Tim Paone Paone: “The demand for market rate is a bit higher than for below market rate, but production is 12 times as great for market rate than for below market rate.”

IRVINE, CA—We need to stop addressing California’s housing crisis through competing interests fighting each other, and the state needs to find a way to bring those interests together in a way that puts less constraint on developers, Cox Castle Nicholson partner Tim Paone tells GlobeSt.com.

According to Paone, in its recent draft assessment of “California’s Housing Future,” the State’s Department of Housing and Community Development made these observations, among others:

  • California needs 180,000 new homes each year while annual production over the last 10 years has averaged fewer than 80,000 homes.
  • Californians overpay for housing, commute too far, and are overcrowded.
  • The existing system of land-use regulation creates barriers to development.
  • The housing crisis makes it difficult for California businesses to attract and retain employees.
  • A smaller percentage of Californians own their homes than at any time since the 1940s.

Paone offers several perspectives on this, including a call to the Legislature to reconcile legitimate environmental concerns, the challenges of climate change, the need for greater housing affordability and the increasing demand for housing of all types. He maintains that the state cannot simply decree that more affordable housing be built; it needs to face the reality that those who build homes will not do so unless it makes sound business sense.

We spoke with Paone about the state’s housing crisis and how it should be addressed.

GlobeSt.com: Why is annual production for new homes in California so far below what is needed?

Paone: You have to break it into two distinct camps: market-rate housing and below-market-rate housing. It’s important to see that it plays out very differently in those camps. Market rate is what moderate or greater income-level households can afford, which is the majority of the housing in the state. It doesn’t outstrip below-market-rate housing by a lot, maybe a little more than a third, in terms of folks who can afford to buy houses.

Then there’s below-market-rate housing, which residents can only afford to buy through government or builder subsidies. The demand for market rate is a bit higher than for below market rate, but production is 12 times as great for market rate than for below market rate. So, the ability to generate below-market-rate housing is the issue: how to get developers to build at a loss?

When you look at market-rate housing, the fact that there’s a shortfall there is easy to understand, but it’s not a significant shortfall—it’s not as great as below market rate. Housing runs in cycles. Right now, developers are cautious; the entitlement process can take years, and they have to make a commitment to buy land and go through that long entitlement process. You don’t want to find yourself at the beginning of an economic downturn with unsold homes, salaries to be paid, etc. There will always will be an excess of demand over supply because by definition, if you meet that market-rate demand or exceed it, developers start to go under. There’s an enormous risk the public doesn’t realize. There’s also a finite amount of developable land.

Below market rate requires an entirely different analysis; you need subsidies and loan programs that work for people to buy these homes, and there’s a lot of resistance to that from government. Look what happened before the Great Recession: loan programs made it possible for people to buy, so now they’re criticized.

GlobeSt.com: How should the issues of overpricing, long commutes and overcrowding in California be addressed?

Paone: There’s no quick fix. There are competing interests between the state, developers, environmental groups, etc. To start with overpricing, as long as demand exceeds supply, prices will go up. As long as Californians want to live here, there will be demand and prices will go up. So much goes into allowing developers to build homes, but part of that process is the resistance communities give to development and the fact that people who already own homes don’t care about homes being overpriced. This is a huge issue. People who own homes want the value of their homes to go up. There’s not a moral commitment to it. People want and, in many cases, need their investments in their homes to generate better results; this will always result in overpricing because the vast majority want prices to rise—it’s human nature, so how can you criticize that? You have to accept it as reality.

One of the often-overlooked but core issues is entitlement fees. The last thing local communities want is too-dense housing because of their perspective of how it will affect their community and home value. This is a real issue.

As far as long commutes go, California is in a tough spot because, with few exceptions, we are way behind the rest of the major areas of the country in terms of mass-transit infrastructure. People sit on the freeways and are willing to make long commutes so their kids can grow up in nice homes. There are two ways to address it: as a housing issue and as an employment issue. It would be helpful if possible for the state to motivate higher-quality employment centers to move into heavily populated areas. They need this infusion of high-quality employment centers, and until we find ways to provide quality employment centers in areas filled with residents, I don’t see that stopping. If you build homes near existing employment centers, which is infill, it can create overcrowding. The cost of infrastructure upgrades on builders and the cost of homes goes up. It’s a dilemma, and there are a lot of band-aid types of solutions proposed, but the state has never grappled with it in a comprehensive manner. Getting all the different entities on board toward a common solution is next to impossible. We will see more overcrowding because areas that are densely populated have better transit options, and that’s where the state is trying to drive new development. CEQA will evaluate traffic impacts differently in the next year, but time spent at a traffic signal is not an issue and miles traveled to work will be.

GlobeSt.com: How should land-use regulation issues be addressed?

Paone: For decades, people have talked about the need for true CEQA reform because CEQA has become a tool for those opposing projects rather than a tool for informing the community about what the project is bringing to that community. CEQA can draw projects out for decades—30 years on some projects. If it’s controversial, CEQA is at its core, and litigation follows. major factor. There are added impact fees developers are required to pay that are really a part of regular community population growth, but state and local communities have pushed improvements to roads, etc., onto developers with the notion that by providing homes that lead to population growth, it’s adding to a problem that needs to be solved. This drives up housing costs. So, we need a way to take that burden off developers and put it back on the government that provides services and should be providing infrastructure. The process needs to be shortened and litigation needs to be limited. Getting a project to market in a reasonable period of time needs to be addressed. Environmental and developmental concerns need to be reconciled. These are the challenges, and nobody has a solution. In the end, what developers do is provide homes for people to live in—not lead to population growth. This needs to be addressed, acknowledging that responsibility. Everybody needs to have a part in finding a solution.

GlobeSt.com: What can be done to increase homeownership in California?

Paone: We need to stop addressing it through competing interests fighting each other, and the state needs to find a way to bring those interests together and start from a perspective where the end result is less constraint on developers so they can provide housing that’s desperately needed. If this is done, the increase to the cost of housing will slow down. We also need programs to address below-market-rate issues. What’s happening is development goes to rental housing, but the cost of this is going up. The opportunity is not there unless you start developing programs through lending subsidies or others that will allow them to get into the market. It’s absolutely critical.