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December 6, 2021

How an Outdated Environmental Law is Sabotaging California's New Housing Rules

[Cross-posted from the San Francisco Chronicle]

By Christopher S. Elmendorf and Tim Duncheon

In October, outrage erupted when San Francisco’s Board of Supervisors voted down a proposal to build nearly 500 new homes — many affordable — on a downtown site at 469 Stevenson St. now being used for valet parking.

Of course, these same supervisors reject housing developments all the time. And yet this denial was especially brazen.

It came short on the heels of a major Court of Appeal decision upholding the state’s powerful Housing Accountability Act, which requires cities to approve housing projects if a reasonable person could deem the project compliant with applicable standards. Yet the supervisors who voted “no” didn’t even try to argue that the project was noncompliant.

Instead, they attempted to evade the HAA by using a different law, the California Environmental Quality Act.

Technically, the board voted to reverse the city planning commission’s certification of the project’s environmental impact report—a report that took over two years to complete and certify in the first place. Board members demanded additional environmental studies, even as they openly admitted that their objections to the project — too big, not enough affordable units, risk of gentrification — had nothing to do with the environment. Oakland and Sonoma have also used similar CEQA maneuvers to hold up housing projects, too, albeit to much less fanfare.

The immediate question this raises is whether cities will be allowed to keep using CEQA to launder denials of housing that state law protects. Can bad-faith cities keep getting away with demanding round after round of ever more elaborate environmental studies, until developers cry uncle and walk away?

But there’s also a deeper question. Why is a housing project that a city can’t legally deny — because it is protected by state law — required to undergo an exhaustive environmental study in the first place?

CEQA requires local governments to carefully consider environmental concerns whenever they make discretionary decisions. For example, it requires cities to do environmental studies when they change their zoning ordinances.

San Francisco’s city charter subjects all development projects to “discretionary review,” making them all potentially subject to CEQA, even if they conform to zoning. But that doesn’t mean every single project in San Francisco is put through the wringer of a multiyear environmental impact report. A report is required only if the development may have a “significant impact” on the environment.

But significant relative to what?

The developer of the Stevenson Street project had to complete an environmental impact report because San Francisco’s Planning Department concluded (after its own yearlong, 342-page study) that the building might have a significant local environmental impact in the form of shadows, wind, or (during construction) noise and air pollution, relative to leaving the site as a parking lot.

This is nuts.

After all, this was a proposal to put dense housing a block from a BART station, in a designated “priority development area” under the region’s climate plan. Few projects could be more environmentally friendly.

Also, critically, California law doesn’t allow the city to retain the site as a parking lot once a developer applies to build housing there.

There was no reason to require an environmental impact report for the Stevenson Street project unless it would have a significant larger impact than any other project of the size that state law authorizes and encourages developers to build on the site. If the impact of the 500-home building the developer proposed would be about the same as the impact of any other 500-home building on the site, then requiring the developer to prepare an environmental impact report was a colossal waste of time (two years and counting) and money. In the midst of a worsening housing crisis.

It doesn’t have to be like this.

Under the federal statute on which CEQA was modeled, environmental review is limited to effects that are proximately caused by a government agency’s discretionary decisions. Because California law prohibits San Francisco from downsizing the Stevenson Street project, the project’s size isn’t caused by the city’s permitting discretion. And so the Stevenson Street project wouldn’t require environmental analysis.

Or consider New York, where if a developer proposes a 10-story development on a site where the zoning currently allows a five-story building, the effect of the larger project is analyzed relative to a smaller one the zoning allows.

The bottom line is that there’s an urgent need for fresh thinking about how to fit CEQA and the HAA together in a sensible way. Ideally, California’s Legislature would do it, with clarifying amendments to one or both laws. But achieving meaningful CEQA reform through the Legislature has proven to be a Sisyphean task due to the powerful interest groups — first and foremost the building trades unions — that have mastered the art of using CEQA litigation to hold developers hostage until the unions secure a side-deal, thereby making housing harder to build — and more expensive when it is built.

Action on this issue will require a full-court press by other actors: the courts, the Attorney General, and most importantly Gov. Newsom, who is riding high after crushing the recall attempt.

