The median price of a home in California of $863,000 is more than double the $417,000 median home price in the U.S. As a result, median family income of $96,000 in California is 38% below that necessary to qualify for the purchase of a median-priced home in the state. In sharp contrast, median income in the U.S. of $81,0000 is 9% above that needed to qualify for purchasing a median-priced home in the nation.
During the 2020 to 2024 period, the most recent Bureau of the Census population report indicates that California lost 1.5 million people in net domestic migration (number of people moving into the state minus those moving out). That’s roughly the population of San Diego. Research conducted at Chapman University suggests that this outflight of California is due to its relatively high state and local tax burden and its high housing prices.
Although lawmakers in Sacramento appear to ignore the state’s tax burden in causing the state’s diaspora, they seem to relish the opportunity to get their bureaucratic hands on the housing market. Through its Regional Housing Allocation Need (RHNA) process, Sacramento intends to force the issue rather than rely on market forces. It’s like the apparatchiks in the former Soviet Union and former Communist Bloc of Eastern Europe have taken hold of state government with an attitude that they can do the job better than private markets. Anyone who has visited cities in Eastern Europe can see evidence of the apparatchik’s hand in subverting market forces. Just look out at the ugly hulking, low-cost, concrete-paneled multi-storied apartment buildings that dominate the urban landscape.
One need not travel that far to observe the impact of bureaucratic meddling. The public housing projects built in many U.S. cities during the 1950s are a notorious example of how supposedly visionary governmental policies led to disastrous urban decay. A more recent example of the government’s failure in dealing with a housing crisis is California’s spending of $24 billion since 2019 to house the homeless. That comes out to an average expenditure of $160,000 for each of the estimated 150,000 homeless people in California in 2019. Since then, homelessness is estimated to have increased by another 30,000.
Now, ignoring the abject failure of bureaucratic meddling in housing markets, California’s Department of Housing and Community Development (HCD) is forcing municipalities in California to comply with its edicts for zoning residential housing. HCD has determined that the Southern California Association of Governments, which includes six Southern California counties with a population of around 19 million people, needs to plan for a projected need of 504,970 housing units and for an existing housing need of 836,857 units for a total of 1,341,827 units. This allocation was based on the California population growing every year. However, since the population of California is lower today compared to 2019-20 when the forecast was made, requests were made to revise the allocation. HCD refused to make any revisions.
As for the existing housing need, SCAG decided to assign 50% of the regional existing need based on the proportion of the population that lives in High-Quality Transit Areas (HQTAs). HQTAs “are areas within a half mile of transit stations and corridors with at least a 15-minute headway during peak hours for bus service”. The projected number and location of HQTAs depend on currently available information. Consequently, the higher the proportion of people living in HQTAs in a particular jurisdiction, the higher the RHNA allocation to that jurisdiction.
The second tranche of 50% of the regional existing need, as defined by HCD, is based on the proportion of jobs that can be accessed within a 30-minute car commute. For a particular jurisdiction, the higher the proportion of jobs within easy access to the region’s jobs, the higher the RHNA allocation to that jurisdiction. An adjustment is made here for disadvantaged communities (DACs). If the existing need is higher than the household growth between 2020 and 2045, the allocation will be only the household growth. The difference is the residual. The residuals are computed for all DACs and then distributed proportionately to all other jurisdictions. This infuriated many cities that received the additional allocation because they had to shoulder additional zoning of housing units that they believed should have been zoned by other cities.
But that’s not the end of bureaucratic overreach. A social equity adjustment is also tacked on to HCD mandates. This is meant to determine the type of housing units to be zoned, above or below market rate. For that purpose, four income categories were created depending on the percent of median income in a jurisdiction out of the median income of the county. The social equity adjustment includes a fixed percentage plus an Affirmatively Furthering Fair Housing (AFFH) adjustment. Jurisdictions that have a higher percentage of the population in very low or low categories will get a lower RHNA allocation of affordable housing units. And jurisdictions that have a higher percentage of the population in the above moderate category will get a higher RHNA allocation of affordable housing units.
Discontent about the RHNA allocation abounds. Early on, half of the cities in Orange County objected to the methodology used by SCAG to determine housing allocation. All appeals were rejected. The city of Irvine filed an appeal to reduce its allocation, citing several reasons, among them inaccurate population count in HQTAs and unfair redistribution of units from other jurisdictions. Being a charter city, the city of Huntington Beach sued the state of California over the housing mandate on the grounds that it is a charter city, and the state of California counter-sued the city. The state of California sued the city of Fullerton for not adopting a housing plan.
Clearly, RHNA is not just a plan devised to address the need for additional housing units. It also purports to address issues such as income levels, cost burden, jobs-housing imbalances, and racially integrated communities. But given its horrible track record in subverting private markets, a legitimate question to ask is whether HCD and SCAG are better qualified than the free market to determine the quantity and quality of housing units to be zoned and built in each city. Newport Beach Councilwoman Diane Dixon is quoted as saying, “A centralized planning agency, like Sacramento, in our opinion, cannot understand the different nuances between Newport Beach and Carlsbad … every city is different”.
Rather than using draconian HCD dictates that have fostered a war between Sacramento and our cities and have led to expensive taxpayer-funded litigation, there is a better way. One could start by asking home builders why housing is so expensive in California. We did, and the response is almost always the same, namely that the cost of conforming to building regulations makes California housing significantly more expensive than other states.
In a recent Chapman University Law Review article, “In the Name of the Environment Part III: CEQA, Housing and the Rule of Law,” the author Jennifer Hernandez writes, “This Study confirms that, in 2020 alone, California Environmental Quality Act (CEQA) lawsuits sought to block 48,000 approved housing units statewide – just under half of the state’s total housing production.” The law review article concludes, “CEQA’s statutory bias is to preserve the status quo, even when the status quo is causing ongoing harms to people, including hardworking families who never voted to abandon the California Dream of home ownership but have been priced out by the housing crisis.”
It’s hard to believe, but when CEQA was signed into law in 1970, the median-priced home in California of $23,100 was about the same as the $23,475 price in the nation. Since its enactment, as noted earlier, a median-priced home in California is now more than double that of the U.S. What has changed in California since 1970 is not the ability of home builders to respond to housing demand but to do so in a legal environment burdened by costly regulatory policies.
Sacramento’s solution to California’s housing crisis is to pile on more regulatory dictates on top of those that caused the crisis in the first place. A more rational and far less costly solution is to radically reform or eliminate CEQA requirements. Even Gavin Newsom recognizes CEQA’s roadblocks to building more housing. As a result of the tragic Southern California wildfires, Newsom recently signed an executive order that suspends permitting and review requirements under CEQA and said, “…victims who have lost their homes and businesses must be able to rebuild quickly and without roadblocks. The executive order I signed today will help cut permitting delays, an important step in allowing communities to recover faster and stronger.”
Newsom’s action begs the question, if CEQA creates roadblocks that should be suspended in times of crisis, why not suspend CEQA for all of California in response to its housing crisis? We bet our bottom dollar that doing so will unleash private housing market forces and restore the California Dream of owning a home.
James Doti is president emeritus and professor of economics at Chapman University. Raymond Sfeir is director of the A. Gary Anderson Center for Economic Research at Chapman University.