Economic Updates

The Affordable Housing Shortage 

SCAG’s draft plan also determined that 41.4 percent (557,336) of the new housing units must below-income or very low-income housing. This is more than triple the RHNA for the SCAG region during the 2014-2021 compliance period, which called for zoning for the potential construction of 438,030 housing units.  No one will disagree that L.A. needs to build more affordable and workforce housing, the question is how to pay for it.

The L.A. City Chief Legislative Analyst released their assessment of the RHNA draft and their report highlighted a number of significant concerns.   The city typically received a little more than 20 percent of the regional RHNA allocation, but is now being asked to meet more than 35 percent under the current proposedAllocation Methodology and the estimated cost to build the 450,744 housing units (192,432 above moderate income or “market rate” for purposes of this report / 258,313 Affordable) needed under the RHNA draft allocation for L.A. is enormous.

The CLA reported that “approximately 254,000 affordable units would require public subsidy and at an average total construction cost of $500,000 per unit it would require $127 billion in public and private financial resources. For units that require a subsidy, the City’s policy sets a limit on the City’s maximum subsidy per unit. At the average subsidy of $120,000 per unit, a total City financial contribution of $30.5 billion would be needed to support the 254,000 affordable units. Therefore approximately $3.8 billion in City funds per year and $12 billion per year in private, State and federal funding would be needed to ensure full project financing.

Currently, the City makes available an average of $30 million annually in federal subsidies to support new construction and preservation of affordable housing. The City’s local funding resources are expected to be bolstered by the recently-adopted Affordable Housing Linkage Fee, which is projected to raise an average of $100 million annually; however, given the phase-in period and grandfathering provisions, it is still too soon to accurately predict what portion of the anticipated $3.8 billion needed in City funds could be generated from this source.”

Planning is Everything, But Plans Mean Nothing

The best way to understand RHNA law is to focus on zoning not housing production.  At the most basic level, zoning laws do four things:

1. Divide land into designated regions or “zones,” each of which corresponds to geographic areas on the zoning map.
2. Specify what type of structures can be built (or not built) within each zone.
3. Proscribe limits on the size and dimensions of each structure type by zone.
4. Define the process by which local governments grant permission for new development – i.e. “by right”, “conditional use”, “spot zoning”.

A 2012 paper by Andrew H. Whittemore Zoning Los Angeles: a brief history of four regimes he shows that land-use regulation in L.A. showshow through the use of tools of land-use regulation, several groups of actors, atkey points in time, became particularly adept at shaping the L.A. we live in today.

The first regime: the era of the speculator – from the advent of zoning in L.A. in 1921 into the Depression.  

• The principal hallmark of the interwar and Depression years was ‘over-zoning’, with this representing a victory for speculating small-scale landowners and a loss for homeowners, big developers interested in a more stable picture, and the Planning Commission.
• The City Council ended up zoning the city for commercial uses almost everywhere it may ever be desirable, and most major roads were given commercial frontage.  Property values jumped as much as 300 percent on up-zonings to commercial use.
• In 1926, 30 percent of land in the Wilshire – Hollywood district to the west of downtown was zoned for commercial use, but only 7 percent was put to this use.  Over-zoning for commercial uses was also negatively impacting the residential character of the city driving homeowners to other jurisdictions.

The second regime: the era of the community developer and government-sponsored big real estate lasting from the Depression until the 1960s. 

• The FHA was founded in 1934 and required lending standards for the reception of federally insured amortized mortgages.  This favored big developers and overwhelmingly denied mortgages in areas of older construction, areas that were not zoned, and areas where the incorporation or proximity of less restrictive zoning, even mildly, threatened investments in low-density residential construction.
• The federal policy of the 1930s seems to have brought an end to over-zoning in many areas, at least on the scale seen in the 1920s and the year 1950 was the busiest for the Planning Department since 1923: the city approved over 30,000 housing units, with 25,000 of these being single-family homes.

The third regime: the era of the homeowner. Anti-growth advocates the third, lasting from the 1960s until 2000.