The governor has tools at his disposal to get the job done. He oversees the Department of Housing and Community Development, which is tasked with enforcing the HAA and other state housing laws. He also appoints the directors of the Natural Resources Agency and the Office of Planning and Research, who in turn issue the official CEQA Guidelines, which spell out the nitty-gritty of environmental review.

The governor’s housing department has launched an investigation of the 469 Stevenson St. debacle. A few days before Thanksgiving, the department delivered a strongly worded letter to San Francisco. This letter suggested that bad faith demands for superfluous environmental studies may violate the HAA. This interpretation — which is plausible but not open-and-shut — would greatly curtail CEQA-laundered project denials. And it’s an interpretation that courts are more likely to accept now that the executive branch of state government endorses it.

The letter is great, but it’s just a start.

CEQA guidelines must be revisited, too. They don’t even mention the HAA. Worse, they arguably call for full environmental impact reports even when a city has limited discretion over a project.

Stevenson St. is a case in point.

This is no way to run the show in a world where, as the HAA puts it, the lack of abundant infill housing is “undermining [California’s] environmental and climate objectives” by causing “urban sprawl, excessive commuting, and air quality deterioration.”

The housing shortage gets worse with each passing month that is wasted on irrelevant environmental review.

One of Newsom’s first official acts after trouncing the recall was to sign a spate of new housing bills. Next in line for the governor’s signature should be an executive order directing a revision of the CEQA Guidelines in light of the HAA. There’s no time to waste.

Christopher S. Elmendorf is a professor of law at UC Davis. Tim Duncheon is a lawyer based in San Francisco. Portions of this commentary were published on the State and Local Government Law Blog.

June 14, 2021

Officials Should Force San Diego to Follow California Housing Law. Inaction Has Consequences.

[Cross-posted from the San Diego Union-Tribune]

By Christopher Elmendorf, Ricardo Flores and Jon Wizard

Last month, California’s Department of Housing and Community Development (HCD) notified San Diego that the city will be out of compliance with the state’s “housing element” law as of June 16 unless it commits to serious corrective actions before then. This is a make-or-break moment for San Diego and for the future of housing in the state.

Every eight years, California cities must adopt a state-approved plan, called a housing element, which shows how the city will accommodate its share of regionally needed housing. This law has been on the books for decades but was toothless until recently. Starting in 2017, the Legislature bulked up regional housing targets, added new sanctions, required cities to loosen zoning restrictions enough to achieve their share of the regional target, and insisted that housing plans undo historical patterns of segregation and exclusion.

What HCD decides in San Diego’s case will establish a landmark precedent for cities throughout the state — San Diego County is the first region to go through this process. It will also have immediate ramifications for San Diegans. Under state law, a city that lacks a compliant housing plan forfeits authority to deny or downsize affordable housing projects on the basis of the city’s zoning code and general plan. Thus, if San Diego falls out of compliance, it would have no choice but to approve large apartment and condo buildings even in neighborhoods zoned just for single-family homes.

Perhaps to shelter the city from this serious sanction, HCD has thus far treated San Diego with kid gloves. San Diego’s housing plan was due last September, but the plan the city adopted and sent to HCD had grave shortcomings. UCLA professor Paavo Monkkonen and his students found that 65 percent of the sites San Diego identified for low-income and multifamily housing are located in the poorest third of the city’s neighborhoods. San Diego has an unusually large percentage of its land area reserved exclusively for single-family homes, yet the city’s plan did not open any of these neighborhoods to multifamily housing. This flaunts the Legislature’s mandate to “affirmatively further fair housing.”

San Diego’s housing plan also presumed that every single parcel of land identified as having redevelopment potential will definitely be developed for new housing during the eight-year planning period. This parlor trick allowed the city to “show” that it can accommodate its share of regionally needed housing (108,000 new homes) without relaxing any land-use restrictions. Yet during any given eight-year period, many sites that have redevelopment potential will be tied up by long-term leases, held back by owners who don’t want to sell or stay unchanged for other reasons. San Diego’s “every parcel will be developed” assumption is like a university that needs a freshman class of 1,000 students deciding to admit only 1,000 applicants, even though the university knows (or could easily learn) from past experience that only about 1 in 3 admitted students will enroll. Just as the university would need to admit 3,000 applicants in order to enroll a class of 1,000, cities need to zone for several times their housing target in order to reach it. San Diego did not.

