The state should spend counter-cyclically to tackle the affordable housing shortage and strengthen our construction workforce.
California’s housing crisis is a many-headed Hydra. It's simply too expensive for most of us to live here, but the root causes are tough to isolate. Even in recessions, rents are still too high for the poor and middle class, and that should terrify us: state policy practically ensures that every aspect the problem will only get worse when the volatile business cycle takes a downturn. California's economy continues to attract migrants and refugees during boom times, but because land and construction costs rise, the state is unable to build low-income housing for the people who need it most. During recessions, investment dries up, and so do construction jobs. It doesn't have to be this way.
In our estimation, it’s quite possible that California could make significant investments in housing and construction labor precisely when private interests back away--serving our neediest neighbors while building sustainable career paths for future generations.
Why does the problem keep getting worse?
Today, lasting relief from the housing crisis seems increasingly out of reach. On the one hand, we have suburban sprawl: when a restricted supply of housing in urban cores drives workers out to less expensive, far-flung areas, these suburbs are often spread out into adjacent “greenfield” land, where services such as reliable public transit can be prohibitively expensive or nonexistent. California's working class is increasingly reliant on cars to move them from impoverished areas that lack opportunity, to high-cost cities with consistent job growth. With automobiles accounting for 75% of carbon monoxide pollution nationwide, and San Francisco’s traffic recently ranked as the 5th worst in the world, our livelihoods and climate cannot sustain this pattern.
Moreover, urban growth in city cores is a much-needed but far from sufficient condition for remedying our housing problem: longstanding patterns of racism, and wealth inequality leave marginalized communities vulnerable to systemic inequality. Marginalized communities suffer from gentrification and displacement when market upswings reinvigorate private investment, yet during downturns, marginalized communities suffer from neglect, disinvestment, and segregation. When boom times return, landowners take most of the bounty largely without labor or improved living conditions for their tenants. If anything, they’re incentivized to evict them and collect more minimally earned profit by virtue of owning finite land. Our regressive property tax system—created by Proposition 13 and its progeny (Props. 218, 26 and 58)—largely prevent the state from redistributing rising land values and other gains into public goods like affordable housing. The rich get richer, the poor get poorer, and moreover, none but the luckiest gain any degree of financial security.
It may be easy to look at this systemic monstrosity and get discouraged at the prospect of ever fixing California’s housing crisis. But there may be a strategy that tries to address two seemingly intractable issues: affordable housing and construction labor.
The difficulties in building affordable housing should be familiar to our readers. The millions of cost-burdened renters with low and moderate incomes can't wait much longer, and the problem only seems to be getting worse. Over half of California’s renters pay more than 30% of their income in rent, the federally-recommended ceiling in rent payments, making them severely housing cost-burdened and depriving many Californians of savings.
For both long-time residents and newcomers that work long hours in the Bay Area’s service industries, current rent is simply unaffordable. The region’s major cities all have median rents well out of reach of their median incomes— even for six-figure households at $117,000 and everyone below is feeling a considerable housing squeeze. Combined with statewide restrictions on rent control, the absence of statewide right to eviction counsel, and dearth of Just Cause eviction protections in many cities, most of us are not just rent-burdened, but housing insecure as well. Not only are landlords empowered by the shortage to considerably raise rents, but many tenants are one rent-hike or legally-uncontested eviction notice away from leaving the Bay Area, every month. Because the Bay Area has seen booming job growth and lagging home construction for decades, these low and moderate income workers are at severe risk of displacement to the Central Valley and beyond. Public investment in affordable housing is absolutely paramount, and can provide the only forms of housing that ensure security for large portions of our working class population.
Below Market Rate (BMR) housing, however, is expensive to build. In fact it is almost, if not more, expensive than market-rate housing. According to a study by the Terner Center, a BMR unit costs only $13,000 less to build than a market rate unit. One affordable home costs $425,000 to build. Below market rate housing is cheaper to tenants because it is subsidized by the local, state and federal government with tax dollars and fees, not because of cheaper materials. If we’re serious about housing as many non-wealthy people as possible (and let’s be honest, practically anyone who isn’t rich needs help now), California needs the best affordable housing bang for its buck.
Construction costs are driven by five Ls: lots (a.k.a. land), labor, lumber, lending, and local regulation. Lending has gotten somewhat easier in recent years for developers, while local regulation—lengthy, discretionary approvals, and density limits banning all apartments in many areas—have been curtailed by state law, including SB35 in 2017.
