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NEWSLETTER
September 2020

IN THIS ISSUE:

Executive Summary
Errors Introduced by Senate Bill 828
Why the Double Counting Matters
Call to Action

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Executive Summary

Four major regions account for 80% of housing in California: the Bay Area, the six SoCal counties, the San Diego region, and Greater Sacramento. California’s Department of Housing and Community Development forecasts the number of housing units needed by income level in each area in eight-year cycles. Under the law, the cities in these regions must approve housing permits to achieve those forecasts (also known as the Regional Housing Needs Assessment, or RHNA). For decades, the Department of Housing and Community Development (HCD) has used a standard methodology to determine the number of housing units needed. This cycle, however, HCD introduced a series of double counts as an unintended consequence of Senate Bill 828. The errors have resulted in a doubling of the assessed housing needs in the four regions.

Errors Introduced by Senate Bill 828
 

1. Senate Bill 828 (2018) mistakenly assumed that past housing needs assessments had only accounted for future growth and had not accounted for pent-up demand.

But in fact, past state assessments of housing need had fully considered pent-up demand. The confusion arose because the previous housing needs assessment began in 2010 during the Great Recession when vacancy rates were high — higher than the benchmark vacancy rates used to gauge the housing market’s health. The impacts of the mortgage crisis distorted the market. By standard “benchmark” vacancy measures, there was no pent-up housing demand during the Great Recession. In fact, there was a temporary housing surplus as households doubled-up, and young adults delayed moving out on their own. The state correctly assumed that the scale of the excess vacancies was a temporary aberration and that a good number of those vacancies would be quickly absorbed as the Recession faded and the market corrected. However, some measure of the existing housing situation was accounted for in the assessments, and the effect of the adjustments was to lower rather than raise the housing targets.
 

2. Senate Bill 828 (2018) mistakenly assumed that the vacancy “benchmark” for a healthy housing market should be the same for rental housing and owner-occupied housing. 

But in fact, the two benchmarks are very different. Owner-occupied housing has a much lower vacancy rate because it is generally only vacant when a housing unit is for sale. The vacancy benchmark for rental housing is widely accepted as 5% (per government code), while the national homeowner (owner-occupied) vacancy rate has long hovered around 1.5%. The owner-occupied vacancy rate briefly rose to almost 3% — during the Great Recession — reflecting the foreclosures caused by the mortgage crisis. A 5% vacancy rate in owner-occupied housing is not a ‘healthy’ benchmark as suggested by Senate Bill 828, but is indicative of a distressed market. The use of the incorrect benchmark for owner-occupied housing significantly overstated the housing need. In rounded terms, the state’s error incorrectly added 229,000 housing units to the projected housing needs for the four regions.

3. Senate Bill 828 mistakenly assumed that overcrowding and cost-burdening had not already been included in the state’s projection of household needs.

But in fact, overcrowding and cost-burdening had for many years been included in household projections created by the California Department of Finance for the Department of Housing and Community Development. The two state departments made an explicit decision to use higher headship rates (the proportion of the population that will become heads of households) than reported in the regions. This step was taken to ensure that housing needs did not reflect temporary market conditions fueled by the Great Recession and affordability crisis, but instead reflected “underlying social-cultural norms.” The goal was a return to those ‘norms’ when the recession faded. The higher headship rates applied by the state, in effect, were designed to “alleviate the burdens of high housing cost and overcrowding” per language used in the Department of Finance’s description of the methodology used in the projection of needed households.

Further, materials published by the Association of Bay Area Government’s, describing the Regional Housing Needs Assessment, stated:

“Mr. Fassinger noted that HCD uses these higher headship rates because the RHNA process is intended to alleviate the burdens of high housing cost and overcrowding.”

Therefore, adding overcrowding and cost-burdening adjustments into a formula that already corrects for overcrowding and cost-burdening through the use of higher headship rates that produce higher targets for projected households, has created a double-counting of the housing needed. The double-counting error added 734,000 housing units to the housing needs for the four regions.

Why the Double Counting Matters:
 

1. Cities and counties are penalized for failing to reach their housing targets per state mandates.

Government Code 65913.1(a)(4)(A) triggers a streamlined ministerial approval process for developments in localities that have not met their “share of the regional housing needs, by income category.” The four regions have easily met and surpassed their market-rate housing targets in the past — but they have consistently failed to achieve their housing needs targets for lower-income housing. 

 Inflating the housing need by a factor of two, due to significant errors introduced by SB-828, will only result in cities and counties failing to hit not only their affordable housing targets but also their market-rate housing targets. This would require cities and counties to grant developers “streamlined ministerial approval” of market-rate housing developments. Yet the primary purpose of “streamlined ministerial approval” was to expedite affordable housing development. When benefits, incentives, and bonuses ordinarily meant for affordable housing are extended to include market-rate housing, affordable housing loses out. The market will always ensure the most profitable housing will be built first. 

2. The exaggerated targets mask the real issues and solution to the housing crisis. 

Over the last several decades, the Regional Housing Needs Assessment has charged cities with the task of building one market-rate home for every one affordable home. But state laws, such as the density bonus law, incentivize developers to build market-rate units at a far higher rate than affordable units. As a result, California has been building four market-rate units for every one affordable unit for decades. And with the near-collapse of legislative funding for low-income housing in 2011, that ratio has grown to seven to eight market-rate units to each affordable unit permitted. 

Exaggerated targets obscure this reality and further encourage market-rate housing development at the expense of affordable housing. They also encourage bills like Assembly Bill 2345 that would lower the percentage of affordable housing a developer must include in a project to qualify for “density bonuses” — where the bonus goes to additional market-rate units. This further exacerbates the affordable housing situation. Senate Bill 1120 would allow two market-rate duplexes on lots that are now single-family zoned, once again incentivizing market-rate housing, making land more valuable and affordable housing more costly to build.

For those who believe ‘trickle-down’ economics works in the housing market, and that more market-rate housing will result in more affordable housing, they need only look at the Bay Area to see the evidence that it doesn’t work that way. Decades of exceeding market-rate targets in the Bay Area has not reduced median housing prices.


Call to Action
 

1. The real solution to the housing crisis is more state funding for affordable housing.

The state should get out of the business of trying to dictate to the market. The market has shown it will take care of itself. The state needs to take care of those not served by the market, and in some cases completely sidelined by it. To that end, the state government should restore past funding levels (and more) for public housing.

2. Fix the errors in the current housing assessments and decide on a consistent approach to determine the state’s housing needs. 

The state currently uses four different methodologies with four different projections to discuss California’s housing needs (below). The SB-828 double count of 2.11M shown below is erroneous. McKinsey’s “housing gap” of 3.5M shown below is overly simplistic and has no serious justification. The conventional approach, used by the Department of Finance and the Department of Housing and Community Development for the past several decades, and showing a need for 1.17M units, is based on sound principles. But it is certainly at odds with another economic indicator, the “jobs-to-housing ratio” often used by regional planning agencies to determine housing allocation, showing a need of 230,000 units. These disparities should be explained and resolved. 

 

For more detail about the 6th cycle errors click here, and for the spreadsheet that outlines all the calculations click here.

 

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