But instead of finding San Diego to be out of compliance last September, HCD deemed the city’s status quo plan “conditionally compliant” and gave the city six months to adopt amendments about fair housing and housing sites’ likelihood of development (the college admissions analogy). Disappointingly, the city has adopted no such amendments. Instead, in February, it quietly floated some inconsequential draft revisions that leave the status quo intact.

One of us leads a coalition of nonprofits that will soon launch a first-time home-buyer grant program for lower-income people of color. Our goal is to build modest for-sale homes — accessible to households earning no more than 80 percent of San Diego’s area median income — in high-wealth, low-crime neighborhoods. We’ve received several million dollars in charitable commitments, but the single greatest barrier we face is restrictive single-family zoning that makes it impossible to construct smaller, more affordable homes in most of the city.

It is a moral and economic imperative that San Diego open up exclusionary neighborhoods and revise its zoning code to allow a lot more multifamily housing. It’s also the law. HCD and Gov. Gavin Newsom must stand tall and enforce it. If they don’t, cities across the state will infer that compliance with the state’s “strengthened” housing law just requires embellishing the status quo with cheap talk about good intentions.

February 11, 2021

Who decides whether California misjudged the Bay Area's housing needs? (And why it matters)

[Cross-posted from the California Planning & Development Report]

By Christopher Elmendorf

Housing advocates YIMBY Law and YIMBY Action sued the state of California last week, arguing the Department of Housing and Community Development misjudged the housing need of the San Francisco Bay Area. The suit raises important questions at the intersection of transportation, climate, and housing policy.

The activists’ complaint has merit. But, the Legislature, not the courts, should resolve it.

Here’s what’s at stake. Every eight years, each city in California must adopt a housing element to accommodate their share of regional housing need, including the need for multifamily housing. Regional housing need determinations (RHNDs) are the state’s principal lever for making cities zone for dense, relatively affordable housing.

Senate Bill 828, enacted in 2018, substantially revised and improved the process by which HCD determines regional need. Previously, the state had relied almost exclusively on forecasted household growth. The obvious problem with this approach is that household-growth trends are the byproduct of land-use policy. Restrictive zoning impedes population growth. And as housing prices rise, young adults shack up with roommates or move back with their parents rather than forming new households. Using the forecasted number of households to judge the adequacy of a region’s land-use plans gets things exactly backwards.

SB 828 tells HCD to top off the baseline, household-forecast RHND with adjustments for cost-burdened and overcrowded households. These adjustments, along with an updated adjustment for vacancy rates, are supposed to better align the supply of housing in California with “healthy housing markets” in other regions of the nation.

Taking its new charge to heart, HCD delivered housing targets for the Bay Area and Southern California that are 2-3 times larger than what these regions had to plan for in previous cycles, from 187,990 units to 441,175 units in the Bay Area and from less than a half-million to over 1.3 million in Southern California.

So why are housing activists suing instead of celebrating? Because HCD appears to have overlooked an older adjustment factor, one which the Legislature added with a landmark climate change bill back in 2008: jobs-housing imbalance.

Escalating home prices have displaced much of the Bay Area’s working class to the Central Valley. As a result, the Bay Area now has the dubious distinction of being a national leader in “supercommuters”—people for whom a one-way trip from home to workplace takes more than 90 minutes. Although there is no settled methodology for adjusting a region’s housing target on account of such imbalances, I and colleagues have explored a couple of different approaches, which suggest that making the jobs-housing adjustment would probably increase the Bay Area’s RHND by roughly 25%.

YIMBY Law’s legal argument looks iron-tight at first glance. The statute says that HCD “shall make determinations in writing” on each of the adjustment factors, Gov’t Code 65584.01(b)(2). As best I can tell, no jobs-housing determination was ever made. An agency’s failure to make an assessment the law requires is normally reversible error.

But this is not a normal case.

There is a strong argument from the structure of the statute that the courts have no jurisdiction to review HCD’s regional need determinations. The RHND is the linchpin of a very complicated, multi-stage process that unfolds on a tight timeline prescribed by statute. The timeline does not accommodate a protracted legal battle – especially when, not incidentally, millions of Californians are under-housed.

