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

LOOKING AHEAD

By 2020, California will need to house an additional 21.3 million people — a daunting task for any state, particularly one in which housing production has fallen so steeply behind. Between 45 to 50 percent of these additional residents will be Latinos — mostly U.S.-born — who comprise the fastest growing proportion of the state's population.⁶¹

Roughly 4.5 million additional housing units will have to be constructed in the state to sustain anticipated population and employment growth — on top of what already needs to be built to fill the existing housing gap.⁶² All told, more than six million housing units are necessary to sufficiently meet housing needs for all of California.

For Latinos, the barriers to achieving greater levels of homeownership fall into three primary categories:

• First and foremost will be overcoming prohibitive home prices growing directly from this severe lack of supply. As a population that is already making considerable progress in reaching the American dream, declining affordability raises the barrier of entry for many of today's Latinos who are now entering into the prime home-buying stage of their lives. This poses a threat not only to current buyers, but also to their children and generations beyond.
• Second is the access to capital that is tailored to the specific credit profile of the Latino home buyer. As the mortgage industry is increasingly a commodity business with low margins and high volumes driven by formula decision making, the characteristics of the buyer with no credit will be increasingly difficult for the lending community to address.
• Finally is the access to information about the home-buying process and the responsibilities of homeownership. Intelligent interpreters of this complex process need to be available to the community. The hurdle of belief needs to be overcome with education. This assistance needs to be provided with the utmost integrity and at competitive rates; otherwise, the specter of predatory lending will further alienate the Latino home-buying public.

Some partial solutions to this problem are already in place and could be greatly expanded. Pushed by secondary mortgage markets and government-driven loan programs, innovations in mortgage lending have opened up numerous homeownership opportunities for immigrants and minority populations that previously did not exist. But increasing the loan pool, even at historically low interest rates that currently exist, will not meet the need as long as the housing shortage and the subsequent high price structure continue and even worsen. As suggested earlier, this situation severely impacts all California home buyers, but most intensely working-class people seeking out their first home, a group that is disproportionately made up of Latino immigrants and their children.

Undeniably, the housing supply constraint — more so than the mortgage lending system and underwriting criteria used — is the single dominant factor impeding increasing Latino homeownership. Although it is fundamentally a problem of supply and demand, it is important not to ignore the need for enlightened attempts to reduce discrimination, provide favorable loan conditions, and streamline mortgage processing.

Changing the now-failing economics of home building lies at the core of any solution to this problem.

Clearly, more housing must be built in California. Drastic measures are necessary ahead to increase housing production and to alleviate the effects of the supply constraint. State leadership — in the private sector, the government, and nonprofits — must now identify housing opportunities and remove obstacles that prevent market forces from responding more effectively to housing demands across all levels.

Numerous recommendations and policy proposals to address the systemic barriers to housing production are already under consideration and have been previously outlined in lengthy detail — including, most notably, the Little Hoover Commission report.⁶³ Therefore, the following recommendations represent what is considered the most critical directional paths that California must take to address its emerging housing crisis and assure its continued preeminence as the vanguard of the global economy.

Remove the Disincentives for Housing Development at the Local Level

At the most fundamental level, housing must become a critical measurement of success for local government organizations and, more importantly, a meaningful contributor to their financial stability. Leaders at the local level play the cards they are dealt, and it is time to change the game so that providing housing gives them the resources they need to provide local services. Currently, virtually no incentives exist for California's cities to produce housing, and there are many reasons — such as environment, traffic, and costs in city services — to eschew such development.

Thus, local governments must be offered alternative revenue resources that are tied to meeting the state's existing housing goals and stiff penalties for those cities that resist meeting these goals. By refusing to meet housing goals — either in their towns or through joint efforts with adjacent jurisdictions — these communities in essence "pass the buck" to other places, which then deal with the consequences of increased crowding and the external costs of new development. Conversely, greater state aid should go to assist those cities that build housing to offset the associated costs of higher services.

New revenue sources for cities must be developed. The clearest alternative is for the state to keep all the sales tax dollars and local government keep a proportionate amount of income tax (50 percent based on where they live and 50 percent on where they work) and an increasing amount of property tax. This deals with multiple challenges at once, providing incentive to local government to provide jobs and housing.

Provide an Accurate Assessment of Housing Needs and Impacts Across the State

Currently, a significant amount of misinformation exists fueling the various anti-housing initiatives. The truth about housing — its need and impact — must be developed and injected into the bloodstream of the media, political leadership, and eventually the public consciousness. Very few media professionals and local government leaders understand the direct relationship between a strong housing infrastructure and a strong economy.

A broad, diverse set of housing is required throughout the state. Rather than focus on any single housing strategy — urban versus suburban, for instance — California must focus on providing the full plethora of housing types, which encompasses infill development, multi-family units, affordable housing, and even suburban housing production. Simply focusing on one particular area of housing will not be enough to accommodate the diverse set of needs demanded by California's increasingly diverse population. Rewarding Ambition: Latinos, Housing, and the Future of California

To meet housing needs in the Latino market, for instance, a large portion of the homes must be priced at moderate levels. At middle-income levels, housing units can only be provided in quantity at remote areas such as the high desert and the closer in parts of the Central Valley. Unfortunately, this often means workers must commute long distances to their jobs.

