Davenport Institute

Research Reports

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Rewarding Ambition: Latinos, Housing and the Future of California

Joel Kotkin, Thomas Tseng, & Erika Ozuna

September 2002

A CRISIS OF SUPPLY

California's current housing dilemma is rooted in a severe lack of supply, which is at a historical record low.²⁸ Simply put, housing production in California has not kept up with the state's remarkable population growth — tightening overall inventory levels and lowering vacancy rates. As a result, soaring home prices and rents are endemic across the state's housing markets, erecting rising barriers and squeezing out many lower- and middle-income aspirants to the American dream. This has resulted in a widening chasm between the housing haves and have-nots.

This current dilemma has been further spurred by recent changes in spending patterns. With the collapse of the dot-com boom and the weakening of stock prices, many middle- and upper-class investors have shifted their primary investment into housing. This has fueled, as Milken Institute economists Susanne Trimbath and Juan Montoya have pointed out, a rather unusual phenomenon — rising residential real estate prices even in a relatively weak economic environment. In contrast, during past recessions, such as in the early 1990s, lower real estate prices allowed new entrants to come into the market more easily.²⁹ Even in Northern California, where the stock market decline and the dot-com bust have been devastating in their effect on jobs and incomes, recent reports suggest a strong rebound is already in place for the resilient housing market.³⁰

But even if the stock market improves and affluent Californians choose once again to put their money into equities, other secular factors will likely exacerbate the housing crisis. Rapid population growth is projected as a result of continuing immigration and natural increases. Groups that have previously not been active players in the housing market, such as unattached singles, are now prominent consumer segments, accounting for roughly one in four new home sales.³¹

Immigrants themselves are a contributing factor, increasing demand in many regions of the state, including once heavily Anglo suburbs such as Riverside-San Bernardino as well as the San Fernando, San Gabriel, and Santa Clara Valleys. "We're not seeing much of a recession in real estate here," notes Brian Paul, a spokesman for the San Fernando Valley Board of Realtors. "The immigrants are fueling growth here that contradicts most of the negative forces."

And, unless there is some radical change, it is difficult to imagine the state producing anything like the additional housing stock needed to meet the growing demand as the economy, particularly in the now hard-hit Bay Area, once again recovers its footing.

Dimensions of California's Housing Crisis

Today, California possesses the second lowest homeownership rate in the country at 56 percent, behind only New York. In contrast, the overall U.S. homeownership rate — driven by historically low interest rates — has soared to an all-time high at 68 percent. While the homeownership rate has actually risen 4.2 percent across the rest of the nation during the 1990s, it increased only 2.2 percent in California.³²

Housing trends in California demonstrate that the crisis is getting worse and showing few signs of improvement, as California has become home to the least affordable housing markets in the entire nation.

Nine of the ten least affordable metropolitan areas in the country are in California. Similarly, the state is home to sixteen of the twenty least affordable metro areas as well.³³

In the Los Angeles metropolitan area, homeownership levels are particularly low at 49 percent — second lowest behind New York among all metropolitan areas in the country. Within the City of Los Angeles itself, homeownership levels exist at a meager 39 percent.

Not surprisingly, the soaring housing prices have had a disproportionately greater impact on the state's considerable immigrant and minority populations than on its older, more established White population, even controlling for income levels. Among Whites, for instance, the homeownership level hovers at 65 percent, compared to 41 percent among Latinos and 39 percent among African- Americans. Conversely, Latinos and African-Americans represent higher renter proportions at 58 percent and 60 percent, respectively, in contrast to only 34 percent among Whites.³⁴

Another major factor lies in intergenerational transfer of wealth, which helps many Anglos and native-born Americans purchase their first home. Minorities, including Latinos, and immigrants are far less likely to receive funds from parents and other relatives that can be used for the purchase of a home.³⁵

It is at this confluence of race and class that California's housing crisis is most acute. The biggest problem is not that the potential new home buyers are Latino; it is that, as the largest portion of the California working class, they are simply being priced out of the market in a way that other generations of California homeowners — refugees from the Plains "dust bowl," the rural South, or returning GI's from various wars — were not. As Armen Avedian, a broker at Dilbeck Realtors in Glendale, put it:

"Ten years ago, the first-time home buyer could get something for $200,000. Now that's up another $100,000. A blue-collar worker earning $10 an hour will never be able to get a house, not even a piddly little condo, at these rates."³⁶

The Housing Supply Constraint

The key difference between the 1990s California boom and previous ones has been the lack of new housing construction. Usually, increases in jobs and incomes drive the housing market, but for a large portion of the past decade, new housing construction has not kept pace with the demands generated by vast employment and population growth.