Consider what must get done. “At least 26 months” before the housing elements of cities in a region come due, HCD “shall meet and consult” with the region’s council of governments “regarding the assumptions and methodology to be used to determine the region's housing needs.” After reviewing the council’s data and arguments, “the department shall make determinations in writing” regarding methodology. Next, HCD applies the methodology and cranks out the RHND, which shall achieve “a feasible balance between jobs and housing . . . .”

The council of governments then has 30 days to raise objections, and HCD is given 45 days to resolve objections. The statute says nothing about appeals by any other person or entity, or appeals to any authority other than HCD.

One way or another, the RHND must be finalized quickly, because “at least 18 months prior” to the due date for housing elements, the region’s council of governments must distribute a “draft allocation” of the RHND to cities and counties. (The localities’ shares of the RHND are called their “RHNAs.”) A rapid-fire sequence then unfolds: cities may appeal the draft allocation to the council of governments, the council holds public hearings on appeals, the council adopts a final allocation following additional hearings, and HCD reviews the final allocation for consistency with the RHND, revising it if necessary. Each step has tight timeframe for completion, usually 45 or 60 days.(Meanwhile, many cities in Southern California have appealed to the Southern California Association of Governments and are threatening to sue the state, because of allocations they consider too high.)

The timeframes must be tight because cities need to know their RHNA well in advance of the date their housing element comes due. Cities that lack sufficient capacity under current zoning to accommodate their RHNA must include a site-specific rezoning plan in their housing element. Using an HCD-issued spreadsheet, they must identify which parcels will be rezoned and the densities that will be allowed following rezoning.

The Housing Accountability Act requires cities to approve projects on such sites if the project’s density is “consistent with the density specified in the housing element,” even if the project is “inconsistent with both the jurisdiction’s zoning ordinance and general plan land use designation.”

Because a city’s housing element controls its development in this and other ways, a city may not adopt a housing element without completing environmental reviews required by the California Environmental Quality Act. This takes time. Yet if it takes too much time—such that the city fails to adopt a housing element on schedule—the city is likely to be found out of compliance. And a city without a compliant housing element apparently forfeits its authority to use its zoning code or general plan as the basis for denying any project with at least 20% low-income or 100% moderate-income units. Hence the need for speed.

The Legislature recognized the need for speed when it exempted regional housing need determinations and allocations from CEQA.

If every city or interest group dissatisfied with an RHND or RHNA could litigate the question in court, it’s doubtful that any city in the housing-constrained and disputatious regions of our state would be able to adopt a housing element on time. HCD and the courts would then face enormous pressure to ad lib waivers of the statutory deadlines—waivers which the statute does not authorize.

A decade ago, the Court of Appeal wrestled with these issues in a case brought by the City of Irvine. Irvine challenged not the RHND, but the very large share of the target that had been allocated to the city. The Court of Appeal concluded that Legislature must have intended to preclude judicial review of RHNAs, because the “the length and intricacy of the process created to determine a municipality's RHNA allocation” did not leave space for plodding, deliberative judicial proceedings.

The same goes for challenges to the regional determination of need (RHND). However, it’s not clear that City of Irvine will control YIMBY Law’s case. Generally speaking, judicial review is available by default in California unless the Legislature has “clearly” withdrawn it, and the housing statutes are silent on judicial review of the RHND. Moreover, the decision in City of Irvine seems to rest in part on the court’s belief that large RHNAs have no material consequences for cities, owing to provision of state law that allows cities to set less ambitious “quantified objectives.” That line of thinking, shaky at the time, has been totally undermined by developments in the years since. To give just one example, Senate Bill 35 (2017) tied a city’s obligation to permit certain projects ministerially to the city’s progress toward its RHNA, not some lesser quantified objective.

So what’s to be done? YIMBY Law’s suit necessitates a one-time legislative fix. While the jobs-housing adjustment is pretty inconsequential for most California regions (because the region encompasses the “commute sheds” of its major cities), this factor cannot be ignored for the Bay Area. Making the adjustment would also bring the Bay Area’s RHND close to parity with Southern California’s. (Whereas Southern California’s RHND for the upcoming cycle is more than three times larger than its last one, the Bay Area’s new target is only about 2.3 times as large, notwithstanding the Bay Area’s higher housing prices and rents.)

