The Housing Treadmill

Amid a shortage of new housing, California liberalizes its zoning rules—even as it adds other restrictions on building.

Recent years have witnessed a transformation in California politics. Scrambling to be seen as leaders on housing policy, state lawmakers have taken big steps to wrest control of land-use regulation from local governments. They gave California homeowners the right to add two accessory dwelling units (ADUs)—smaller homes or apartments on the same lot as a traditional single-family home—or to split their lot and build duplexes. Starting this July, properties that cities zoned exclusively for commercial or parking uses will be open for development of four- or five-story apartment buildings. Local minimum-parking requirements have been preempted, freeing up space for additional housing options. Developers have also been relieved of subjective zoning standards, discretionary conditions of approval that reduce project density, and surprise changes in local rules. Developers who agree to set aside some units in a project as deed-restricted affordable housing—that is, the units must remain affordable for a certain period, in accordance with a regulatory agreement—qualify for density bonuses and regulatory waivers.

California legislators have refurbished an old state law that requires local governments to plan for development of the city's "fair share" of housing needed in a region. Fair-share housing plans are being transformed into ambitious, enforceable contracts between cities and the state. Cities without a compliant fair-share plan are subject to a "builder's remedy" that allows developers to bypass local zoning—and some developers have been emboldened to use it. Cities failing to meet their fair-share targets forfeit authority to apply discretionary local standards to qualifying projects.

Though these reforms march under the banner of housing affordability, word and deed haven't quite matched up. Whereas the "red states" of the South achieved widespread affordability by allowing unlimited numbers of cheap houses to be built in sprawling suburbs, California favors building up, not out. Such "infill" housing has long been costlier to develop than cookie-cutter tract houses. Given that fact, one would expect California's leaders to have done everything in their power to reduce the cost of infill. The reality, however, is the opposite. Almost all the California housing laws that purport to liberalize infill development come with new restrictions that raise the price tag for bringing units online. These include mandates to use union labor or pay "prevailing wages" (a term of art for union-negotiated wages); to set aside a portion of new units as money-losing affordable housing; and to offer any tenant displaced by a development project the right to rent one of the new units at a price that he can afford. The state gives with one hand as it takes with the other.

In unconstrained housing markets, the equilibrium price of a house—the point where supply and demand meet—is only a little higher than the construction cost. If California continues to remove zoning restrictions while adding new rules that raise the expense of building, then housing prices and rents will stabilize—but at very high levels.

Back in 1979, California enacted the first version of what came to be known as the Density Bonus Law. If a developer of a project with five or more units agreed to set aside some of those units as deed-restricted affordable housing, the developer would be allowed a modest increase in density. This idea—relax some local land-use restrictions, but only for developers agreeing to provide special benefits in return—has become the California way of doing land-use reform: give, but take.

A newer breed of housing law offers relief from costly, unpredictable reviews under the California Environmental Quality Act (CEQA) and local discretionary standards, but only for developers who agree to special labor standards. First came Senate Bill 35 (SB 35), which exempts qualifying projects from environmental and local discretionary review if the developer agrees to pay prevailing wages and set aside at least 10 percent or 50 percent of the units for low-income housing. (The required number of affordable units depends on how well the city is doing vis-à-vis its fair-share housing target.)

After passing SB 35, housing advocates proposed several other streamlining and "upzoning" bills, but unions fought them off by insisting on "skilled-and-trained" workforce requirements, which compel builders to hire affiliates of the State Building and Construction Trades Council (the Trades). Housing advocates considered the "skilled-and-trained" requirement a deal breaker because the Trades constitute less than 10 percent of the construction workforce. It would be like countering a famine with a law that says that only one in ten of the available farmworkers can plant crops.

The legislative logjam broke in 2022. Splitting with the Trades, the United Brotherhood of Carpenters and the Service Employees International Union backed a bill that allows multifamily residential development as of right (meaning no CEQA or local discretionary review) on parcels that front major roads and are locally zoned for commercial or parking use. To qualify, developers must reserve 15 percent of the units for low-income housing, pay prevailing wages, and provide workers with health benefits. A peculiar legislative compromise resulted in this bill passing, together with a similar bill that includes no affordable-housing minimum but requires "skilled-and-trained" labor. The legislature additionally authorized the University of California to build student housing without running the CEQA gauntlet or complying with local zoning—so long as it uses union labor.

The legislature passed statewide parking reform in 2022. The parking bill purports to get rid of local minimum-parking requirements for developments near transit, but a loophole lets cities require parking unless 20 percent of the units in the project would be deed-restricted affordable housing. Give, but take.