Since the mid-1990s, a low production of predominantly single-family homes has characterized the building environment. After reaching a pinnacle of housing production in 1986 — when a record 303,000 residential units were built — housing production has since dropped precipitously, accelerating its decline during the state's draining recession until bottoming out mid-decade.

Housing production began to pick up again in 1996, as new construction followed the economy out of the trough, but has only grown at modest levels since — far below previous decades of economic growth. Since 1996, the state has produced just an average of 128,000 units per year. During the entire 1990s, California as a whole produced only 1.1 million housing units. Much of this, in addition, was located not in the key metropolitan regions, but in the more distant suburbs.

In contrast, housing production soared in previous eras of the state's economic expansion. During the 1980s, for instance, California produced more than 2 million units of housing — an average of more than 200,000 units per year. Likewise, housing construction during the 1970s saw the development of nearly 2.2 million housing units for an average of 216,000 units.



Since the beginning of the new century, California has slightly lifted its housing construction levels to approximately 148,000 units per year. Nevertheless, this is still far short of the estimated 250,000 units necessary to sustain statewide housing needs according to estimates.³⁷ Housing permit activity in California is anticipated to increase to slightly above 156,000 in 2003. If the state continues this current path, approximately 1.4 million units will be produced by the end of the decade, well below aggregate housing needs.

In sum, California currently faces an annual shortfall of more than 100,000 units. Unless this improves in the immediate future, the gap will persist in the face of projected economic growth, straining supply levels. Inventory levels for new homes are at near record lows statewide.³⁸ At the same time, prices are rising fastest not in the affluent areas — out of the price range of most working-class, immigrant, and Latino potential homeowners — but in areas with more modest housing that traditionally attract these buyers including such communities as Bell, Paramount, Lancaster, and Pomona. These communities in 200l saw rises in home prices by as much as 20 percent. Observes one Santa Ana realtor:

"We get calls saying, ‘If you find anything under $230,000, I don't care where it is, I just want to see it.'"³⁹

Exacerbating the crisis even further has been the dramatic drop in multifamily housing construction in California since 1986.⁴⁰ While they constituted approximately 45 percent of total housing development during the 1970s and 1980s, these developments plummeted drastically to just under one-quarter of all housing developments during the 1990s. Currently, multifamily housing comprises just over 28 percent of total production and accounts for a considerable proportion of the overall housing shortfall.



Multifamily housing has always served as an affordable source of shelter for lower-income families and immigrant households as they prepared to join the ranks of homeowners. Now these units are crowded and increasingly expensive, draining savings that otherwise might be used for purchasing new homes or condominiums.

Declining Affordability

The low production of new homes in California has resulted in scarce inventory across the entire housing market. This comes at a time when the state has experienced historical record levels of home sales: existing single-family home sales skyrocketed during the latter half of the 1990s, exceeding 500,000 units for the first time in 1998, sustaining that number for four consecutive years.⁴¹



However, the home-buying frenzy is rapidly draining housing stock across California's communities and has swiftly inflated home prices. This has severely constrained new home sales — making buying a home both more difficult and competitive — intensifying home buyer frustration. One-fifth of all home buyers now must make an average of three offers on three different homes before a successful transaction is completed.⁴²

Home prices have risen across the entire country, but few places have matched the blistering pace generated by California's housing markets. Across the state, home prices have escalated to astronomical levels. A median-priced single-family home in 1996 was $177,270. Today, the median price has climbed 83 percent to over $324,400. In a single year between June 2001 and June 2002, the state's median home price rose 21.3 percent from $267,400 to $324,400.⁴³



Not surprisingly, rising home prices have in effect shut not only low-income households, but also many moderate-income households completely out of the market. As of May 2002, a little over one-quarter — 27 percent — of the state's population could afford to purchase a median-priced single-family home in California — compared to 56 percent in the general U.S. population.⁴⁴ Qualifying income levels must be greater than $65,000 — $25,500 more than the median household income in California.



