Homelessness & Housing Policy in the Golden State
How to Restore the California Dream with Lawrence J. McQuillan
Solve this mystery: Why does it cost three times as much to rent a U-Haul going from San Francisco to Austin than going in the other direction?
Answer: When all the movers are heading one direction (SF to Austin), you have to pay somebody to drive them back.
Lawrence McQuillan, a Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute, connects the dots in his new report on California’s dysfunctional housing policy. How to Restore the California Dreamexplains how the “Golden State” became the poster child for high housing costs and, relatedly, homelessness.
Through a combination of regulations, zoning taxes, and higher labor costs associated with union requirements, we’ve pushed thousands of low and middle-income residents to other states (or in the extremes, to the streets). Lawrence finds that California would need another 4 million additional housing units just to stabilize prices, yet this is impossible given the amount of red tape.
As lower income people look for cheaper and cheaper housing, they crowd out those already living on the edge. Thus the homelessness has become a state of emergency.
Last time I had Lawrence on my show, we discussed California’s pension crisis. This Sunday, we’ll discuss housing and homelessness, and how a proposed Constitutional amendment could resolve the affordability crisis.
Finally, I ask Lawrence to define a “housing shortage,” which I argue cannot exist by definition. Are exorbitant housing costs simply the price we pay for living the California Dream?
Related Shows:
- Jerry Brown’s Time to Shine? Lawrence McQuillan on Pension Reform
- The Rent Control Bomb with Christian Britschgi, June 10, 2019
- Randal O’Toole on Rising Rents
- Get Paid More Than You’re Worth — What A Deal!
- California Dreamin’ — About Sane Government
Links
- Independent Institute
- Lawrence McQuillan (@Econ_Doc) / Twitter
- How to Restore the California Dream: Independent Institute
- A Proposed California Constitutional Amendment to Resolve the Housing Affordability Crisis | Lawrence J. McQuillan
- The Oakland-based Independent Institute gives its annual “California Golden Fleece Awards” for our beautiful states ugliest policies.
Homelessness & Housing Policy in the Golden State
Bob Zadek: Welcome to the Bob Zadek Show, the longest running live libertarian talk radio show on all of radio.
We are this Sunday, and always, the show of ideas, never ever ever once the show of attitude. Thank you so much for listening this Sunday morning. This morning’s show we are going to examine probably the second most important issue in California. We got elbowed out by Gavin Newsom’s edict.
We are going to discuss the issue of the “housing crisis” in California. Is there a shortage of housing? What does that even mean? If there is a shortage of housing in California, how did it happen? Is it inevitable that we’re going to run out of places for people to live or is it artificial and government induced?
To examine this issue I’m happy to welcome back to the show Larry McQuillan. Larry has studied this issue long and hard and has recently written about it.
He will share the results of his examination this morning. Larry is a Senior Fellow and Director of the Center for Entrepreneurial Innovation at the Independent Institute, a wonderful think tank located in Northern California. It does magnificent work. It has a wonderful cadre of very hardworking knowledgeable scholars, economists and philosophers. I commend both the writings of the, of the Independent Institute and of Larry specifically.
Larry has a special distinction which she will share with us. He has invented a very valuable tool for evaluating government. He has invented the Golden Fleece Award. We will start with that. Larry, welcome to the show this morning.
Larry McQuillan: Good morning Bob. It’s great to be with you again.
The Golden Fleece Awards
Bob Zadek: Larry, before we get into the business at hand tell us about your California Golden Fleece awards.
Larry McQuillan: Well, we’ve been doing this for several years now and we spotlight government waste, fraud, and abuse both at the state and local level in California. So as you can imagine, it’s a very target rich environment. The intent of the award is to bring to bear a special focus on an issue that is particularly oppressive to Californians across the political spectrum. Housing, as you mentioned, is a perfect example of that. We want to give the public a deeper understanding and more information than they would normally get from the media in order to hold local and state government officials accountable.
Bob Zadek: You perform a wonderful service in doing so. Senator Coburn who had a similar process in the Senate –– he was, I believe, from Oklahoma. That was very effective and it was very readable and very interesting. It helps interested taxpayers’ and interested citizens really get an insight into their government in a way that’s not otherwise available.
Larry McQuillan: It’s a transparency project. We want to illustrate the effect of policies on California and arm people with a lot more information so that they can approach their public officials with more facts and more understanding of what’s really going on and hopefully make some positive change in policy.
Bob Zadek: My only criticism with the structure of the Golden Fleece award is instead of every quarter you should do it everyday.
