☆ California's "housing element": an over-faith in bureaucracy

Housing quotas (elements) set by the government, unsurprisingly, do not meet the housing needs of the consumer market. Scott Beyer of Market Urbanism Report takes a look at San Jose's Housing Element, and finds a case study in how incompetent gov't bureaucracy and over-regulation contribute mightily to our housing crisis. An Opp Now exclusive.

All California cities are mandated by state law to have what is called a “housing element.” It exists, among other reasons, to ensure that cities are building enough units. San Jose’s element, which is incorporated into its Envision 2040 plan, is covering its final year, after which a new element will need to be approved. But the fundamental problem with these elements is that they set goals based on complex, centrally-planned metrics rather than market signals. This means they regularly underestimate how much housing is needed in California cities, giving local politicians cover to perpetuate the shortage.

The state mandate for housing elements began in 1969 and creates a comprehensive series of regulations around housing policy. Cities adopt elements as part of their general plans, and as a state website says, these elements ensure that “in order for the private market to adequately address the housing needs and demand of Californians, local governments must adopt plans and regulatory systems that provide opportunities for (and do not unduly constrain) housing development.”

Cities must meet the goals in order to receive various state funds, including for transportation. Each municipality is required to draft a plan that enables housing increases based on local demand, including an inventory of all sites that are zoned and available for home production. The target goals are determined by the Department of Housing and Community Development, which conducts calculations of statewide and then regional housing demand. 

Notes San Jose’s housing element draft: “The California Department of Housing and Community Development (HCD) and California Department of Finance (DOF)...first calculate statewide housing need[s] based on population projections and regional population forecasts used in preparing regional transportation plans.” A separate process called the Regional Housing Needs Allocation (RHNA) then is conducted by “regional Council of Governments (COGs) throughout California, which works with cities and counties.”

DHCD is ultimately responsible for determining whether a city’s housing element is adequate. According to DHCD, to comply with state regulations, the element is one of many criteria a city must issue in its general plan. Other concerns relate to “land use, transportation, conservation, noise, open space, safety, [and] environmental justice.” The state has taken an increasingly influential role in housing policy recently as NIMBYism dominates local government. 

San Jose’s element is due to expire in the next year (each element lasts for eight years until it must be reassessed). Next year’s element, according to the draft document, will detail five city goals: abundant and affordable housing; providing homeless housing; “healthy, thriving neighborhoods”; wealth generation opportunities; and increased diversity. 

Many of the city’s goals are laudable: The element calls for reducing red tape for permitting and eliminating a restriction requiring commercial uses to be incorporated into some residential construction. But other measures take a limited, micromanaging approach. 

For instance, the element establishes a “housing overlay” approach in North San Jose: “to integrate affordability, create North San José-specific Affordable Housing Overlay Zones that support only Industrial uses, 100% affordable housing, or market-rate housing that integrates affordable units into their developments.” 

Aiming to create 100% affordable housing can actually increase home prices. If it leads to measures that cap the rents a landlord can collect, it can reduce housing supply and thus increase rents, by preventing projects from penciling. As we wrote for ONSV in May, many studies find that “inclusionary zoning” policies do precisely that. On that note, San Jose’s housing element calls for rent restrictions on 20% of North San Jose residences.

Another problem with these elements, beyond micro-management of housing type, price, and location, is their underwhelming numerical goals. For its next element, San Jose endeavors to build 62,200 units by 2031, or about 621 units per 10,000 people for the full 8-year cycle. San Francisco must build 82,000 by 2031, or just over 1,000 per 10,000 residents from 2023-31. By comparison, cheaper Sunbelt metros typically permit 100-200 units per 10,000 residents annually - without the need for state laws to force them. 

This gets to an uncomfortable issue for supporters of housing elements: They don’t produce much housing. Certainly not in San Jose, where the city will miss its goal to add 25,000 units between 2017 and 2022. And the same is true of California as a whole; despite the law’s over-half-century existence, California has the country’s second-highest housing costs and is 49th among 50 states in units per capita.

This is where housing elements may even be a problem: If they set artificially-low goals (and they often do), they give politicians and NIMBYs cover to build less housing. After all, if they can claim that their city met its housing element, they can propagate the common myth in California municipal politics that a given city is “building enough”. 

In fairness, the goals that inspire housing element policy come from a good place: Activists view them as a form of state preemption that outlaws cities from under-building. SPUR, the San Francisco-based land-use organization, recently wrote a positive review of elements as part of a larger mix, along with state housing bills, to combat NIMBYism. But housing elements have been at best ineffective, and at worst, have added to the regulatory mix that causes California’s home shortage. 

Even some proposed “reforms” are derived from a central planning bias. For example, a paper by UCLA’s Lewis Center for Regional Policy Studies wrote that elements should “mandate that every city carry an equal percentage of income-restricted housing and make space for an equal rate of new housing growth.” Such a policy would ignore that housing markets are different across California, meaning it would cause shortages in some cities and over-building in others.  

Fundamentally, the path to more home production in California is deregulation, not more of it. The state should weaken current impediments, such as restrictive zoning and CEQA, that prevent home producers from meeting consumer needs; but should avoid bureaucratic ones that let unit production be set by politicians and administrators. Housing elements fit that latter category, and as such are not a particularly useful - and in fact counterproductive - means of addressing the supply crisis facing Silicon Valley and beyond. 

This article featured additional reporting from Market Urbanism Report content staffer Ethan Finlan.

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