The roots of this impending problem lie in COVID-19. The pandemic has sparked a scorching housing market in the United States, particularly in California, with factors ranging from the ability to work remotely to a desire for vacation getaways driving unprecedented housing demand. Prices have reacted accordingly: From May 2019 to May 2022, median list prices for California homes rose from $577,000 to $759,500, an increase of more than 30%, according to data from Realtor.com.
As a rule, an increased demand for something stimulates its production. As the need for N95 masks grew in 2020, producers like 3M ramped up production. However, the California real estate market did not react in a natural way; new construction is was flat.
One of the main culprits is local governments, which often limit the height and density of new buildings and push demand toward lower-density sprawl.
Now the Federal Reserve is about to further restrict our limited housing supply.
While the broader implications of the latest Fed rate hike are still uncertain, the California housing market will undoubtedly be the loser. Credit conditions have a powerful impact on the willingness of private builders to invest. Over the past six months, rate hikes have already almost doubled the average mortgage rate, halting home ownership plans for millions of working families, especially first-time buyers and households low income. As a result, homebuilders began cutting housing production across the country — by 14.4% in May, according to the most recent Census Bureau data. New home construction in San Francisco is particularly moribund: The number of new units under construction is down half of what it was five years ago, while new unit completions and permit approvals are well behind the levels of these last years.
This will worsen California’s long-term affordability crisis.
Fortunately, a solution is making its way through the Legislature that could break this economic stalemate and prevent further damage to housing markets in the Bay Area and across the state. San Jose Assemblyman Alex Lee’s public housing law, which was passed by the Assembly and Senate Housing Committees, creates a new public housing agency to build mixed-income homes for all Californians. By using income from market-priced apartments to subsidize lower-cost apartments, it would dramatically increase the availability of affordable housing in the state. This will bring public competition to California’s monopolistic real estate market and help reduce the cost of housing across the state.
San Francisco leaders know these issues well — the city is currently hearing from developers who are feeling the pressures of the housing market. In 2020, voters in San Francisco approved two measures, Proposals I and K, which supported social housing by authorizing and funding construction projects. But transforming this financing and this authorization to build into real housing requires another ingredient: a public developer. The Social Housing Act would authorize a newly created agency to work around the state, which could help realize the vision of Proposals I and K. In fact, early Tuesday morning, Supervisor Dean Preston announcement that an agreement has been reached with the mayor’s office to use some local social housing funds. Now is the time to empower the state to help with coordination.
Passage of the Social Housing Act is particularly important on the eve of a slowdown in housing construction. Under the current circumstances, the public developer proposed by the bill could buy back unfinished housing developments from builders who would suddenly find themselves in a precarious financial situation. Because he has no investors to satisfy, the public developer can continue to develop these projects and his own original projects at a lower cost or break even. Instead of falling by the wayside, languishing projects like many in San Francisco’s planning pipeline will be terminated by the government, bringing new housing online and saving jobs.
As a result of the Great Recession of 2008, California and the nation as a whole lost valuable housing stock and a generation of valuable, skilled construction labor. A public developer will ensure this doesn’t happen again, and the state will have the healthy supply of housing it needs to adjust to a high-growth, high-wage economy.
The state should also consider implementing public funding measures complementary to the law on social housing. San Francisco and other city governments are currently paying top dollar to Wall Street banks for crucial cash management services. But public banks could take on this role more cheaply, freeing up funds for affordable housing projects. These banks could also use their nonprofit mandate to issue low-interest loans for affordable housing projects.
For decades, housing has been caught in a vicious circle. High prices force the Fed to adopt high interest rates, creating a recession and dampening housing production before a healthy market can emerge. It is time to think outside the box and consider the possibilities of a robust public enterprise system to combat this dynamic. With the Social Housing Act, we can ensure California has the homes and workers it needs for years to come – and see what it’s like to have an economy that works for all of us.
Yakov Feygin is the associate director of the Future of Capitalism program at the Berggruen Institute. Paul Williams is the founder and executive director of the Center for Public Enterprise.
Comments are closed.