California’s Housing Crisis: An Overview
Bob Zadek: We are going to be discussing an issue together with the related issue of homelessness, where California is first in the country in producing homeless people. We’re going to discuss the subject of the alleged lack of housing in California. The study of housing in California is a wonderful concept to study because there’s a rich history. It goes back maybe as far back as California’s statehood. When California became a state in the 1850s and through an including up to 10 years ago or less a magnet, not for the country, but for the world, of people to move here.
California loves to have that image. It just wasn’t able for one reason or another, to accommodate the results of its own success. It was able to instill in the minds of citizens of the world, let alone the country, how desirable California was. Single family houses, orange trees in the backyard, the surf, and all that goes with this California lifestyle. So California had the world’s most effective real estate advertising campaign. It was profoundly successful, and then was in one way or another victimized by its own success. Now, before we get into the details, let’s do some big picture stuff. Help our listeners understand exactly what this crisis is: What’s wrong with housing?
Larry McQuillan: It goes back to around the mid-1980s, when both the state government and local government started to erect more and more artificial restrictions to housing development in California. I would say after world war two up until through the 1950s and 1960s, the housing market worked very well in California. And as you said we were victims of our own success in a way because we had the sun and the surf, the California lifestyle, booming economies both in entertainment and aerospace and eventually Silicon Valley.
People from not only around the United States but around the world want to move here. The housing market worked well for about the first 30 years of that or so where it was flexible and accommodated new construction and saw a lot of big track housing going in, especially around the Bay area in places. There was an allowance of the supply to expand to meet growing demand. Over time, as I mentioned in the mid 1980s, we saw all of these new impediments to new housing passed by state and local governments.
Housing entrepreneurs entering California and investing the capital that was needed to meet the growing demand and to keep housing prices either stable or in some cases actually declining for a while. Now we’re faced with housing costs of about two and a half times the national average because we’re not building to meet our growing success in California in terms of drawing new people to stay.
Bob Zadek: Now, Larry, let’s unpack a little bit and do a little economics. You mentioned artificial limitations on the market. Of course, any governmental measures are artificial if by artificial you mean interfering with the natural supply and demand in the marketplace. Any regulation of the free market is artificial because the artificial only has one meaning, which is outside of the free market. The second comment is that I am always suspicious of, which is “works,” because there has to be an underlying standard that the speaker has in mind when saying something works or doesn’t work. It cannot work or not work in the abstract. It has to be according to criteria. So when you say the market was working at one time for housing and then it stopped working, what does working mean in that context?
Larry McQuillan: Well, to an economist, that would mean that the market allows for entrepreneurs to invest new capital into a market to build housing up until the point where you’re no longer receiving what economists called normal rates of return on that capital investment. So therefore, the additional investment would stop at that point or slow down. Working as an economist means basically that capital can flow from one use to another freely until the point when entrepreneurs are making normal rates of return. Beyond that point, they would make below normal rates and the capital then would move on to other industries or other sectors of the economy. That’s how an economist would look at it.
These impediments that are imposed by the government artificially restricting the movement of capital and the investment in housing in California. So to an economist schooled in market economics, as I am, that would be seen as an artificial impediment to a market working efficiently and correctly. Therefore you get what we’ve seen in California, which is housing and rental prices that are sky high and continue to increase.
Bob Zadek: If prices are sky high, there’s no indication that the demand for sky high housing prices is diminished. In fact, housing prices are high and are still being built only because there is a demand. So isn’t there still a healthy demand for expensive housing and aren’t entrepreneurs still rewarded for building expensive housing? So isn’t the supply and demand still working, i.e. housing is being built because the demand is there? So is it fair to say the problem is not the supply and demand for housing, but the result of that supply and demand is forcing up the price of housing so certain types of housing is not being built.
Larry McQuillan: Partially. The Bay Area obviously compared to other labor markets in the economy is very productive and people that work here command very high salaries. And as a result people who do move here, not only from around the country but also outside the country to a large extent, especially in Silicon Valley, are making wages far in excess of anything that they could get in their home country or their home area. It is much higher than what we see in other parts of the United States. So that obviously that income is helping to drive the prices higher for housing in California. Some housing is being built as you mentioned, and it does tend to be at the higher price of the spectrum of housing prices. So it doesn’t mean nothing gets built, but we’re seeing a very select elite group of people who are able to afford the housing here and things at the lower runs of the housing ladder aren’t being built that could be built due to the restrictions on the supply of new capital coming into the housing market.