It would be simple enough for the Legislature to pass a bill raising the Bay Area’s RHND by 25% (the midpoint of my estimates of the jobs-housing adjustment), while ratifying HCD’s determination in all other respects. If it wished, the Legislature could also extend Bay Area cities’ deadline for submitting housing elements by a few months, though this seems unnecessary. And, to avoid any confusion, the legislature could provide that the 25% jobs-housing increment shall be distributed pro-rata to all cities and income categories. This is an easy rule to apply, and it respects the intraregional allocation chosen by the council of governments. Each Bay Area city’s target for each type of housing (very-low income, low-income, moderate-income, and above-moderate income) would increase by exactly the same percentage.

It is odd to think of the Legislature as a pseudo-appellate body sitting in judgment of a state agency or department. But given the process California has chosen for determining and allocating regional housing need, this is as it must be, at least for now.

A few years hence, we’ll be able to look back and see how the RHND -> RHNA -> housing element process played out during this cycle, and debate procedural and substantive reforms for the next cycle. Perhaps some will argue that expedited judicial review in a designated court should be part of the process. In the meantime, responsibility for supervising HCD’s determinations of housing need belongs to the Legislature, not the courts. 

For a fully footnoted version of this piece, please click here.

December 20, 2019

Making It Work: Administrative Reform of California’s Housing Framework

[Cross-posted from Legal Planet]

By Chris Elmendorf

How recent legislative changes have given the state greater power to enable prohousing policies

This blog post is coauthored by Chris Elmendorf, Eric Biber, Paavo Monkkonen, and Moira O’Neill.

As California’s housing crisis swirls through the national news, attention has focused on statewide upzoning bills. Sen. Scott Wiener’s ballyhooed effort to allow 4-5 story buildings near transit was tabled until 2020, but earlier this fall the legislature effectively terminated single-family zoning, authorizing homeowners to add two “accessory” dwellings to their property.

Less widely appreciated is that the legislature has also empowered a state oversight body, the Department of Housing and Community Development (HCD), to make local governments rezone for much more housing while removing unnecessary constraints to development. It was not one big reform that put HCD in the driver’s seat. Rather, as we show in a new working paper (issue brief, full paper), the department’s newfound position is the byproduct of a number of individually modest reforms that work together to enable administrative interventions which would have been (legally speaking) unimaginable just a few years ago.

We argue, for example, that HCD can effectively double the amount of “zoned capacity” that local governments must provide, by requiring local governments to account for development probabilities in their housing plans. The department can also enact metrics and standards for whether the supply of housing within a local government’s territory is substantially constrained. Leveraging these standards, HCD could require poorly performing local governments to commit to speedy, ministerial permitting of projects that conform to the locality’s housing plan.

To put these ideas in context, let’s turn the clock back to 1980. In that year, California enacted an ambitious statutory framework to make local governments accommodate their “fair share” of “regional housing need.” But the law on the books was not enough to overcome entrenched local resistance. The Legislative Analyst estimates that between 1980 and 2010, developers produced only about half of the housing units that would have been needed to keep California housing prices from escalating faster than the national average. Similarly, during the most recent planning cycle, California’s local governments permitted, on average, only about half of what was determined to be their share of regional housing need.

Some of the blame for these failures rests with the misbegotten process by which California determines regional “need” and then allocates production targets among local governments. And some of the blame lies with the rickety state-law conveyer belt for converting housing targets into actual production.

Our new white paper focuses on the conveyor belt. It theory, it works like this: (1) a local government, after receiving its housing target, revises the housing element of its general plan, showing that there exist developable or redevelopable parcels with “realistic” zoned capacity to accommodate the locality’s production target; (2) the draft housing element is submitted to the state housing department, HCD, for review and approval; (3) if  HCD disagrees with the housing element’s assessment of capacity, the department may require the local government to include “program actions” for rezoning and removal of other constraints; (4) the local government then enacts the housing element and implements the program actions; and finally (5) if the local government improperly denies a zoning-compliant project, the developer may sue under the state’s Housing Accountability Act (HAA) to get her project approved.