The lack of housing affordability extends beyond purchasing a home — it is even more acutely felt in the rental sector. Rising rental rates have grown much faster than overall median income levels among renters.⁴⁵ With a substantial number of California residents priced out of the housing market, there is mounting evidence that renters are shouldering a greater financial burden due to inflating rents. For instance, 45 percent of California's renting community now spends more than half their income on rent compared to 21 percent of owner households who spend more than half their income on payments.⁴⁶

Since reaching a peak in 1999 — when a record 538,000 single units were sold — home sales have plateaued and may soon hit a wall with the depletion of the housing inventory, aggravated with low rates of production. It is true that the current home-buying attraction will not likely wane — fueled by historically low interest rates and a glut of consumer-friendly mortgage product innovations — but a crushing lack of supply may prove disastrous to housing affordability unless production improves sharply in the near future.

Therefore, California now faces an incongruous condition in that while housing production has not kept up with overall employment growth, income levels generated by that employment also have not kept pace with the subsequent escalation in housing costs.

Barriers to Housing Production

Forced to play catch-up with such tremendous demand, residential developers have been severely strapped in their ability to increase housing production in California. The state has now become one of the most difficult places for developers to construct housing in the country. A myriad of structural and institutional barriers have made it increasingly complex for developers to efficiently gain approval and begin construction for new housing units that might even approach meeting the demand stemming from California's growing base of residents.

Fiscalization of Land Use

One of the core issues driving land-use decisions in California has become known as the "fiscalization of land use." Since the passage of Proposition 13 in 1978 — which limited local use of property tax revenues — California's local communities have looked to generate alternative sources of revenue to fund public services and infrastructure. As a result, local municipalities employ two primary methods for revenue generation: the imposition of heavier exaction fees for new development and the promotion of retail development in order to maximize sales tax revenues.

This has had a direct, deleterious impact on new housing production. Rather than adopt land-use policies that advance or incentivize new housing production, developing new retail centers — such as big box developments, entertainment complexes, and shopping destinations — emerged as the primary approach for increasing local government revenue. Consequently, residential development (and other forms of development) suffered due to a lack of incentives or outright disincentives. At the same time, in the minds of many public officials, housing development became even less desirable — particularly affordable or moderate-priced residential units — due to perceived fiscal burdens and public spending they imposed on local government. Cities wanted customers but not new residents, particularly those who might also demand services such as schools, hospitals, or police.

Because land use decisions in California are so localized — driven separately by individual municipalities and communities — local governments have become absorbed in the frantic chase for local sales-tax revenues. This fierce competition for retail development has become the primary motivating factor driving land-use decisions across California's cities and counties.⁴⁷ The incentives to build housing in this fiscal environment have been minimized and pushed to the margins — promoting uneven and inefficient land uses that tilt lopsidedly in favor of retail development.

Lack of Raw Land in Metropolitan California

Unlike previous eras of unencumbered development, raw land is no longer as plentiful across California's metropolitan areas as it once was. Across the state, local communities are finding prime developable space in scarce supply — intensifying the shortage constraint. A lack of buildable land in large metro areas such as San Francisco, Los Angeles County, and Orange County has exerted increasing upward pressure on housing costs, straining affordability while construction lags behind.

Yet this is not simply an issue, as some suggest, of "sprawl to the wall." Despite the relative paucity of prime space to be developed, from a historic viewpoint, sufficient land capacity exists in California — even in the most heavily urbanized coastal regions — to accommodate, at least in part, the enormous growth generated by the economy through infill development strategies.⁴⁸ The real problem lies in inefficient land uses and countervailing public pressure against higher densities — making these types of projects extremely difficult to approve.