This self-defeating pattern in the California housing story has two obvious culprits. First are the Trades, for whom the only good housing is housing built by their own membership, which, again, constitutes a sliver of the state's construction workforce. Second are self-styled progressive activists, for whom the only good housing is deed-restricted affordable housing. Leftist groups have lined up against everything from upzoning near transit to upzoning along commercial corridors to parking reform.

Ironically, California's decades-long housing shortage has actually built up the very interest groups, such as the Trades, that now perpetuate the shortage. The shortage means that in high-demand areas, the price of new housing is often substantially more than the cost of construction. (Recent estimates put the ratio at three to one, or even higher.) Thus, for many potential projects, a large surplus of value exists that someone should be able to capture. Maybe it will be captured by the landowner, who—if no one jacks up the cost of building—will be able to sell his property for a large premium over the value of the existing use. Maybe it will be captured by labor unions, which—if they have legal or political leverage—can extract project-labor agreements from the developer. Maybe it will be captured by local activists, who—if they have the leverage—can get payoffs and in-kind subsidies in the form of "community benefit agreements." Or maybe it will be captured by the city government, which can demand ad hoc exactions for infrastructure or anything else that the city would otherwise finance with general taxes.

Seeking the upper hand, cities adopted land-use rules that let them approve or deny housing projects for any reason. This came to be known as "discretionary review." Good data are lacking on exactly when discretionary review took hold, but commentators think that the major changes occurred in the 1970s and 1980s, as California housing prices were taking off and Proposition 13 curtailed property taxation. Whatever the historical trajectory, new research shows that virtually all urban housing development in California must run the gauntlet of local discretionary review—except where the state has preempted it.

Ironically, the discretionary-review frameworks that cities embraced also empowered third parties, such as labor unions and neighborhood groups, due to an accident of state law. Under CEQA, the trigger for environmental review is government discretion. Thus, by making housing permitting discretionary, cities subjected their project-approval decisions to CEQA. This meant that anyone with the resources to hire a lawyer had enormous clout. (CEQA's requirements are fuzzy, and project financing is hard to secure while litigation is pending.) Repeat-player labor unions became experts at the CEQA game. Some community and neighborhood groups got in on the action, too.

The upshot is that, today, any successful state effort to upzone metropolitan land for denser housing development and to reduce the cost of development—that is, to do what's needed for widespread affordability—would effect a massive transfer of resources from the (concentrated, well-organized) interest groups empowered by CEQA and the housing shortage to the (dispersed, less well-organized) owners of sites that could be redeveloped. The "take" in California's give-but-take model of land-use reform has been the politically necessary price of avoiding such redistributive effects, even as it undermines the efficacy of the reforms.

Is this the whole story? Maybe not. "Well-organized interests that leverage discretionary review for private benefits" cannot explain why so many of the state's reforms require developers to subsidize the production of below-market-rate units. The purpose of the inclusionary requirements built in to the Density Bonus Law, the fair-share planning law, and the new parking reform and commercial-corridor upzoning statutes is likely not to convert these laws into de facto zoning overlays that only politically connected nonprofits can use. Were that the case, the inclusionary requirements would have been much higher, and pro-development groups wouldn't have backed the bills.

"Seeking the upper hand, cities adopted land-use rules that let them approve or deny housing projects for any reason."

The nonprofits that lobby the state legislature for deed-restricted affordable-housing requirements are not, like the Trades, big players in campaign finance. It's more plausible that they have influence because lawmakers accept their arguments on the merits—or believe that the arguments will resonate with voters.

Public opinion about affordability mandates remains a cipher, but the literature includes some related findings that are suggestive. In two national surveys, my colleagues Clayton Nall and Stan Oklobdzija and I found that, while most people would prefer housing prices and rents in their city to be lower, they don't believe that even a large increase in the regional supply of housing would cause rents or prices for existing homes to fall. University of California–Merced professor Jessica Trounstine, studying public support for a hypothetical housing development in one's neighborhood, found that support craters if houses in the development would be substantially more expensive than the median house in the respondent's zip code. In short, people don't like the idea of new, richer people living near them, and they have little reason to tolerate such housing projects because they don't see that building them would make other housing more affordable.

In another study of public opinion about hypothetical housing projects, UCLA professors Paavo Monkkonen and Michael Manville found that telling respondents that the developer would get rich and might have secured special advantages causes a huge dropoff in support. Nall, Oklobdzija, and I asked respondents to indicate which of 11 actors were responsible for "high housing prices and rents in their area." They blamed developers more than any other group.

