Originally posted at CALmatters.
By Matt Levin.
A few months back, we created an explainer to answer two questions: How bad is California’s housing crisis, and how did it get so bad? We tried to cover as much ground as possible—from affordable housing funding to Proposition 13 to why no one else in your apartment building cleans out the lint filter after using the communal dryer. But we knew we couldn’t get to everything.
So we asked readers “What did we miss? What questions do you still have about California’s certifiably insane housing market that we didn’t answer?”
We received more than 130 questions, from the delightfully wonky to the insightfully big-picture. We selected a handful that we thought merited a full story, putting four up for an audience vote on which we should pursue. Two of those stories—how foreign investment impacts California housing prices, and how development regulations and fees in California compare to other states—are in the works.
But we didn’t want to toss away all the other great questions we received. Besides, many of them were variations on the same topic, meaning lots of you were wondering about the same things.
So we’ve used them to create a little housing crisis FAQ:
GORDON FROM BRENTWOOD ASKS, “I SEE SO MANY AVAILABLE APARTMENTS IN MY NEIGHBORHOOD, SOME EMPTY FOR OVER A YEAR. WHY AREN’T RENTS DROPPING?”
Gordon isn’t alone—we got lots of questions about vacancy rates in California, and other anecdotes calling into question the relationship between available units and sky-high prices.
The first thing to know about apartment vacancies is that a 0 percent rate is not a good thing. The natural order of a healthy apartment rental market isn’t that every unit, or even nearly every unit, is filled.
Vacancy rates are kind of like unemployment rates or even inflation, says Richard Green, director of the University of Southern California’s Lusk Center for Real Estate. There’s an ideal equilibrium above zero that kind of keeps things in economic order and indicates appropriate levels of supply and demand. Renters on average leave their apartments every two years, often for new jobs or to enter the single-family market as homeowners. This is healthy and normal.
Researchers peg the “natural” vacancy rate at around 5 percent or so.
Unfortunately most coastal urban areas in California have very low vacancy rates. Of the five metro areas nationwide with the lowest rental vacancy rates in 2016, three were in California: Los Angeles (2.9 percent), San Diego (2.9 percent), and San Francisco (3.6 percent). All of which indicate too much demand and too little supply.
“Here’s where your eyes can be deceiving,” says Green. “Think of the hundreds of units that there are in Westwood for example, around UCLA. There’s hundreds and hundreds and maybe thousands of rental units, so even if you have a 3 percent vacancy rate, you’re going to see a ‘for rent’ sign.”
More to the point, landlords rarely have a rational financial interest in keeping a rental on the market for too long. “You have to remember, if you lose a month of rent, that’s 8 percent of your annual revenue gone,” says Green.
LISA ASKS, “HOW HAS RENT CONTROL IMPACTED THE SITUATION? IT LOOKS LIKE A LOSE-LOSE PROPOSITION, NO?” OR, FROM ANOTHER PERSPECTIVE, DARCY ASKS, “WHAT ABOUT RENT CONTROL? WHY DID IT GO AWAY AND WHY WON’T THEY REINSTATE IT?”
Something tells us Lisa and Darcy aren’t roommates.
Let’s start with the basics. Currently 15 California cities have some form of rent control or rent stabilization ordinances on the books. They include major population centers like San Francisco, Los Angeles and Oakland. Most rent control laws were passed in the late 1970s and early 80s, and each has its own peculiarities on allowable increases.
Why isn’t Darcy seeing more rent-controlled units around? That’s partly because of the Costa-Hawkins Act, a 1995 state law that sought to limit the expansion of rent control around the state. Costa-Hawkins had two major rent control provisions: 1) That landlords could reset rents to market rate once a rent-controlled tenant left, and 2) that rent control can’t apply to buildings constructed after 1995.
Darcy may not have to wait long for a dramatic California rent control expansion, however. Tenants’ rights and anti-gentrification groups are pushing for new legislation that would essentially repeal many Costa-Hawkins provisions. A similar measure may be headed to the November 2018 ballot. Advocates argue that rent control is vital to protect lower-income tenants from displacement.
So is rent control good or bad for California? Depends on who you are, and whom you ask.
Most economists, even progressive ones, say rent control is, at the very least, an inefficient policy. Basic microeconomic theory holds that capping rental prices will inevitably result in housing shortages and disincentives for new development, and will make landlords less likely to maintain their properties. While current tenants benefit from artificially depressed rents, those who desire to move into the neighborhood suffer.
But in practice, is that really how rent control plays out? Research on the empirical effects of rent control is frustratingly limited. A recent study on San Francisco rent control with groundbreaking new data found that beneficiaries of rent control were 10 to 20 percent more likely to remain in their units decades after the law went into effect. But the study also found that the policy reduced the supply of available rental housing by 15 percent, causing $5 billion in losses to renters not in rent-controlled units.
ADOLFO ASKS, “IS THE HOUSING CRISIS WORSE FOR PEOPLE OF COLOR: LATINOS, AFRICAN-AMERICANS AND ASIANS?”
Yes, the housing crisis is worse for most communities of color. Just how much worse depends on which metric you use.
The legacy of explicitly discriminatory housing policies like redlining—which essentially barred African-Americans and other ethnic groups from purchasing homes in white neighborhoods—is largely to blame.
KELLY ASKS, “DO GROUPS LIKE HABITAT FOR HUMANITY THAT BUILD LOW-COST HOMES AND FLIP DILAPIDATED HOMES FOR LOW-INCOME PEOPLE MAKE A NOTICEABLE DIFFERENCE?”
They certainly make a noticeable difference in the lives of the families able to benefit from their services
But as far as putting a significant dent in California’s annual 100,000-unit deficit of new housing construction?
“There’s no doubt that if somebody can access homeownership, there’s all sorts of positive associations with that,” says Carolina Reid, an assistant professor at the University of California, Berkeley’s College of Environmental Design. “But are they funded at a scale that will make a difference in the large housing market? No, they don’t have that kind of impact.”
To give a sense of scale, Habitat for Humanity of Greater Los Angeles has built, rehabilitated or repaired 700 homes for low-income families. That’s one home for every 80 people now homeless in Los Angeles County.