Does California Have Limited Housing Development Capacity?
- William Fulton
- Jan 8, 2024
- 4 min read
Now the hard part starts: Actually building the housing.
California is gradually swallowing the zone changes and other requirements to meet the extremely challenging Regional Housing Needs Assessment targets in the sixth cycle of housing elements. The Department of Housing and Community Development reports that two-thirds of cities and counties in the state now have adopted housing elements. Appeals have been denied; lawsuits have been shot down.
Local jurisdictions that are out of compliance are mostly accommodating the builder’s remedy applications that have come their way.
Yes, some reluctant cities are still fighting – Huntington Beach first among them and Beverly Hills is currently fighting a judge’s housing element ruling that shut down its permitting power. And San Francisco is struggling to make changes that will eliminate the possibility of its compliance being revoked. But mostly they are falling in line. Even Coronado has now made a deal with the state.
So despite these ongoing skirmishes, California’s communities appear mostly ready to accommodate lots more housing. The question now is whether the private market will build it. And if not, what does that mean for cities and counties around the state that have vastly expanded their housing capacity in their new housing elements? Most cities in California’s big metropolitan regions don’t have to deal with housing elements again until the late 2020s. But already, HCD has issued target letters to rural jurisdictions that are on a five-year cycle beginning next year.
There is no question that the housing market is changing – or, at least, the financial calculus of developers and lenders is changing. Yes, prices are still high and inventory is low. But high interest rates mean that it’s harder for developers to borrow money at a rate that makes their projects work financially. And already we are seeing developers back off in unexpected ways. One of the biggest headlines in the San Jose area over the last month was the decision by several builder’s remedy applicants to actually reduce their project size, even though the builder’s remedy virtually guarantees approval of a project of any size. Entitlements matter, but so do pro formas.
Indeed, despite more than 100 new laws since 2017 designed to make entitlement easier, the needle has barely moved. In 2018, the year Gavin Newsom promised to build 2.5 million housing units in five years while running for governor, the state saw 114,000 new residential units built. In 2022, the year he ran for re-election after the passage of dozens of pro-housing laws, that figure had grown to only 120,000. As the accompanying chart shows, California has had housing production slowdowns in the past (early ‘80s, mid ‘90s and during the Great Recession), but never has a period of low production lasted so long. We haven’t seen a year with more than 120,000 new housing units produced since 2007.
