include things like the rising price of steel or the skilled labor shortage, it’s pretty much entirely out of residents’ control. Lowering these types of costs may mean seeking out creative ways to build new homes, which could be in the realm of possibility for an innovation hub such as Silicon Valley.
Still, communities have a say in lots of other regards. According to Dr. Greenberg, “Every neighborhood needs to step up, and develop housing for homeless persons that live in that immediate vicinity." While housing the most vulnerable takes precedence, many residents feel that the same advice could apply to those making less than six figures.
"Proposition 10-Expands Local Governments' Authority to Enact Rent Control on Residential Property. Initiative Statute". Alex Padilla-California Secretary of State.
“San Francisco Bay Area Jobs-Housing Imbalance Grows”. Building Industry Association. June 2017. http://www.biabayarea.org/san-francisco-bay-area-jobs-housing-imbalance
Dr. Brian Greenberg, Vice President of Programs and Services, LifeMoves.
“Reforming Land Use Regulations”. Edward Glaeser. Brookings Institute. April 24, 2017. https://www.brookings.edu/research/reforming-land-use-regulations/
"Housing in the US is too Expensive, Too Cheap and Just Right. It depends on where you live.” Cecile Murray and Jenny Schuetz. June 21, 2018.
“How Land Use Regulations are Zoning Out Low-Income Families.” Richard V. Reeves and Dimitrios Halikias. August 16, 2016.
“It All Adds Up: The Cost of Development Fees in Seven California Cities”. Sarah Mawhorter, David Garcia, Hayley Raetz. Terner Center Housing for Innovation-University of California-Berkeley. March 2018. http://ternercenter.berkeley.edu/uploads/Development_Fees_Report_Final_2.pdf
“National Impact Fee Survey: 2015”. Duncan Associates. http://impactfees.com/publications%20pdf/2015_survey.pdf
“Making It Pencil: The Math Behind Housing Development”. Terner Center for Housing Innovation-University of California-Berkeley. May 22, 2018. http://ternercenter.berkeley.edu/uploads/Making_It_Pencil_Recording.mp4
“Change in California’s Prop. 13 makes 2020 ballot: Business would pay more”. Melody Gutierrez. San Francisco Chronicle. October 17, 2018.
“Santa Clara County Homeless 2017 Census & Survey: Comprehensive Report. Page 11. Applied Survey Research. https://www.sccgov.org/sites/osh/ContinuumofCare/ReportsandPublications/Documents/2017%20Santa%20Clara%20County%20Homeless%20Census%20and%20Survey%20Report.pdf