The lowest rungs on the housing ladder pay so much for a roof over their heads, they can’t live a life.

California has a housing problem. Anyone who lives in California copes with higher housing costs than nearly everywhere else in the United States. This problem is a boon to landowners and high wage earners, but it’s a bust for lower middle class wage earners who often put 50% of their income toward housing. Why do we have this problem?

First and foremost, the problem is one of supply. California has a chronic shortage of housing. The lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain any housing at all. It’s why an income in Southern California that barely affords a condo would buy a McMansion anywhere else in the country.

Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Unless many more dwelling units are approved, the shortage will continue, and probably get worse — and there is no sign of this changing.

Ordinarily, if house prices were pushed up above the cost of construction, builders would respond by providing more housing units (either rentals or owner-occupied), and the increased supply would blunt further price increases, but that doesn’t occur in California. The problem is not physical, it’s political.

In California local opposition groups have too much power to stop development. Years ago I worked on a large residential project in Calimesa, California. There is a local opposition group that wants the area to remain rural. We arranged a meeting with them to hear their concerns, and the first words they spoke to us was that they would sue us if we proposed anything with lots smaller than 2 acres; no compromise, just threats — and we took them seriously as they previously sued other developers proposing projects near their area.

The market for housing in most of the United States is much more stable, and house prices are much less inflated because the local political system does not restrict new home development near as much as it does in California. Affordable housing in California requires ignoring the NIMBYs.

The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians. In California no State or regional entity has the power to mandate that any local political body must provide sufficient housing to meet local demand. Further, since local governments are highly dependent upon commercial and business tax revenue, they are always keen to zone for more commercial than residential land uses, which in turn creates imbalances between the number of jobs and the number of available housing units.

The only way California will ever have housing that’s affordable in a free-market, non-subsidized way is to shift some power away from local governing bodies — a course of action that will not be popular on the local level. This could take the form of direct approval override of local governments by a State or regional decision-making body, or it could take the form of mandates for development. In whatever form, some State or regional body must be given power to stop NIMBYs from lobbying local government officials to stop development that benefits everyone.

So why should we care? These community groups who oppose development win two ways: first, they maintain the status quo in their neighborhoods, and second, they inflate the value of their own real estate by choking off the supply. Once set in motion, this kind of opposition spirals out of control.

When supplies are limited, as they are now due to the presence of so many underwater borrowers stuck in the purgatory of cloud inventory, the substitution effect forces buyers at every price level to buy a lower quality house than they otherwise would. At the very bottom of the housing ladder, those buyers who can only afford the least expensive properties get priced out by higher wage earners substituting downward.

In short, California housing policies devastate the lower middle class.

By Nick Timiraos, November 20, 2015

… economists want [to] explain why incomes for the broad middle class aren’t rising. Their latest target: land-use restrictions. Housing is growing less affordable because there’s more demand for rental and, increasingly, owner-occupied housing, but little new supply. … Now, there’s growing attention on what’s happening on the supply side. Some cities face supply constraints beyond their control. Coastal cities often see much pricier housing—and considerable price volatility—because there aren’t too many places left to build.

Availability of land is not the issue. Many metropolitan areas have extremely high densities of development, and they provide the necessary quantity of housing units to keep housing affordable to the populace. We chose not to redevelop with higher densities, and it creates an artificial shortage. This is a political problem, not a market one.

But other cities make things worse with zoning and other land-use restrictions that discourage production, said Jason Furman, chairman of the White House Council of Economic Advisers … “Artificial constraints” on housing supply hinders mobility, and increasing mobility “is going to be an important part of the solution of increasing incomes and increasing incomes across generations,” Mr. Furman said. Zoning rules, of course, aren’t distributed randomly across the country, which means they’re “actually correlated with those places that have higher inequality,” he said. This feeds a cycle in which cities that have more restrictions on land use have higher inequality, which further constrains mobility, which further exacerbates inequality, and so on. … “If you’re not pricing people out of the market, you’re able to attract more people and increase employment more,” Mr. Furman said.

It’s often difficult for businesses to expand in California due to the high housing costs. Tech companies in Silicon Valley are starting to feel the pain.

The second paper, by Peter Ganong and Daniel Shoag of Harvard University, examines the slowdown in income convergence—that is, the rate at which incomes in places with lower incomes catch up with those in places with higher incomes. The paper found that income convergence was more common in states during the 1960s and 1970s regardless of constraints on housing supply. By the 1990s, states with more constrained housing supplies saw far less income convergence than those with less constrained housing supplies.

This is the key point. When everyone substitutes downward in quality to obtain housing, it harms everyone. Higher wage earners aren’t hurt much financially, but they are forced to live in less opulent housing than their counterparts in other locations. However, low wage earners can’t substitute downward because they are at the bottom of the housing ladder. They must increase the amount they spend on housing or move out of the area. This is how California’s land use policies devastate the lower middle class.

The land-use and affordability issue isn’t just some idle worry of economists, Mr. Furman added. “It’s something the president is personally concerned about,” he said.

Is it something you’re concerned about? Most readers of this blog aren’t in the lower middle class, and although we are all impacted by the high housing costs, it’s not as devastating for us as it is for the lower middle class.

Since NIMBYs are rewarded with higher home values, many higher wage earners join opposition groups to preserve their wealth and their way of life. Most don’t realize the problems they create for the less fortunate, and many wouldn’t care even if they made this connection.

Perhaps this is an area where I lean Left, but I believe our land use policies are a social injustice, and we all pay a price for that.

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