NIMBY-ism

No-growth sentiments — led by the NIMBY movement (Not In My Back Yard) or NIMFYE (Not In My Front Yard Either) — have become a powerful force in prohibiting local housing construction in many existing cities and localities across California. Many new housing developments today — particularly affordable rental projects or any construction that raises density — are vociferously blocked by these citizen-led, no-growth advocates. Their reactions govern many neighborhood attitudes throughout the state.

New housing development is widely seen as causing more traffic, crowding, and congestion while adding nothing, or little, to the tax base. Widespread public perception that the state's environment is deteriorating has fueled an increasingly potent anti-growth movement.⁴⁹ Slow-growth advocates, according to a study by the Ventura-based Solimar Research Group, won the majority of 61 land-use ordinances on the November 2000 ballot.⁵⁰

Even the most sensitive infill developments today must face concerted opposition by NIMBYs equipped with the California Environmental Quality Act (CEQA) — used by NIMBYs to legally halt or stall new development projects — driving up costs for numerous residential developers. Though originally intended as an important guideline for mitigating the environmental impacts of proposed developments, CEQA has become one of the primary weapons used to thwart new housing development.

Construction Defect Litigation

Although condominium and affordable townhome developments are viewed as being viable, efficient alternatives for higher densities, they are now rarely built in California due to the prevalence of construction defect litigation. Between 1994 and 1999, condominium construction dropped from 18,700 units to just over 2,900 units — collapsing from 30 percent of overall housing production in the state to just 2 percent.⁵¹

After an epidemic of lawsuits over construction defects early in the 1990s, condominium units have become virtually uninsurable. California's lawsuit-dependent system of dealing with construction disputes drove condominium development into the abyss as insurance companies discontinued issuing premiums to builders and subcontractors for these projects. Without policy coverage to protect the builder, condominium construction simply languished.

High Development Fees NIMBY-ism and environmental pressures have fostered a building environment in which high development fees predominate. California's approval process for new development has become the most complicated in the country. High degrees of uncertainty envelop the development process for developers, who end up shunning projects tainted with extreme levels of ambiguity — many of which are affordable housing developments.

Lack of Housing Production on the Lower End

Although the most acute housing shortages exist among the low- and moderate-income populations of California, most new residential development has been targeted at the high end, pricing out those who face the greatest housing needs. The promotion of high-end housing development by local governments is also a reflection of the fiscal pressures faced by municipalities in generating revenues. In contrast to affordable housing, high-end housing units generate higher levels of property tax revenues and require relatively lower demands on public services such as public safety, schools, etc.

Lack of Political Will and Vision

Thus far, Sacramento has been ineffective in finding solutions to the current housing crisis. The political environment in California has been characterized by a lack of vision, balkanization, and political gridlock, which has stunted any potentially efficacious responses to increasing residential production to alleviate the housing crisis.

Moreover, various factions and groups have developed in the housing debate, forming polar opposites and splintering recommendations in their housing agendas. Factions among environmentalists — with some favoring "smart growth" while others rarely supporting any development — and among developers have created a veritable chokehold on the creation of new, enlightened housing policies.

In sum, there is nothing determinative about the severe shortage of new building from the perspective of available land. Lacking is creative vision, public determination, and political will to build housing in the available space to accommodate California's growing citizenry.

Implications of California's Housing Crisis: What's At Stake

Clearly, a new path for housing production must be achieved in California. The state cannot afford to continue under-serving its growing population that keeps its economy running in full motion. The immense housing shortages that currently exist are widening and eventually will threaten not just California's robust economy, but its overall quality of life as well.

An Increasing Jobs/Housing Imbalance

According to the State Department of Finance, a healthy jobs/housing balance should be one new unit of housing for every 1.5 jobs created. California, however, is producing only one new home for every 3.5 jobs created; and in some metropolitan areas, such as Los Angeles County, Santa Clara, San Francisco, and San Mateo, the ratio of new jobs to new housing is even greater — exceeding 5-to-1.⁵²

Due to increases in housing costs, first-time home buyers and renters are left with few choices for housing they can afford near major job centers. Consequently, a greater number of prospective homeowners must pursue their housing needs further away from the places where they work.

The resulting geographical mismatch between where the job centers are and where affordable housing exists cultivates circumstances in which families are commuting and living further from where they work. Such conditions exacerbate traffic congestion, hasten environmental degradation, and distress infrastructure — all of which lead to a decline in the quality of life for communities across California.