Economic booms are when affordable housing is needed the most, but oftentimes land costs and construction costs can be rather obstructive.. Nonprofit developers housing have more trouble competing on lots (urban land) and lumber (material) costs as increased private housing but also office, industrial, infrastructure, and even renovation investment crowds out competitors. The General Accounting Office (GAO), in a study of low income housing tax credit project costs, examined a stimulus program that offered grants for affordable housing through the American Recovery and Reinvestment Act. The study found that for affordable housing projects that used the program between 2011-2012, median per-unit costs were 6% lower.
But as economic recovery begets economic expansion, it becomes incredibly expensive for BMR developers to build the same number of units—not very cost effective for public subsidies. BMR developers would be better able to maximize those scarce and important public dollars during an economic downturn.
It’s time to consider a countercyclical funding strategy for affordable housing.
Labor costs rise during economic expansions as the construction workforce slowly grows. For the construction trades, higher-rent uses like office and private high-rise projects can be preferable to contractors over BMR projects. Additionally, according to a recent study from BuildZoom, renovations of existing homes require more labor, resulting in higher prices. Given the lower-density zoning in many California cities, renovation projects that raise prices on older housing also competes over scarce laborers with new construction.
This brings us to the second, related issue affecting California’s housing crisis: a construction workforce shortage. It’s not enough to have lots, lumber, lending and approval under local regulations—laborers must pour foundations, swing hammers, and install plumbing.
There is currently a shortage of trained construction labor statewide, but acutely affecting the Bay Area. In the short-term, that shortage means that commercial, office and high-rise projects will outbid BMR housing developments for labor. In the long-term, even with game-changing reforms brewing in the state legislature, property taxes from Evolve CA’s split-roll ballot measure, and injections of massive subsidies from to nonprofit affordable housing developers, affordable housing production will still be limited by the pool of workers ready to build it.
Some of the biggest barriers to expansion of the construction labor workforce are wages, workplace safety, and employment insecurity. Low pay and subpar safety standards remain critical problems, which lawmakers and labor unions can address together through prevailing wage requirements, Project Labor Agreements, and stronger safety oversight. Those could take up their own lengthy proposals, but job security can specifically be addressed through well-designed countercyclical policies.
The volatility of the construction industry is brutal on both the wallet and the brain. Financial security and mental health become increasingly tenuous for workers when economic downturns wreak havoc on the entire sector.
California’s highly cyclical housing market (and economy writ large) means that laborers are stretched thin during boom times, but end up without any projects for months at a time during a bust. Long periods of unemployment impoverish workers, encouraging them to look for work in other states or leave the field altogether. Unless volatility is reduced, the ability of the construction labor force to expand to meet California’s housing needs will be structurally limited.
Pay It Forward
We can address these two issues: 1) high costs for affordable housing; and 2) construction labor volatility, with some good old fashioned Keynesian spending. Countercyclical investment in BMR housing during recessions and recoveries would help maximize public subsidies for affordable housing while buoying the construction labor force.
Naturally, California is limited in its ability to spend freely without its own currency. Cutting other essential services amid budget deficits is always a painful process that the state should always avoid.
Instead, California could create a “rainy day fund” for affordable housing, similar to the reserve funding currently used to cover impending budget deficits. Each year, California could tax and set aside money to be used in the event of recession. Upon a legally-defined trigger—say [X]% increase in construction unemployment and two quarters of declining building permits—all affordable housing projects applying for the Low Income Housing Tax Credit (LIHTC) program would become eligible for grants from the countercyclical fund.
This would enable shovel-ready projects to break ground right away. Otherwise, projects would have to wait months, even years to get permitted and start to receive grants. New projects could assemble land and entitlements during recession to build during recovery, maximizing public subsidies with lower costs.
Grants by themselves would be insufficient to cover the cost of a construction loan. Private debt may be necessary to fill gaps. So the California Housing Finance Agency should also be permitted to make loan guarantees for BMR projects to ensure that private lenders—notoriously flighty during downturns—have the confidence to lend.
Who pays for all of this? Ideally, those who are profiting from rising real estate values should pay it forward via a land value tax. (Don’t worry, we have plenty of op-eds in the queue extolling the virtues of this policy.) But absent significant changes to Prop. 13, such a tax is pie in the sky. Consider, however, that a small windfall tax on profits from home sales and a small tax on rental income could generate hundreds of millions a year for a counter-cyclical housing fund. Berkeley voters have already passed similar measures in recent years to fund affordable housing.
In an ideal world, none of this would be necessary, and the federal government would step in to backstop construction unemployment and invest in safe, affordable housing nationwide. But those of us who struggle with high housing costs and construction unemployment today cannot wait for Washington. We need Sacramento to step up.
Darrell Owens is the Co-Executive of East Bay For Everyone, a volunteer housing advocacy group.
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