One clear alternative is to encourage greater levels of high density "infill" housing development that would allow workers to live closer to their jobs, extended families, and shopping destinations. Density bonuses granted in metropolitan areas on relatively small parcels, with significant buyer/builder incentives, can support cities in developing these properties. These projects can take place in areas where economics dictate the logic of land-use changes, such as "land recycling" of the numerous, redundant strip malls across the state, or, as has occurred in Fullerton, among other areas, by reusing land that is no longer needed for industrial firms.

In addition, government agencies could increase land availability by selling their own underutilized properties to developers. Many of California's riverways, for example, are severely underutilized and can be converted into new housing sites for attractive, medium densities. Similarly, corporations and other private agents that sell large parcels of land for affordable housing should have formulaic reductions on their state tax based on size of the housing gain.

A significant issue is the 20,000 to 30,000 housing units condemned annually. Many of these units could be appropriately rehabbed, thus reducing the need for new housing. A conscious effort on the part of local government to encourage rehabilitation versus destruction would be beneficial.

In the same vein, the state must encourage housing adjacent to job and transportation centers. For example, while combined job growth in Riverside and San Bernardino Counties is equivalent to Orange County, many residents of the Inland Empire nevertheless commute to Los Angeles and Orange Counties for better paying jobs. In the Silicon Valley, government employees and other workers regularly commute from the San Joaquin Valley, forcing some agencies to adopt a threeshift, 12-hour day in some cases so key personnel, such as police officers, can spend some time with their families.

Modify State Regulations that Act as Impediments to Reasonable Housing Projects

Modifications need to be made in environmental laws. For example under current circumstances, the California Environmental Quality Act (CEQA) can be used with impunity to block or delay almost any housing development. State priority to environmentally sensitive housing — particularly high- and mid-density development near transit hubs — should be developed so that housing uses can be categorized as adding to, not detracting from, the state's long-term environmental health.

Insurance liability needs to be limited to reasonable levels. Current premiums can add thousands of dollars to the cost of constructing a unit for house contractors and subcontractors.

Foster Greater Regional Coordination to Produce More Housing

Improved planning coordination among the regional associations of government about statewide housing opportunities should complement state efforts to improve housing production. California continues to grow through its first- and second-ring suburbs, integrating them even further into the broader metropolitan framework — and incorporating them into the broader regional challenges as well. Thus, many cities — rather than being secluded from adjacent metropolitan problems — are increasingly facing the same regional planning concerns, issues, and cultural characteristics as those of the broader metropolitan region. Local "visioning" processes in these areas — from large regions to neighborhoods — could help establish more cooperation and shared goals from the local level on up.

Expand Homeownership Programs

Traditional obstacles, such as lack of credit and down payment, are no longer viable impediments for greater homeownership as they once were — especially since secondary mortgage markets now recognize alternative credit sources as a legitimate determinant of creditworthiness.⁶⁴ Likewise, zero-percent-down programs remove what was once the greatest obstacle for homeownership — the down payment. However, awareness of these programs and financial literacy remains an acute challenge, particularly among the immigrant segments of the Latino market. Thus, the delivery mechanism for communicating these new products and programs should be greatly extended.

Existing homeownership programs by local governments, nonprofit organizations, and communitybased groups should be expanded. Despite limits to resources and funding, such programs have experienced remarkable success in navigating many first-time immigrant home buyers into homeownership. In addition to credit counseling and educating new consumers interested in purchasing homes about the home-buying process, many programs also offer lending assistance, low-interest mortgage financing, and down payment or interest rate subsidies.

Conclusion

Whatever the views of individuals on the merits of immigration, the current reality impels Californians to plan for the increasing "Latinization" of the Golden State. This does not mean that there should be any special programs just for Latinos, as suggested by some. Such actions would be, by their very nature, divisive and discriminatory. Latinos represent just the latest of the earlier waves of migrants and, like them, will become critical to shaping California's future. Over time, with rising rates of intermarriage and increased presence in the middle class, Latinos and their children can, and probably will, become less a distinct group and more reflective, even somewhat defining, of the American mainstream.⁶⁵

The critical issue will be whether these new Californians — with a strong family-oriented culture and historic penchant for homeownership — will enjoy the same access to the fruits of their labor as newcomers from the 1930s to the 1970s. As a population segment that is already making a considerable impact on the consumer marketplace and demanding increasingly greater attention from both corporations and politicians alike, Latinos will also constitute the largest constituency for housing in California over the next several decades.

As evidenced by our survey, even Latino residents who are not current homeowners display a remarkably high degree of optimism in achieving the American dream — even in the face of such discouraging prospects. Most Latinos, including those who are now renters, remain optimistic that the state will meet its promise. It is up to California's present and next generation of leaders to make sure that their optimism is not dampened, but rewarded.