California's Free-Market Housing Fix

"Has California's housing crisis gotten so bad that the state is willing to try a free-market approach? The recent passage of SB9, also known as the California Housing Opportunity and More Efficiency Act, suggests so.

The new law upends the long-held assumption that elites can allocate resources better than markets. In California, that belief produced zoning overreach, excessive land-use restrictions, urban growth boundaries, endless environmental reviews and further regulation by neighborhood groups and local officials. All that made buildable land scarce and expensive.

This dysfunctional regime, known locally as "build absolutely nothing anywhere near anyone," or Banana, has prevented thousands of small property owners and builders from adding to the housing supply by working on a few units at a time. But it has rewarded deep-pocketed developers with large government subsidies for few new units built near a handful of transit stops or in low-income neighborhoods. If government money were the fix, California wouldn't have the second-highest home prices after Hawaii, the highest rents and the third-highest rate of homelessness of any state.

With an untenable status quo, the Legislature decided to restore some private property rights taken away by zoning restrictions to most property owners and rely on private markets. Effective Jan. 1, SB9 allows landowners to build up to four housing units on about 80% of the lots currently zoned for only one unit. It allows lot splitting -- the conversion of current homes, with some limitations, into rentable units, and new construction of duplexes. We estimate that around 2.5 million single-family detached homes in California could be converted to duplexes. In a best-case scenario, more than 500,000 units would be added over 10 years with benefits accruing to existing property owners and small-scale builders, not large, politically connected private developers.

SB9 reinforces a growing consensus that the way to make housing more affordable is to increase supply, not to ease credit, increase government subsidies, or suppress interest rates. Even a few progressive think tanks and cities have come around to this view.

Modest zoning reform on a broad scale is highly effective. The borough of Palisades Park, N.J., always has allowed moderately higher density housing, unlike many neighboring communities. Over the past 40 years, Palisades Park has seen a 50% population increase by replacing older single-family homes with two-family homes -- mainly duplexes -- while neighboring boroughs' populations remained flat. Today, Palisades Park residents enjoy lower taxes and a more vibrant commercial area than their neighbors.

Even in California there are signs that private enterprise can take off. From 2018 to 2020 homeowners added more than 15,000 accessory dwelling units, also known as granny or mother-in-law flats, with more to come. The catalyst for this explosive growth was a decadeslong effort by the Legislature to overcome local obstacles that began in the 1980s.

SB9 applications are already being filed. The first was for a private home built in 1951 in Palo Alto, Calif., which sits on a 1-acre lot and is valued by Zillow at around $4.5 million. With four newly-built energy-efficient units, the lot's total value could double easily, now split over four units. The city's tax base would also double -- all with minimal new infrastructure expenditures, no subsidies and no urban sprawl. What's not to like?

It is true that not-in-my-backyard types or local officials still may hinder SB9's effectiveness. While the Legislature tried to limit the discretionary powers of local officials, it didn't remove all options for local opposition, leaving, for example, the ability to impose onerous design requirements. Affordable-housing mandates or rent controls could limit the number of new units built, which would interfere with the filtering process. This process relies on the building of new, more-expensive units, which frees up an older, less-expensive ones, similar to the used-car market.

SB9's broad applicability may allow for the largest restoration of property rights in our lifetime. In many of California's 4,000 jurisdictions, the chance to evaluate the effects of best and worst practices at the local level will help policy makers craft solutions for other high-priced communities around the country.

If SB9 fails, California may be doomed to a demographic future in which the state consists of a small group of the ultrarich, a shrinking middle class, and a growing segment living in or near poverty. There is hope that SB9 will allow private enterprise to address California's housing crisis. Policy makers should provide all the backing they can." [1]

1.  California's Free-Market Housing Fix
Pinto, Edward; Tobias, Peter. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 04 Feb 2022: A.15.