Put these findings together, and it's easy to see how an external shock that causes a modest rise in housing prices could induce political dynamics that generate a severe, long-term housing shortage. People who resent new housing that they can't afford may respond to rising prices by demanding inclusionary requirements. These requirements keep new housing from getting built, except in places where market prices are very high, so whatever market-rate housing does get built becomes even more distasteful. Meantime, tenants clamor for rent-control protections. Rent control provides them with some security, but it widens the gap between what existing residents of a neighborhood can afford and what a new market-rate project would rent for, sapping support for development even more.

High housing prices also induce city governments to try to capture sites’ development value by establishing, and then manipulating, discretionary review. Permitting discretion leads to corruption or the appearance of corruption, causing ordinary people to view developers in a negative light and to oppose policies that developers support. Permitting discretion plus high prices enables trade unions and other lawyered-up groups to fight for a share of project surpluses with CEQA litigation. Their wins build their coffers, and their coffers then get used to attack policies that would reduce the cost of development. The policies needed to make real headway get tarred as politically toxic "developer giveaways."

Risk-averse, politically engaged homeowners may provide political support for restrictive land-use policies, as Dartmouth professor William A. Fischel famously argued in The Homevoter Hypothesis. But my colleagues and I found that the difference between the share of homeowners and renters who support preemptive state upzoning was a modest 5 to 10 percentage points. It's not clear that Fischelian "homevoters" are anything more than bit players in the state politics of land-use reform.

The feedback loops that sustain California's high-price equilibrium are clearly tough to break, but a few examples do exist of the state liberalizing local zoning without establishing new labor or other requirements that increase development costs.

Consider the state's ADU law, which has been strengthened time and again, to increasingly powerful effect. Today, about 20 percent of annual housing production in California consists of ADUs. A decade ago, ADU production was trivial. When it comes to ADUs, the legislature has overridden not only local zoning standards and discretionary-review procedures but also municipal impact fees. The state's unabashed aim is to make ADUs cheap to bring online.

This was likely politically possible because the Trades had no stake in ADU production and because ordinary homeowners, rather than demonized developers, are seen as the proximate beneficiaries of ADU liberalization. In a similar vein, the state legislature authorized homeowners to split their lots and develop duplexes without local discretionary or CEQA review, without conforming to an affordability standard, and without meeting labor standards. California additionally passed a bill that lets cities rezone infill parcels for up to ten units of housing (a threshold that signifies that the project is too small to interest the Trades) without CEQA review.

The other way that the legislature has managed to enact pro-housing bills that don't include a takeback is by rolling them into a larger bundle—as with the 2017 housing package, which included 15 bills and funding measures. Two of the bills worked together to transform the state's Housing Accountability Act (HAA), substantially curtailing local discretion to deny or downsize any zoning-compliant housing projects—whether or not the project meets a labor or affordability standard. Lawyers in the trenches have told me that the 2017 HAA reforms are the most significant action that the legislature has ever taken for housing. Whether those reforms could have passed on a stand-alone basis is unclear; but, packaged with money for affordable housing and homeless shelters, other housing bills with labor conditions, and changes to other laws sought by affordable-housing advocates, the HAA amendments made it through.

These experiences suggest two ways out of California's present dilemma. First, encourage homeowners to see themselves as "site-value capitalists": as people who could profit from their home not just by remodeling an outdated kitchen or bathroom but by adding ADUs, splitting the lot, or even selling for a premium to a developer who would replace the family home with condos or apartments. The more that homeowners envision themselves in this entrepreneurial role, the more they will resist impact fees, inclusionary requirements, and other regulatory fetters that reduce the redevelopment value of their property.

The other way out is to package state upzoning and streamlining bills with spending measures—especially measures that benefit the Trades. Public-works investments are an obvious candidate. California revenues are notoriously volatile, but the next time the state is flush with cash, it may be able to make real headway on the housing problem by pairing major new infrastructure investments in roads, bridges, and transit with preemptive upzoning for low-cost development.

For now, though, California's big lesson for other states is cautionary. If you let your housing shortage fester, even for a little while, you’re likely to be stuck with it for a whole lot longer.

Christopher S. Elmendorf is a Martin Luther King Jr. Professor of Law at the University of California, Davis.

Top Photo: Reducing parking requirements has helped spur construction—to a point. (JASON FINN/ALAMY STOCK PHOTO)

City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

-

-

-

-

-