Bob Zadek: Now we’re getting somewhere. Now the question is, just following this thread a little bit further. Is there a housing crisis in Beverly Hills? Is there a housing crisis in Palm Springs? After all, housing in those two markets and many others are very expensive. Is there a housing crisis on Park Avenue condos?
Well, of course not, but for sure there is a shortage of low-income housing. If there’s no housing crisis in Beverly Hills, if there is no housing crisis on Rodeo or Park Avenue or any of the other high cost of housing areas around the country, and there are many, then why is it a crisis if there’s no cheaper housing in San Francisco? Isn’t it just becoming one giant Beverly Hills?
Larry McQuillan: Well, I would phrase that a little differently and say that people in Palm Springs and Beverly Hills can afford the costs of government regulations. It’s not that it’s not having an impact. And in fact, I think we would see more housing built in those areas as well without the restriction people of that income range can afford to pay for all the restrictions that are imposed. Whereas in other parts of the state where people don’t have that kind of wealth or don’t make that kind of salaries, and can’t afford it, and therefore the housing doesn’t get built.
Sifting Through the “Crisis”
Bob Zadek: In the Bay Area, if people can’t afford to live there, then they don’t live there. People don’t have an inherent birthright to live in the most valuable real estate on earth. People have a right perhaps or at least a reasonable expectation that they want to live comfortably. But it doesn’t mean the most expensive real estate on earth. What’s happening in California or in the Bay area is that the Bay Area has this tradition of having a wonderful mix in its population of lower income people, a mix in ethnicity, a mix in people on the various rungs of the wage scale.
It has that concept of itself and it is in effect legislating that concept away. So San Francisco either has to be willing to accept being Beverly Hills North in terms of housing prices or it has to adjust the policies that you will explain at the second half of the show. So it is only a crisis if we say, “But we like it the old ways. We like it the way it was in the summer of ‘68. We like it to be cheap and yet they legislate to make sure it’s not cheap.”
So is the crisis nothing other than a lifestyle crisis rather than an economic or a housing quantity crisis issue?
Larry McQuillan: I would agree with you that nobody has a right to live wherever they want to live. But I would also add to that is that nobody has a right to use government force to exclude other people from having a roof over their head if a housing entrepreneur is willing to build a home for someone and someone wants it or needs it, I don’t think anyone has the right to use government to stand between that entrepreneur who is willing to build a home and the person who needs a home. To me that’s immoral. That’s what these rules and regulations do. They impose a barrier that no longer allows that link between the entrepreneur and the customer to take place and allow for housing to be built that’s needed.
Bob Zadek: You’ve gotten to the heart of the matter by pointing that out. The free market acting without artificial government interference would satisfy that need. It knows how to do it. The alleged crisis, which is artificial because it’s governmentally induced, prevents the free market from satisfying the need for low income housing. So this is a government induced crisis, not a crisis caused by the free market.
Government Suppression of Housing
Bob Zadek: Help us understand what the tools which the government in California uses to suppress the supply of housing.
Larry McQuillan: We itemized about eight different rules and regulations that have the biggest impact in terms of suppressing investment in housing in California. I’ll just tick off some of the major ones. Obviously zoning and other land use restrictions is one of the most important, especially for multi-family housing development or what we would call apartments or condos or duplexes, that sort of thing. Many communities in California prevent any construction of apartment buildings and have done so for up to a decade. The only that is zoned is single-family homes. That’s the only thing you can build, but you can’t build multi-family homes.
Bob Zadek: Zoning is to me one of the hardest issues for me to form my own opinions about and here’s why. I find myself parting company uncomfortably with other libertarians on this issue. I start with a very simple question. What’s wrong with my wanting, through local government, to control the character of the environment, the town, and the street on which I live? That’s quite natural. I think everybody would like to have some control of that. Some people can and some people can’t. I want to protect the value of my property and zoning is either hurting somebody else or helping me.
Larry McQuillan: Let me try to convince you. There’s nothing wrong with trying to maintain the character of your neighborhood. The question is how you do it. There’s a right way to do it and in my opinion a wrong way to do it.
The wrong way to do it is government zoning restrictions.
The right way to do it is through private neighborhood associations or community associations or homeowners associations where you form a contract between neighbors and you say, this is now a private community. We’ve set up this charter or contract amongst the people who live in this community. And these are the characteristics we want to maintain in this community. Absolutely nothing wrong with that. What it does allow them is for outsiders to buy the right into the community. So if I was a developer and said I wanted to build some additional housing in your homeowners association community, I could go to the homeowners association members and say, I will give you $2,000 each or whatever the amount is to build additional homes.