This conveyor belt was prone to all sorts of breakdowns. But in the last couple of years, the legislature has substantially reinforced it. Among other things, the legislature has amended the HAA to prevent local governments from denying or reducing the density of a proposed housing project if any reasonable person could deem the project to be consistent with the general plan (which includes the HCD-approved housing element), notwithstanding local zoning and development standards that are more restrictive. This effectively reverses the traditional norm of deference to local governments on questions about the consistency of local zoning with the general plan, and allows developers to end-run restrictive zoning if a local government fails to complete a rezoning promised in its housing element.

Yet the reinvigorated HAA won’t accomplish all that much unless housing elements are beefed up too. This is where HCD’s new authority comes into play. Historically, the department’s reach was tightly circumscribed. HCD could issue interpretive guidelines, but local governments were obligated only to consider them. HCD could find a housing element noncompliant, but if the local government then turned to the courts, the courts would likely approve it—deferring to the local government’s judgment at the expense of the department’s. HCD’s review of housing elements was also frustrated by a lack of systematic, reliable information about local permitting practices, zoned capacity, and more.

All of this is changing. The legislature has authorized HCD to issue “standards, forms and definitions” concerning the analytic side of the housing element, including the assessment of developable sites’ capacity, while tightening the standards for what qualifies as a developable site. The department’s new standard-setting charge extends to local governments’ obligation to report annually to HCD on housing development applications, approvals, and processes. The legislature has also authorized HCD to decertify housing elements midcycle for failures of implementation, and backstopped decertification with fiscal penalties and more. This allows for both more immediate response by HCD to recalcitrant local governments (rather than having to wait through the eight-year cycle until it’s time for a new housing element), and for more effective penalties (in the past, the stiffest penalty available against noncompliant local governments was a court order shutting down all development in the jurisdiction, a penalty that might not have stung for growth-averse cities). Finally, we argue that the legislature has tacitly ratified HCD’s preferred, functional gloss on whether a housing element complies with state law, abrogating the traditional judicial standard, which was highly deferential to local governments.

The import of any one of these reforms, considered in isolation from the rest, would be modest. But they work together to fundamentally transform the position of HCD. Ambiguities in the new substantive requirements of housing element law provide occasion for HCD to exercise its “standards, forms, and definitions” authority. HCD’s expanded authority over local governments’ reporting will allow the department to obtain information it needs to make good decertification decisions, and also to shape the analytical side of the housing element. The legislative ratification of HCD’s gloss on what is required for a housing element to comply with state law should result in judicial deference to HCD’s findings of noncompliance. And judicial deference to the department’s decertification decisions, coupled with newly serious penalties for remaining out of compliance, should make local governments much more willing to accede to the department’s demands.

This is not to say that all is well with California’s planning-for-housing framework. There’s certainly important work that the legislature still needs to do. But it’s equally important to ask whether HCD will have the necessary resources and leadership to take advantage of its new authority. The director’s position has been vacant since late summer, and it’s up to governor to choose the department’s next leader. When he was running for office, Governor Newsom boldly announced that he would more than triple California’s rate of housing production. The ball is in his court.

March 5, 2019

A Legislative Response to California's Housing Emergency: Senator Skinner's SB 330

by Rick Frank and Christopher Elmendorf

[Cross-posted from Legal Planet]

How to Make a Good Bill Even Better

Last week, as President Trump harrumphed about the faux emergency on our nation’s Southern border, California State Senator Nancy Skinner introduced a potentially transformative bill that addresses California’s real emergency: the ever-escalating cost of housing in the state’s economically productive metropolitan regions. As this post will explain, Skinner’s new bill, SB 330, is a hugely important milestone in the evolution of state land use and housing policy, but it still falls short of what’s needed. Happily, there is a fairly straightforward (and conveniently low-visibility) way to fix the bill’s shortcomings.

What’s Great About SB 330

Starting as far back as the 1970s, California has enacted a huge range of mostly ineffectual remedies for the arbitrary and excessive barriers to new housing that local governments continue to throw up. In addition to being (largely) ineffectual, most of the state’s mandates have one other thing in common: they apply indiscriminately to local governments throughout the state, paying little heed to differences among jurisdictions in housing demand, supply restrictions, development potential, or planning capacity.

