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any support services, military veterans with various health issues in need of care. Other states today are ”shipping” some of their homeless population to us right here in California! Other causes of homelessness include foster children ageing out of care without needed services, and high student loan debt payments, among other things. We also suffer from the misguided perception of civil liberties here in California. The idea that people can just camp out on the streets irrespective of the adverse health effects it creates for themselves and everyone else is insane. Finally, some people are just trifling. Homelessness is an extremely complex issue, and a person or family could actually be victims of more than one of the causes I’ve outlined.
Three points are often overlooked when looking at problems and for their solutions: How did we get here in the first place? What caused this problem? What do we consider to be a solution to the problem? And, finally, what are the consequences of the proposed solution, or in other words, what are the unintended consequences?
REGULATIONS INCREASE COST OF LAND AND CONSTRUCTION
Urban land in California is becoming more valuable as demand continues to overtake supply. One way to reduce costs in developed areas would be to increase density. However, local zoning rules and the California Environmental Quality Act (CEQA) make building here far too difficult and expensive. Zoning rules often limit how many units can be built on a lot. A term for this in urban planning circles is “exclusionary zoning.” An interesting historical fact is that this type of zoning became more prevalent after the federal government banned the enforcement racially restrictive covenants on real estate in 1948. The goal of exclusionary zoning was to make the property more expensive such that it would limit Blacks and other “undesirables” from moving into certain neighborhoods.
NIMBY-ism (Not in my back yard) has also become a deterrent factor in the housing business. Just as when laws were passed to make it more difficult for Black people to own property, laws were then passed making it more difficult to build “affordable housing” this drove-up the cost and had the effect of limiting supply. The California Constitution has a provision that says a vote of the people is required if government money is going to be used to build affordable housing! This was an industry sponsored initiative. I guess everyone is a Christian so long as someone else is carrying the cross!
IMPACT OF ELIMINATION OF REDEVELOPMENT AGENCIES
A dwelling unit is basically comprised of six things: (1) land, (2) labor, (3) materials, (4) permits and (5) fees, and (6) return on investment. If you want “affordable housing” in other words, below cost housing, you must decide which of these items you are willing to give up. Increasing density would lower the cost of land per unit for example, but not all folks are on board with that. Each of these six have their own constituency. In 2011, the California Governor and Legislature eliminated redevelopment agencies (RDA’s). Because of the ability of RDAs to reduce or even eliminate land costs, RDAs provided over 40% of the affordable housing in California. To date, nothing has replaced the RDA, and as one might have predicted the housing affordability problem has only gotten worse. A state senator predicted this at the time of the vote!
As previously mentioned, the cost of land and improvements have increased far faster than wages. Rents for a one-bedroom apartment are more than $2,000 per month in many Los Angeles neighborhoods. This means a prospective tenant would have to make over $75,000 per year to qualify under the 30% income coverage factor. As tax and regulatory changes over the last 40 years have driven much of the private capitol out of the rental housing business, “mom and pop” rental property investors who were are the majority of rental property owners in California and have been particularly hard hit. Since the 1970’s, government at all levels, with the guidance of Wall Street have waged war on small rental property owners, and as the “moms and pops” exited the rental housing market, they have taken their money with them.
Back in 1970, a taxpayer could deduct taxes, interest and expenses from as many properties as they owned from their ordinary income, Form W-2 wages, which encouraged investment in rental housing. Today investors can only deduct from two pieces of property. Add to this the loss of accelerated depreciation, which is a business accounting tool. Then we saw the inability of a developer to deduct front-end construction costs related to a project. This deduction was replaced with the insane “tax credit allocation committee.” Getting a project through this committee can take years, and often comes with certain “strings” attached that add even more project costs. The Internal Revenue Service has even altered rules requiring depreciation on many repairs rather than simply allowing for the deduction of them. Taken together, this makes real estate less attractive financially. Which, by-the-way, is just what our good friends on Wall Street had wanted.
APARTMENT MANAGEMENT MAGAZINE - JULY 2022 CS-13