Opinion: California housing development remains abysmal despite reforms. Here’s what’s missing

The median Los Angeles home sold for $849,000 last year, according to the National Assn. of Realtors. Meanwhile, one of California’s signature zoning reforms of the past few years, Senate Bill 9, appears to be having at best a desultory effect on new housing supply, the shortage of which is driving prices upward.

Los Angeles and other California metropolises need abundant housing to become affordable, and they can get it only by empowering private developers to build significant projects. The fundamental flaw of SB 9 is that it allows individual homeowners to add one or two units at most to their properties, and that is no way to build enough housing to increase affordability.

If California actually wants housing to be inexpensively produced, it must enable large-scale production of housing by private firms that have strong incentives to cut costs. Whether politicians like it or not, housing production is indeed governed by the laws of supply and demand.

Los Angeles is one of the most productive and inherently pleasant parts of the United States, which ensures that demand to live here remains robust. Accordingly, in the 1950s and ’60s, Los Angeles’ housing stock grew at a healthy rate of 2.2% a year, adding more than 375,000 units over two decades.

Prices remained affordable as a result. In 1970, the median owner-occupied home in Los Angeles was valued at $26,700 — $205,900 in 2023 dollars — and the median monthly rent was $107 — $825 today. Since 1970, the housing supply growth rate has dropped by two-thirds to 0.7% a year, and prices have soared as demand collided with an increasingly fixed supply.

How do we know that the basic economic principle that restricted supply means higher prices applies to housing? Across American cities, the places that build a lot, like Atlanta and Houston, are not expensive, and the places that are expensive, like Boston and Los Angeles, don’t build a lot. The rate of home building is lower and prices are higher in metropolitan areas where building is more regulated, according to a survey by Wharton researchers. Studies have found that zoning restrictions have increased neighborhood housing prices by 29% to 38% in Chicago, 17% to 38% in San Francisco, and 32% to 46% across the United States.

Los Angeles’ sky-high housing prices and limited supply growth now pose an extreme burden on all but the richest urbanites. According to some estimates, L.A. is the second-least affordable housing market in the country. An average salary earner in Los Angeles needs to spend 83% of their income on mortgage and taxes to afford an average home. Los Angeles’ large homeless population partly reflects high housing costs.

L.A.’s gentrification fights, such as the battle over Boyle Heights, also reflect the shortage. Wealthier people move into lower-income areas in search of cheaper homes, pushing people out of those communities. The cascade effect is visible throughout the city.

That’s why more housing in richer neighborhoods would reduce Los Angeles’ economic inequities. Tracking anonymous data on 20 million Americans from childhood to their mid-30s, Harvard University scholar Raj Chetty and his collaborators found that where people grow up can have a significant impact on their economic outcomes.

In collaboration with the U.S. Census Bureau, Chetty and his team launched the Opportunity Atlas, which shows that a child who grew up in a low-income household in Los Angeles’ affluent Brentwood neighborhood earns on average nearly four times more at age 35 than someone who grew up in lower-income central L.A. More homes in affluent areas would give more children a better chance to succeed.

Building more housing in Los Angeles is also good for the environment. Research conducted with USC environmental economist Matt Kahn found that Los Angeles was the fifth-greenest large metropolitan area in the country as measured by carbon emitted by a standardized household, which is almost entirely a function of the relatively mild weather. If Los Angeles built more housing, there would be less building in areas such as Atlanta or Houston that have higher greenhouse gas emissions.

SB 9, enacted a year ago, created a process for splitting lots and putting up to four homes on an existing parcel, promising to make building easier in California. But we feared that small-scale building — which could be hindered by local governments — would do little.

A year into the program, our fears have only grown. A survey by UC Berkeley researchers of 13 cities, including Los Angeles, found that as of November, a total of 53 new units had been permitted under the law. Fewer than 1 in 5 applications in Los Angeles had been approved.

California needs hundreds of thousands of new homes, and that requires building on a different scale. A major housing deficit can be solved only by large-scale production, and that almost inevitably means big private developers. When William Levitt built tens of thousands of homes for veterans after World War II, he figured out how to make housing production as efficient as Henry Ford’s assembly line. No homeowner adding an “accessory dwelling unit” could be remotely as cost-effective.

The division of labor was central to the cost-saving assembly lines of Ford and Levitt because each worker focused on one task. But specialization requires scale, and homes today are produced mostly by tiny firms. California has 5,247 companies with fewer than five employees building single-family housing, and only 10 companies with more than 500 employees in the same business.

Important new research by the University of Chicago’s Yueran Ma and her co-authors shows that over the past century, almost all industries have become increasingly dominated by a small number of large, productive firms. These firms invest more in research and development, growing bigger by developing new technologies. Construction, with its preponderance of tiny firms, is a clear outlier.

The small scale of home building helps explain what economists Austan Goolsbee and Chad Syverson call “the strange and awful path of productivity in the U.S. construction sector.” Their data show that construction value added per worker has been declining since the 1960s.

The timing of the drop in productivity reflects zoning changes that shut out large companies. Land-use regulations really began to limit large-scale housing production in the 1960s, making the sector less conducive to bigger companies. Small-scale housing projects don’t enjoy scale economies, and small housing producers don’t have the resources to invest in the research and development that can lower costs.

The fact that California’s housing regulations ensure small-scale housing production is ironic, because the state’s iconic industries rely on global markets. What sort of movies would Hollywood have created if it had to get a separate permit for every new movie for every theater?

So how can California promote the large-scale development it needs to become affordable?

Since 1969, California has required cities to produce zoning plans that can accommodate regional housing needs. A year ago, the Los Angeles Times reported that the state found L.A. had to add more than 250,000 homes to its zoning plan by last October. L.A. did comply by June, but the city is still obligated to zone for another quarter-million homes by 2024. The cost of noncompliance is pretty small: losing access to state affordable housing funds. Most of the NIMBYs who oppose housing development would be happy to lose those funds.

A far sharper penalty is available: the so-called “builder’s remedy” included in California’s 1982 Housing Accountability Act. The idea is to allow developers to bypass zoning codes and land-use plans as long as more than a fifth of the units of a project are affordable to lower-income households. In practice, however, the remedy’s strength remains unclear. Communities will continue to find ways to deter new construction, as they have under SB 9. Judges will stop new projects because they incorrectly believe that building in Southern California is bad rather than good for the environment.

To solve its affordability problem, California ultimately has to be willing to overrule reflexive local obstruction of large-scale development. Nothing less will motivate Los Angeles and other cities to permit the housing they sorely need.

Edward Glaeser is a professor of economics at Harvard University and the author, with David Cutler, of “Survival of the City.” Atta Tarki is the founder of ECA Partners and the author of “Evidence-Based Recruiting.”