Today everybody has an incentive to say no. Nobody has an incentive to say yes. So with the private neighborhood association, you can at least create this incentive system where you could buy your right into a community by offering the members of the private association a payment in order to build today.
People now have no incentive to ever vote “yes” for new housing. There’s no reason or new thing in their community cause all they see is negatives.
All they see is downsides, more traffic, more people. There’s no benefit to them.
Some of the downsides are imaginary. I think some are real, but whatever they are — real or imagined — people just see the negative impacts of development because there’s no incentive for them to say yes. So I think moving towards private neighborhood associations would be the way to go because neighborhoods and local communities control the character of their neighborhood. It would all be done through contract, it would be enforceable. But you would maintain the opportunities to change it somewhat voluntarily by buying you’re right into the neighborhood. So my opinion would be the right way to go. Private homeowners associations are very popular around the country.
Building Codes: Mandating Perfection
Bob Zadek: So by zoning, you decrease artificially decreased opportunities to increase supply. The cost goes up. So that’s quite clear. That’s how it all works. What are some other statutory or regulatory events that increase artificially the cost of housing?
Larry McQuillan: Building codes have decimated single-room occupancy apartment buildings. These are very low-cost housing for low-income people. Homeless or previously homeless people used to be very common in cities. Oftentimes there were older hotels that were converted into what’s called SRO’s, but now building codes have really almost made it impossible to operate one or build one anymore because building codes mandate perfection in many cases. You have to have a kitchen in every unit. You have to have a bathroom in every unit. You have to have what’s considered, you know, proper ventilation or proper rules about how many people can live in a unit. Density restrictions, how many people can live on a particular lot, etc.
And all of these rules and regs have, have worked to suppress and basically eliminate housing at the very lowest rungs at the housing ladder. Now we’re seeing even building codes that are targeting some of the highest levels of housing in California with solar mandates. Now we have residential solar mandates in California where if you build a new home and it has to have solar panels on the roof, that’s going to add anything between 10 to $40,000 a unit. These building codes, which appear helpful, end up doing the opposite in terms of eliminating housing.
Bob Zadek: The fact that there are windows, the fact that there is heat. The fact that it is protection from the elements, the fact that it is infinitely better than the alternative below it. Of course it has more frills than what’s below it and less frills than what’s above it.
Larry McQuillan: Another one is that the California Environmental Quality Act is used time and time again to either delay or stop housing development projects by demanding these lengthy detailed environmental impact reviews that are usually challenged then in court. And these court costs can go on and on to the point where developers just back out of developing the project and they’ll build in Arizona or Texas or Nevada where they can get things done quickly.
Any kind of CEQA litigation on average increases the delay of a housing project in California by about two and a half years. Most developers and builders don’t have that kind of time.
Bob Zadek: Larry highlights an issue where in fact there is a California only verb. It’s a verb in the English language but only in California where unions will approach a prospective building project and threaten that they will CEQA you, which means bring an environmental quality lawsuit knowing that’s going to add to the cost tremendously and the delay unless you accommodate our needs of union labor.
That’s how sinister it all has become. Anybody in California can bring a lawsuit under CEQA even if unaffected, so that’s where the club comes about.
NIMBYISM: Not in My Backyard
Bob Zadek: All of these issues add profoundly to the cost of housing. It’s not greedy builders, it’s not exploitation, it’s that we the builders have no choice. We have to charge more than the cost of construction to make a profit to be induced to do so. So take the costs, add our regular profit, and that’s why housing is so expensive. Now you also mentioned, Larry, in your study, NIMBY-ism. You and I will have a short conversation about whether that is a problem or whether NIMBY-ISM is a right. Explain NIMBY-ism to our friends.
Larry McQuillan: It stands for “not in my backyard” and over time it’s become very organized in California where you have groups that are constantly active in challenging housing developments in California, particularly in local communities. They’ll say, “Perhaps you can build here, but it has to look like this, X, Y, and Z, And if it doesn’t look like this we’re not going to allow it.”
Usually that’s through building permits. So if it is allowed to be built at all, it’s going to be very stack and pack housing near transit hubs. That’s usually what’s permitted otherwise.
That plays into the climate change green vision of the NIMBYs as well. So it’s very limited housing and to very specific areas and it doesn’t allow for the expansion of housing at the rate that’s necessary to bring prices down across the spectrum.
Expensive housing is being built for wealthy or well off people, but at the medium and lower ends of the housing ladder, things aren’t being built.
Just to give you a perspective, despite all the hand wringing by politicians and all the pronouncements to fix this problem, California issued fewer residential building permits in 2019 than in 2018.
