Overview of the California Housing Crisis

California has a housing crisis. Since 2012, the median home has doubled in price, pricing out many residents, and ensuring ensuring that a thriving economy has not been the beacon of prosperity that it should have been.

There are many failures in the California housing market, including over burdensome regulations, an over focus of affordable housing as a percentage of new development, local governments delaying development, and a lack of ability/desire for the California government to enforce it's housing requirements. All of these contribute to 97% of cities missing their state housing goals.

This R1, however, will focus only on the bad economics behind those state housing goals and demonstrate that, despite 97% of cities failing to meet the housing goals, the housing goals themselves are dramatic understatements of the true need for more housing in California.

How Housing Goals are Set in California

Beginning in 1980, California developed standards for how much housing each region should develop within a given planning cycle.

• These goals are called Regional Housing Needs Assessments (RHNAs).
• Regions are assessed "housing needs" or the number of housing units, with varied levels of affordability between low income and market rates.
• These RHNAs are then allocated by the regions into each of the member cities.

So for a given region A, you might see an RHNA look something like this (you can also read a full report for the Bay Area here):

     | Total | Low Income| Market Rate 

Region 100k 25k 75k

City 1 75k 20k 55k

City 2 25k 5k 20k

Technical Overview of How RHNAs are Set

You can see a full breakdown of how the RHNAs are calculated (also here) but they are generally a function of:

1) Past RHNA performance (missed housing goals compound)

2) Income considerations (high price cities have to build more affordable housing)

3) Projected population growth (weighted by new jobs, transit access, and a few other things)

With projected population growth getting the most weight

Fundamental Problem: Aiming for the wrong target

The R1 of the RHNAs are based on the fact that projected population growth is a terrible metric for gauging a region's housing needs

Take Piedmont, which is a suburb of Oakland. In Piedmont, the median home value has increased by 1.5 million over the last 10 years. Under sensible housing policy, an area that has seen such a tremendous run up in housing prices would have a correspondingly large housing goal.

Piedmont's RHNA for 2015-2023 was 60 units, which is driven entirely by the fact that Piedmont has seen very little population growth (and thus projects very little population growth).

You see similar stories in places like Beverly Hills, which was one of the few cities to hit its housing target!

The California housing crisis is a crisis of affordability. The bad economics is that population growth is endogenous to affordability. If an area is in-affordable then it likely will have lower population growth. Again, take Beverly Hills as an example. It is hard to imagine a place where the median home price is over 3.5 million ever having substantial population growth because so few people can afford to move there!

Low population growth coupled with high home prices is a sign that a region should have a higher RHNA, not a lower one. Effectively, California is reasoning from a population (lack of) change and concluding that, if an area has not increased in population, then it should not have to increase its housing goals. This has had the consequence of lowering targets in exactly the areas that should have higher ones!

Solution:

RHNAs should take into account housing prices. If an area has had little population growth, but a run-up in housing prices, that is evidence that there are a large number of people trying to enter an area. This should revise upwards a region's RHNA and we should see dramatically larger housing goals in California, especially in high price areas like Piedmont, Beverly Hills, and San Francisco.

TLDR; Endogeneity