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.