Political Delusion

I am becoming more and more convinced that housing is the meta-issue of our age. And, no, it’s not because my livelihood is completely tied to the industry. Although, that’s interesting. Rather, it’s because housing is the link between so many seemingly disparate political struggles. You cannot talk about things like wealth inequality, racism, homelessness, education, poverty, or even immigration without also talking about housing.

I guess this should come as no surprise, right? For America has always been
about this. The chance to own some land. 40 Acres and a Mule.
The American Dream.

The story has changed through time but the promise has always been the same. America is the place where you can actually own something. Or so they say! I once said in a podcast appearance that “the American dream has always been a lie.” And while mostly true, it’s a bit of an overstatement. It’s not a lie in the sense of some deliberate intent to mislead but rather it’s just something that, statistically speaking, hasn’t always been true. Not even close. And over the years, American society has bifurcated into two distinct experiences, determined largely by whether you own a home or not.  

Take, for instance, the question of wealth. Well, in America it is so, so much better to be a homeowner than a renter. The difference in outcomes couldn’t be more stark:

And what’s so fascinating is that this dynamic is actually worse in liberal dominated places like California. Over the last few decades, a unique confluence of events and policy decisions has created an environment where the housing-driven wealth inequality phenomenon is running amok. There’s literally nowhere better to own a home than in California, at least from the perspective of your net worth statement!

How ironic (and tragic) that in a state dominated by politicians who are on-paper 1000% supportive of affordable housing, housing-driven wealth inequality is literally running out of control.

Before we dive deeper into the sad California story, let’s zoom out a bit.
The national story here is basically one of a giant supply problem. A function of both market and policy failure, a decades-long structural misalignment between household formation and the production of new housing units has created an almost insurmountable supply gap. Just in the past 10 years,
the US has added 15.6M new households but only built 11.9 housing units (8.5M homes & 3.4M apartment units). We’re talking millions of units of
under supply.

How did this happen?

I’ll give you a few ideas:

• Zoning—believe it or not, under current zoning laws across the country, it is NOT permissible to build an apartment on over 75% of residentially-zoned land. WTF! There’s not much to say here other than that. This is a function of racism and classicism at worst and stupidity at best.

• Regulation—while I’m not one of those capitalists who think there should be no regulation at all, there’s no question that the pendulum has swung too far in the wrong direction here. We’ve made the development process almost impossibly complicated and slow.
  This is especially true in the Blue States, where well-intentioned environmental laws provide NIMBYs with incredible firepower to
  delay and prevent development.

• Labor Market Problems—we’ve let this housing supply problem grow and metastasize for so long that now homeownership is basically out of reach for a huge percentage of the American population. The median house price is now 6-7x median household income ($450K versus $70K) and it’s cheaper to rent in almost every city in America.

As housing policy has become the key battleground in the political fight for America’s future, states have started to respond in interesting and diverging ways. When it comes to production, the Red States have already been doing a much better job:

While California is permitting 2,600 new homes per 100,000 people, well below the 3,900 national average, states like Texas and Florida are permitting over 5,000.

Here in California, we have been pursuing a hodgepodge of pro-development policies like streamlining, density bonus programs, eliminating minimum parking requirements and incentivizing ADU’s. However, these policies are
so meagre in comparison to the size of the problem it almost feels like a joke.
It's not these policies aren’t smart, it’s that they are delusionally unambitious.

According to California’s most recent Regional Housing Needs Assessment (RHNA), Los Angeles needs to build approximately 456,643 units from 2021
to 2029. This is literally 5x the 83,865 units that LA produced from 2010 to 2019. Let me spare you the suspense. There is ZERO chance that this happens. It doesn’t matter how much streamlining, density-bonus and incentivizing ADU’s we do, LA isn’t going to go from building 9,000 units a
year to 57,000.

A Quick Side Note on ADU’s: While everyone is excited about the ADU story, which has been a success in a sense, growing from a mere 1,100 units in 2015 to 23,000 in 2021 and 14,500 in 2022, it is still rounding error to the broader supply problem. When California needs to be building something like 300,000 new units of housing per year, this obviously isn’t going to cut it. Don’t get me wrong, the ADU story is ultimately a positive one. At Metros Capital, we’re doing several ADU projects and the permitting process has been decidedly better—it’s taken approximately 100 days from submitting plans to getting our permits. That sure beats the 2-3 years it took for our regular ground-up projects.

Back to our story. What happened during the great COVID-migrations put everyone on notice that the housing affordability crisis is not just a Blue State problem. It’s a national problem. It doesn’t take much in the way of population flux to mess-up a local housing market. Just ask Nashville or Boise or any of the dozens of smaller cities that saw their housing markets inflate out of control in a matter of months. Even Texas is struggling!

But what we’re seeing so far is that the Red States, who, remember, are already doing a much better job in terms of production, have learned from the mistakes of places like NY and CA and are taking more decisive and practical action. Just this year, for example, Florida passed the Live Local Act, a pretty bold piece of legislation that addressed almost all of the points we discussed above. The law takes away local power over zoning (in some instances), bans rent control, provides tax breaks for affordable housing projects, and provides a property tax exemption for certain types of affordable development. It also set aside over $1.5B in various programs to support affordable housing. Whatever you think of Florida politics, this is bold and much more likely to be effective than what we’re doing here in California.

While Florida is passing the Live Local Act, California is doubling down on policies that might look good on paper but have, again, zero chance of helping the situation. For instance, there’s now a Special Assistant Attorney General for Housing, whose job is to work with tenant’s rights advocacy groups. Look, I think we should be careful about predatory evictions and provide legal support for tenants but Californians have to understand that this is not going to move the needle on housing affordability.

The way things are going here, it’s more likely that California regulates its way out of population than it builds its way to an affordable housing market

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