Overcrowding

Overcrowding has worsened in the past several decades in California. One of six renter households in Los Angeles County live in overcrowded conditions, in which there is greater than one person per room in a household. Between 1980 and 1999, for instance, overcrowding nearly doubled from 11 percent of all renters to 17 percent.⁵³



The consequences of overcrowding impact two primary areas: (1) the quality of life for California's families — especially for children — is adversely degraded, and (2) the deterioration of critical infrastructure in the state accelerates much faster, since significantly more people move into neighborhoods not designed to accommodate higher density conditions. This constrains a community's capacity to provide the necessary level of public services such as water, sewer, roads, parks, fire, police, etc.

Evidence demonstrates that immigrant households face even greater overcrowding challenges as a result of affordability issues. This is particularly true among Latino households in the state — where one in three Latino renter households in California cope with overcrowding.⁵⁴

Lack of Community Stakeholders

Ultimately, the housing crisis produces large segments of California's populace who fail to participate in the financial gains of homeownership, which has been one of the leading vehicles of wealth accumulation for a majority of Americans. Housing appreciation, income tax deductions, and home equity are some of the reliable fiscal advantages of owning a home that are not part of the experience for non-homeowners. Renters — particularly in poor, heavily immigrant communities — find it more difficult to accumulate the necessary economic power to improve their class status and move into the middle class.

The housing crisis, seen as one expectation dashed, also threatens the health of our democratic system. Diffusion of property ownership has been a centerpiece of the American experience. In contrast, through much of its history, Europe was bedeviled by struggles over land between peasants and landowners. More than 1,600 peasant revolts took place between the Middle Ages and modern times.⁵⁵

From its inception, America was conceived, at least by many of its founders, as a different kind of place. Here, as Jefferson put it, "most of the laboring class possess property."⁵⁶ This was the essence of what made democracy viable — in the minds of founders such as Jefferson and Madison in America — while much of the world was dominated by autocracies.

Expansion into unsettled areas both spurred economic growth and fulfilled a social need. When the eastern states became more fully occupied, the West provided an outlet for those seeking to establish homes and farms of their own. This notion of securing land for the largest number of people played a critical role in the thinking of Franklin D. Roosevelt, whose New Deal sought to reconcile free-market principles with the priority of allowing those disenfranchised by the catastrophic Depression of the 1930s to keep their homes, farms, and businesses.⁵⁷

California has had a special place in the quest for property and ownership. For many Americans from the eastern and middle parts of the country, California, above all places, was often the place where that dream seemed most manifest and alluring. "In a very real way," suggests historian and current state librarian Kevin Starr, "the California dream was the American dream undergoing one of its most significant variations."⁵⁸

Now, with the opportunity for ownership diminishing, the American dream, at least in California, is severely threatened. This is not just an issue for the working-class or immigrant Latinos. As the founding fathers understood, ownership makes neighborhoods more stable and connected than those made up of renters. Significantly, studies have found that true not just in affluent suburbs, but in working-class sections of places as diverse as Baltimore, Cleveland, and Columbus, Ohio. Homeowners, a recent Harvard University review of the best available research shows, clearly are more likely to participate in volunteer and political organizations as well as stay in their areas longer, thereby helping to promote social stability.⁵⁹ Hence, a lack of homeowners decreases a base of community stakeholders — resulting in a less vibrant civil society and a more fragile social fabric overall.

Expanding homeownership is one of the critical ways that working-class communities in California can attain a more stable political and social environment. Communities like La Puente in Southern California tend to be more rooted because many of its residents are homeowners. Allowing for housing opportunities for upwardly mobile Latinos represents an investment not only in the economy, but in the fundamental sense of optimism critical to maintaining and protecting California's democracy. As Maria Loera, who recently bought a home in La Puente with her husband and three children, put it:

"I feel like we have accomplished something. We have something to look forward to." ⁶⁰

By not partaking in homeownership — which has become so intertwined and identified with the American dream — more people become disenfranchised from larger mainstream American society. And there are none more vulnerable to this than those who comprise the nation's most recent newcomers.