SB 330 is different. It recognizes that the housing crisis now afflicting San Francisco, whose median home would cost you $1.2 million, is not really a crisis in, say, Fresno, where the median house barely crests $200,000. Most of SB 330’s provisions would apply only to a subset of “covered” jurisdictions, defined by average rent and vacancy rates. The idea of tying state housing remedies to market conditions is very important, and long overdue. San Francisco needs to permit loads of new housing. Fresno does not.

SB 330’s “coverage” strategy is also politically advantageous. State legislators can pull specific jurisdictions out of the bill’s reach by adjusting the coverage formula or cutoffs. Back in the 1960s, Congress used the same strategy to pass the Voting Rights Act. The VRA created special protections for black voters in most of the Jim Crow South, but its coverage formula was reverse-engineered to exclude Texas. This was the price of getting the bill across the finish line.

SB 330 would impose a panoply of new controls on the jurisdictions that it covers. Among other things, SB 330 would prohibit covered jurisdictions from applying any off-street parking requirement to new housing proposals, and it would prevent them from making their zoning more restrictive, from enacting new caps on building permits, and from applying fees or historic-preservation ordinances retroactively.

However, apart from the parking provisions, SB 330 does nothing to erode the thick accumulation of growth controls, excessive zoning restrictions, cumbersome permitting procedures, exorbitant fees, arbitrary code requirements, and layers of discretionary review that already exist in the covered jurisdictions.

How to Improve SB 330

SB 330’s glaring omission—its failure to remove existing barriers to housing in the high-cost jurisdictions—probably reflects a political calculation. If the bill were to enumerate certain “excessive” barriers to housing which local governments could no longer enforce, it might become too hot to handle.

But an effective attack on existing barriers to new housing needn’t be so overt. As one of us (Elmendorf) explains in a draft law review article, the California Legislature could bring about the elimination of many of these restrictions simply by tweaking the legal standard for determining whether a local government’s housing plan complies with state law, and by authorizing mayors to promulgate interim housing plans.

Let us explain. Since 1980, California has required its local governments to revise the “housing element” of their general plans every 4-8 years. The housing element is supposed to explain how each local government will accommodate its fair share of regional housing needs. It must include an analysis of local constraints to the development of housing, and a schedule of actions addressing those constraints. Local governments must submit their periodically updated housing elements to the state Department of Housing and Community Development (HCD) for review and approval.

But there’s a hitch. The legal standard for what constitutes a “substantially compliant” housing element has no teeth. So long as the housing element “contains the elements mandated by the statute,” the courts will uphold it. Whether it will actually result in construction of the target number of units has been regarded as a question of “workability” or “merits,” and irrelevant as matter of law to the housing element’s validity.

This deferential approach makes some sense for the Fresnos of the world, but it’s a disaster for the San Franciscos. SB 330 is thus the perfect vehicle for a solution. California should enact a new definition of “substantial compliance” that applies only to the high-cost jurisdictions covered by SB 330. In these jurisdictions, a housing element should be deemed compliant only (1) if it is likely to result in production of the targeted amount of new housing over the planning cycle; or (2) if it removes, or commits the local government to removing, all unreasonable constraints to the production of new housing. Discrete, removable constraints which are identified in the housing element but not reformed on schedule should become inoperative as a matter of state law. And if a local government fails to adopt a new, substantially compliant housing element on schedule, state law should authorize the mayor (with HCD’s approval) to promulgate an interim housing element, which would govern housing development in the meantime.

These seemingly small-bore reforms would have far-reaching consequences. Initially, they would make it easy for a city’s elected leadership to suspend exclusionary, voter-adopted growth controls, while deflecting blame to the state. If a housing element lists a voter-adopted restriction on its schedule of (unreasonable) “constraints,” and if the city’s voters fail to approve an adequate reform by the appointed date, the constraint would be repealed by operation of state law. While local officials may have some reservations about putting voter-adopted measures on the chopping block, the state-law framework would give them cover. “The state pushed us to do it; we had to or else we’d lose our state funding,” they can say.

And if mayors can promulgate interim housing elements when cities would otherwise be out of compliance, this will shift cities’ land-use policies toward the mayors’ preferences. Mayors, who are elected citywide, tend to be less responsive to neighborhood NIMBY groups than city councils. Knowing that the mayor could issue an interim—yet legally binding—housing element, city councils would make generous concessions ex ante to the mayor, in the hopes of avoiding a veto or other mayorally-induced delay of the council’s housing element.