So we are actually headed in the wrong direction. If by measuring this we measure it by building permits issued, and even issued building permits doesn’t mean the building will be built.
Oftentimes they decide not to use the permit and not to go forward with the project because of all of these other costs that get piled on or all of these delays as we mentioned with environmental regulations. A lot of that is driven by NIMBYs at the local level that are using their political persuasion and votes and campaign contributions to limit housing in their communities.
Bob Zadek: And nimbyism is, again, an area that I am less disturbed by than other people in this regard. I say “Not in my backyard” — Well darn it, I would like to control what is built in my proverbial backyard. I would be very unhappy if I couldn’t control it. And I’d be very unhappy if my neighbor or somebody nearby could do something with their property that makes the quality of my life lower.
We have had in the principle of common law, “nuisance,” where in fact I can prevent somebody from performing an activity next door like smoke blowing into my property. I have always been given, under the common law, the right to stop it.
So to me it’s nothing other than an extension of the law of nuisance, which is accepted by all of us as an appropriate continental law.
NIMBYism to me is directly associated with it –perhaps an extension to the common law of nuisance. But I’m not worked up over that. I am worked up over the hypocrisy of those who say not in my backyard, but yet do something about the absence of housing. I don’t say the second, but I kind of feel strongly about the first because it affects me personally in an adverse way.
I have paid what I paid for my housing because I want what it offers and I don’t want people to take it away. So that to me is an issue that can be discussed further. The hypocrisy is unacceptable, but merely wanting to preserve the quality of your life. If it’s not directly harming somebody else, it may be indirectly by increasing the cost of housing. But that’s what the market is.
Larry McQuillan: Well, again, as we talked about earlier, there’s a right way and a wrong way to do it. The right way is through contracts between homeowners to preserve the character and quality of their neighborhood. I don’t have any problem with that, but oftentimes with zoning people who don’t even live in that neighborhood control how it’s used. I don’t understand why people in the sunset district in San Francisco, which is way out by the Pacific Ocean, should have any say about what goes on in the Marina District, which is way on the other side of the city.
With private homeowners associations, the people who are impacted and share the same common interests would make the decisions about the character of their neighborhood rather than people who are not even in their neighborhood and probably pass through it maybe twice a year and really don’t even care about the neighborhood.
Is There Even A Housing Shortage?
Bob Zadek: Is there a housing shortage in California and in other metropolitan areas? And if the answer is yes, what does that mean?
Larry McQuillan: Well, to get back to what I was talking about very early on in the show, an economist would look at a shortage in terms of capital flows. Is there a capital that entrepreneurs want to invest in a market to build good X, whatever that good is, and supply more of it to the market but that’s being prevented from doing so by the restrictions that we talked about.
That is how an economist would look at a shortage and say there’s a lot of entrepreneurs lining up to produce more housing here and are willing to invest more capital. But because of the delays and the costs and the restrictions, it can’t be done. And so they’re doing it in Arizona or Nevada or Texas, which are booming right now in terms of housing construction. So that would be how an economist would look at it. We really don’t know how many kids living in the basement of their parents’ home would want an apartment if the apartment prices were a lot lower.
I mean, we’re just making a guess in terms of what that would be. I’m sure some of them would move out and have their own apartment if apartment costs were lower. But how many? I don’t know. Nobody knows.
How many people would start a new household if the housing prices were a lot lower so people would move out of the granny flat in their parents’ back backyard and buy their own home? Again, that’s really just speculation. So what I would look at is not prices, it would be at capital. Does more capital want to come into that market? Clearly in California, entrepreneurs would trip over each other to get in here if it was profitable to do so. And all the restrictions eliminate the profitability and therefore they go elsewhere to build.
Solutions to Increase the Supply of Housing
Bob Zadek: What are some of the headlines of the easy low hanging fruit solutions? We have about a minute left that the government could easily adopt to increase the supply of housing.
Larry McQuillan: Abolish CEQA or radically modify it. It doesn’t serve it’s original intent of protecting the environment anymore. And for zoning, I would favor the private neighborhood association model. None of this would be easy though because there are many groups that would fight against this.Senator Scott Wiener from San Francisco has introduced SB 50 which was intended to kind of take away some of the regulatory authority from local governments and allow for more construction to be built. And that was struck down three times in a row. The quickest way to get out of this regulatory thicket that we’re in is a ballot initiative, a state constitutional amendment that would re-establish private property rights to housing development in California would allow residential housing to be built.
Originally published at http://www.bobzadek.com on March 16, 2020.
