Expensive Housing Swallows Up Middle-Class Paychecks in Over-regulated California
Mary and Hector Hernandez are young parents who work full time in San Francisco. Mary graduated from high school and earns $11 an hour as a secretary. Hector did not graduate and earns $9 an hour as a day laborer. Together, they make $42,000 a year, about what the average California worker earns in a year. Their income would put them at about the 28th percentile for household income in the San Francisco area and the 39th percentile in Los Angeles. They pay $28,000 per year, two-thirds of their income, to rent a below-average apartment outside San Francisco proper (the average San Francisco apartment would cost $42,000 per year). It barely fits their three young children and one of their parents and is far from their jobs near the city center. Their remaining $1,170 each month must cover food, utilities, taxes, health care, transportation, debt, clothes, and other expenses. They receive minimal government assistance.
With no savings, a layoff or illness could push them into debt or out on the street. Although Mary and Hector (a fictional though representative couple) are doing what they should, they are just getting by instead of saving for the future and spending on other, important expenses. In another time or place they would, but not in today’s California. Many see the Hernandezes’ low incomes as their biggest issue, but marginal increases in income will mean little in the face of their high and fast-rising housing expense.
While California’s housing market is particularly unaffordable, the housing-affordability problem is worsening across America. If the rest of the nation is to be spared the California nightmare — the exodus of millions and the worsening of living conditions for many of those who remain — we will need to understand how California got to where it is today. And understand fast. As Californians emigrate from the Golden State, they bring along with them the ideas and tendencies that corrupted the California Dream. Once the brightest part of the sunbelt, California was for the young, eager, and talented the mecca that Texas and Georgia are today. If they and the rest of the nation are to avoid California’s fate, and if California is to have any hope of recovery, we need to understand why California got in its current predicament. Saying “Texas” five times fast won’t do a thing. Understanding that ideas matter more than slogans is essential if the rest of the nation is to be spared a rerun of California’s affordability crisis.
California’s housing markets rank among the most expensive in America. According to a recent report by the state’s nonpartisan Legislative Analyst’s Office (LAO), whereas the average American home costs $180,000, the average California home costs $440,000, or 240 percent more than in the rest of the country, up from 30 percent more in 1970 and 80 percent more in 1980. San Francisco and Los Angeles are more expensive still. If California incomes were that much higher than national incomes, expensive housing would not be a problem. But they are not. The average California income, according to the LAO, is $9,000 more than the national average. Housing eats up $5,400 of that extra income.
Housing costs contribute to California’s poverty rate of 23.4 percent, the highest in the nation, when costs of living are considered. According to the LAO, the average household in the bottom quarter of incomes — earning less than the Hernandezes — also spends two-thirds of its income on housing, 11 percent more than elsewhere. If Mary and Hector could spend the recommended maximum of 30 percent of their income on housing, their after-housing income would more than double, to $29,400.
Why is California’s housing so expensive? Supply constraints. The LAO calculates that if California’s market were free enough to keep prices at 80 percent above the national average, as they were in 1980, we would have 2.7 million more homes, and 7 million more Californians today.
After the Second World War, California’s housing market was relatively free, making the housing supply plentiful and cheap. Things started to change in the 1960s. Policies from every level of government since then have made it harder to build affordable, market-rate housing.
Local governments began instituting zoning and environmental regulations meant to plan the development of their communities, but their policies have led to a near-cessation of market-driven construction in many cities and to its slowdown in others.
Local governments bear the brunt of responsibility. They began aggressively instituting zoning and environmental regulations meant to plan the development of their communities to meet particular visions — often quite nice visions, and conservative ones at that. Some regulations were obviously wrong, aimed at overt racial exclusion; but plenty of others focused on aesthetics, historic preservation, the promotion of single-family homes with two yards and a pool, crime reduction, traffic, density, environmental protection, or even efforts to provide affordable housing. This panoply of policies led to a near-cessation of market-driven construction in many cities and to its slowdown in others.
Many think that the rise in prices is good, and in some ways it is. Land is a fixed commodity, and its value increases with demand. Those who “bought low” early in the post-war period have rightly benefited from the arrival of new Californians. The problem is not the natural increase in land prices but rather the artificial increase in housing prices. Housing, unlike land, is not a fixed good.
When land becomes expensive, its cost can be divided, either by building up or by dividing it out into smaller, more-affordable lots. A free housing market would see denser development to account for higher land values where people want to live and are willing to pay for it. But local regulations on building height, lot size, and so on make it impossible to meet demand in the places where jobs are and where people want to live and would pay for it if they were allowed to. As a result, those who cannot afford a single-family home are driven out into the desert or into overcrowded homes, garages, and apartments. In a free market, their good money would buy them comfortable if not extravagant living, but California’s housing market is not free. California’s policies not only undermine the lifestyles of many millions but also subvert some core American values.
Since the founding, Americans have understood that property ownership is the path to financial independence and advancement for the vast majority of Americans. Rent is an expense; mortgage payments are investments.
The aspiring class — the young, the working class, minorities, and new families like the Hernandezes — is worse off in California than their peers in other states. California’s aspiring class often finds itself in perpetual poverty or near-poverty. At least part of the reason is that the cost of a down payment and monthly mortgage, the gateway to middle-class security, has been pushed beyond their reach. Not only is home ownership expensive, but absurd rents make it impossible to save enough to afford even reasonable down payments and mortgages elsewhere. Although other issues are also important, especially California’s poorly performing job market and educational institutions, hardly any attention is paid to housing, which actually relates closely to both those issues. That must change. And as it turns out, all of us have a stake in solving California’s (and soon, the nation’s) housing-affordability crisis, whether we realize it or not.
Today’s wealth gaps between race, age, and income groups should be seen as a function of assets and liabilities rather than incomes. Those gaps should trouble conservatives much as they do liberals since, as recent research suggests, the great growth of wealth inequality today may be totally attributable to home values. America, led by California, may be in the midst of the creation of a property-based class system because regulations are privileging property ownership, putting it out of the reach of the aspiring class. There is a legitimate role for government in regulation, but its rules must be carefully tailored and non-discriminatory. With today’s land-use regulation regime, they are neither.
Californians and all Americans who want to ameliorate the condition of those with the least means should not start with incomes, which must compete globally. A minimum-wage increase sounds nice, but it could easily put people like the Hernandezes out of work. And the benefit would be marginal, at best. Rather, we should examine the expense, housing, that wipes out two-thirds of the incomes of California’s impoverished households, and a large share of the incomes of people in the middle class. The solutions won’t cost a dime; but they will require political courage. They will require an understanding of not only the problems but also the principles that undergird the successesof all flourishing societies – places more or less like California in the 1960s or like present-day Texas: individual rights and equality under the law, ideas that, today, are almost as distorted as California’s housing market.