Senator Skinner deserves major plaudits for SB 330. Now let’s make it even better.

August 12, 2012

Debunking the Myth of Homeownership

This Op-Ed appeared in the Sunday edition of The Sacramento Bee.

Homeownership promises more than it delivers. Americans purchase homes for perceived financial security and social benefits, while politicians push homeownership for imagined economic growth. Such claims are traded like stock tips around water coolers and repeated by "experts" paid by the real estate and home building industries. But they are merely myths, widely held but false.

Here are some of the biggest whoppers.

Homeownership is a good investment.

According to housing guru Robert Shiller, from 1950 to 2000, annualized returns to housing averaged less than 0.5 percent after adjusting for inflation.

Returns were even lower over a longer horizon, with real prices growing 0.4 percent per year from 1890 to 2004. Relative to other investments, owner-occupied housing has grossly underperformed.

Between 1926 and 2009, compounded annual returns for small stocks (11.9 percent), large stocks (9.8), long-term government bonds (5.4), and Treasury bills (3.7) far outpaced housing returns.

Owning a home is the path to prosperity.

At best, homeownership amounts to a decent savings account, but even then it is ineffective. Policies like the mortgage interest deduction encourage taxpayers to finance homes with debt, and result in leveraged ownership, not true ownership.

Between 1950 and 2010, the percentage of home equity plunged from 80 percent to 38.5 percent. In the words of one commentator, "the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place."

Homeownership creates positive social benefits.

The housing industry likes to say that homeowners enjoy better lives than renters. It touts studies correlating homeownership with higher rates of civic participation, beneficial effects on children's well-being and behavior, and lower rates of crime.

But no study has identified a causal connection between homeownership and what economists call "social capital." Children of homeowners might exhibit lower rates of truancy than children of renters, but that doesn't mean renting will land your kid in juvenile hall or that owning will get her into Harvard.

In fact, studies that isolate causal influences of homeownership on social capital find that the purported benefits disappear and even become negative.

Housing subsidies lower the cost of homeownership.

Current housing policies distort the allocation of financial capital by altering the decision to pay for homeownership with debt over cash or other assets.

Thanks particularly to the mortgage interest deduction, mortgage indebtedness soared in the decade preceding the housing collapse, rising as a percentage of GDP from 47 percent in 1995 to 81 percent by 2007.

Subsidized mortgage debt encourages homebuyers to consume bigger, costlier homes. Yet artificially boosting the cost of housing helps no one. Higher prices prevent millions of potential homebuyers from entering the market.

And while current homeowners may prefer inflated prices for maximizing gain upon sale, any perceived benefit is illusory as sellers become buyers in the same overheated market.

Housing subsidies help the economy.

Housing subsidies distort the decision over where to invest as much as how to invest. By lowering the cost of owner-occupied housing, subsidies contribute to overinvestment in residential real estate.

"Don't build a factory, build a mansion," economist Kevin Hassett has said of the mortgage interest deduction's influence on capital investment. Indeed, while the tax rate on corporate investment exceeds 30 percent, housing enjoys a rate near zero.

The distortions caused by tax subsidies for housing may account for half of all misallocated capital in the economy, shrinking GDP by 10 percent.

They also contribute to labor immobility, which raises unemployment. No wonder nearly every economist believes "the most sure-fire way to improve the competitiveness of the American economy is to repeal the mortgage interest deduction."

Housing subsidies help middle-class families.

Subsidies for homeownership accrue disproportionately to upper-income households.

Only 3 percent of taxpayers report income over $200,000, but they enjoy 35 percent of the mortgage interest deduction's largesse, while the 75 percent of all taxpayers earning less than $75,000 receive just 11 percent.

In fact, the mortgage interest deduction delivers 10 times the savings for households with income over $250,000 compared to those with income between $40,000 and $75,000.

The disparity in benefits exists because taxpayers receive them only if they itemize deductions.

But just one-third of taxpayers itemize, while two-thirds take the standard deduction (and thus receive no benefits). Even among itemizers, high-income households receive larger benefits, because the value of the subsidy rises as taxable income increases.

There are good reasons to buy a house. But none of them involves attaining financial security, admission to elite colleges, a stronger economy, lower taxes, or the American dream.