• This was the ‘middle-class progressive regime’, a political system concentrated on as environmental protection, historical preservation, and other quality-of-life concerns.  Problematically for homeowners, as land that could accommodate low-density development dwindled in L.A. and its vicinity.  Developers began to pursue denser infill development in already built-up areas and height was only one target for homeowners’ groups.
• The city expanded the regimen of exclusive residential zones in the 1960s.  It was increasingly evident that the combination of high land costs, density restrictions, and parking requirements was forcing developers to charge higher prices for housing units.
• Already in 1963, builder Ray Wyatt of Los Angeles complained that unreasonable density restrictions forced him to price units out of the range of the majority of consumers: ‘We are forced to build 75 percent of our houses at prices 15 percent of our customers can afford’, he said.
• Public faith in planning and zoning fell precipitously, and From 1972, the Planning Department began to organize its staff geographically to encourage specialization in local issues and priorities.  One result of this in the 1970s was a rebellion against property taxes in the form of Proposition 13, a 1978 state-wide measure severely restricting cities’ and counties’ ability to raise taxes on residential property.
• As a result, residential construction, as far as fiscally minded planners viewed it as a revenue-generating commodity, lost much of its appeal.  The Housing Element of 1986 reported that the combined effects of Proposition 13 and zoning restrictions meant that housing turnover was slow, and when new units were added to the city’s supply or older units came onto the market, they tended to go to the highest bidder.  NIMBYs arrived on the scene and CEQA was established in 1970 and Proposition U passed in 1986, thereby reducing the allowable size of new buildings on 70-85 percent of the commercial and industrial areas of L.A. by one-half.

*According to a 2001 Brookings Institute report Sprawl Hits the Wall:  In the 1990s, L.A. County added more than 1 million residents, the vast majority of them in existing urban neighborhoods. But overall L.A. County housing production dropped from 400,000 units in the 1980s to only 120,000 units in the 1990s.  Most of this drop came in the multi-family category—a decline from 270,000 units in the 1980s to only 56,000 in the 1990s.

Two other key things occurred:

• In 1986 the rental vacancy rate in the LA/LB metro area in 1986 was 2.9 percent. Developers saw an opportunity to build more supply, and did so. Then the economy turned and the vacancy rate started climbing at a rapid clip.  By 1995 the vacancy rate was 8.9 percent in the same metro statistical area (this is from US Census Bureau stats).
• Many developers and projects went bankrupt as they weren’t able to service their date with such a high vacancy rate. President Reagan’s team successfully pushed legislation in 1986 that ended up reducing many of the tax advantages of apartment construction (depreciation). This had a lot to do with a slow down in apartment construction. If you look at page 23 in the report you will notice there may have been a rush to break ground before the “reforms” went into effect, which would have contributed to the spike in mid-decade apartment construction.

The fourth regime: the era of balance – What began as a housing crisis for lower income households in the 1960s has in the last two decades become a crisis affecting the middle-class majority.

• The Citywide General Plan Framework of 1996, although it officially replaced the quarter century-old ‘Concept Los Angeles’, largely reiterated the goals of the old plan: the preservation of low-density residential areas and the accommodation of population growth in new and revitalized high-density mixed-use districts proximate to transit corridors.
• The Anti-Growth advocates found a home in Neighborhood Councils when they were permitted by the 1999 City Charter and these voluntary non-mandatory organizations intended to enhance community presence in decision-making.  By 2007 a University of Southern California study found that these Councils had failed to become representative of their communities in terms of demographics and local priorities.
• Post 2000 has been characterized by a balance between allied housing and development interests and anti-growth advocates. In November 1999, a Housing Crisis Task Force was convened by the Los Angeles City Council. The recommendations were presented in a report titled “In Short Supply”:

1. 1. Establish a housing trust fund with dedicated sources of local revenue.
   2. Develop a comprehensive strategy to preserve existing affordable housing.
   3. Create more affordable home-ownership opportunities through innovative land use.
   4. Make the City user-friendly with phone and Internet information services for housing, building, zoning and planning.

Even with some success on these recommendations the fear of too much density continues to persist with many long-time angelenos, most notably former public official Zev Yaroslavsky.  In April of 2008 he penned an Op-Ed in the L.A. Times entitled Don’t be dense; The growth policies favored by some city officials threaten L.A.’s livability.

Zev made one clear point that holds true in a lot of ways today: The scale of development should be informed by the character of its surrounding neighborhood. And the one-size-fits-all approach embodied in the density-bonus law and the indiscriminate approval of denser residential housing on commercial property is not an appropriate growth strategy for Los Angeles.