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Bay Area faces hard choices in making housing affordable
By Tracey Kaplan and Sue McAllister
Mercury News Posted on Sat, Aug. 03, 2002
siliconvalley.com
For $198,000, you can get a new three-bedroom, 2,200-square-foot house from Standard Pacific Homes, complete with two-car garage, marble sinks and extensive landscaping.
But you'll have to move to Dallas or Phoenix.
To buy a similar Standard Pacific house in San Jose, you pay $665,000 -- more than three times as much.
The main reason isn't the cost of labor, materials or the difference in profit margins, although they do contribute to the disparity. It's the dirt.
Stratospheric land prices are the paramount reason the Bay Area has the nation's most expensive housing -- so costly that only a quarter of the households can afford a median-priced house. The shortage of affordable housing is the greatest economic threat facing the region, economists warn.
By understanding why dirt is so expensive, people in the Bay Area can start to understand how difficult it is to imagine the situation improving, and what kind of hard choices must be made if buying a home here is ever to become affordable.
To build enough housing for the 1 million new people expected in the Bay Area by 2020 -- equal to adding the combined population of Las Vegas and New Orleans -- residents and community leaders will have to abandon long-held anti-tax and anti-growth policies, surrender some local control to a regional government and accept more city-like neighborhoods around them.
The alternative is to stick with the current course: Let housing woes continue to erode employers' ability to recruit and retain employees, to sap the productivity of workers with long commutes and to push families with moderate incomes inland, leaving the coast to those who can afford it or are willing to pay high rents or share crowded quarters. The Bay Area is already short more than 57,000 housing units, according to some estimates.
``For life and the economy to remain vital,'' said Judy Nevis, chief deputy director of the California Department of Housing and Community Development, ``you have to figure out how to house not just a small portion of people, but the whole.''
If you talk to builders, you find a number of costs are higher in the Bay Area, not just land. Labor in Northern California is more expensive, so it costs $143,000 to build an average three-bedroom San Jose house compared with about $100,000 in Dallas.
Developer fees to fund schools, parks and other services also are higher for the San Jose house -- $29,000, compared with $5,000 in Dallas -- because California voters have sharply limited the property taxes cities can levy while the state has grabbed a larger share of those taxes. Those fees are passed on to home-buyers.
Profits also are higher on the San Jose house: $99,750 or 15 percent before taxes compared with $9,900 or 5 percent in Dallas. The company's money is at greater risk and tied up longer during California's lengthier environmental review.
But the biggest cost difference between Dallas and San Jose is land: $232,000 for a tiny 2,400-square-foot lot in San Jose vs. $29,000 for a lot almost three times larger in Dallas.
Matter of choice
• Policies protect land, homeowners' wealth
That difference is the result of choices that have been made by Californians, starting with the choice to live here despite high housing prices. During the late '90s boom, only one house was built in the Bay Area for every six new jobs. Regardless of the lack of affordable housing for sale, the region remains desirable. The tech industry continues to attract people from across the United States and around the world.
Other choices have been made in 30 years of anti-growth politics. Residents have been determined to preserve the scenic environment, closing off large areas from development. The Bay Area has at least 20 urban growth boundaries, as well as dozens of parks and areas set aside for open space.
Homeowners also have been determined to protect their lifestyle and home equity from being overwhelmed by traffic and other unwelcome effects of new subdivisions and apartment complexes.
Californians have approved a tax system that favors longtime homeowners and makes newcomers pay most of the cost of growth.
Cities often approve only a limited supply of housing. New housing doesn't bring in as much in taxes and fees for a city as it costs the city to provide police, fire and other services, unlike commercial development, which generates sales tax revenue for the city.
Californians have also given condominium owners 10 years to sue for construction defects, one the longest periods in the nation. Production of relatively affordable condos and townhouses in the state has fallen 90 percent since 1994, in part because builders and insurance companies fear being sued.
But none of these decisions has stopped people from coming to California. Between 1980 and 2000, the state's population grew by about 11 million.
Instead, each of these choices has helped drive up the cost of land in the areas where people most want to live: along the coast and mountains and in areas like Silicon Valley, where good jobs have been plentiful.
Once the price of land is sky-high, that drives everything else. A look at the Quimby Road development in San Jose's Evergreen neighborhood shows how it works.
The 13-acre site was put on the market this spring for $11.35 million, or $873,000 an acre. One of the last available parcels in the area, it was so desirable that five builders vied for it, driving up the price.
SummerHill Homes of Palo Alto ended up paying $16.5 million, or more than $1.2 million an acre.
The developer would like to build 49 houses, 10 more than allowed by current zoning. That would make the dirt alone worth $336,735 per lot.
Add in construction costs, development fees, labor and a modest 8 percent profit, and the average price of the houses soars to $875,000 -- a tab only about 8 percent of county households can afford, said economist Michael Dardia of the Sphere Institute, a Burlingame-based think tank.
SummerHill president and CEO Roger Menard said the economics of the land deal and the zoning leave him no choice but to build mini-mansions.
``It doesn't add up to build $200,000 to $300,000 houses,'' Menard said. ``Not when you have more than that in land costs.''
Goal out of range
• Subsidies needed for affordable projects
Some developers say they would like to build more affordable housing in Silicon Valley because there is high demand for it. But it is virtually impossible for a developer to build housing that a schoolteacher or police dispatcher could afford without government subsidies, said Steven G. Delva, president of the South Bay division of Standard Pacific Homes.
Assume that teachers earn $50,000 a year. By most measures, they could afford a home costing up to $175,000.
Now look at a townhouse or condo project designed for 40 units an acre. Land zoned for that density would cost at least $2 million an acre, Delva said. That's about $50,000 in land costs per unit. Labor and materials would cost $100,000 a unit, bringing the base price of each unit to $150,000.
Add developer's fees, the cost of road and sewer improvements, general expenses, marketing, sales commission, insurance and a 10 percent profit, and the total comes to $350,000, double the $175,000 a teacher could afford.
As long as land remains so expensive, affordable housing in Silicon Valley can be built only with large public or private subsidies, or by allowing developers to ignore neighborhood opposition and build high-rises or more densely packed units.
Meanwhile, building condos has become more difficult, builders say, because of the legal obstacles.
Indeed, developers concentrated on building houses for high-wage earners in the decade between 1988 and 1998, according to a study of 40 cities that account for most of the Bay Area's housing. The study was funded by the Non-Profit Housing Association of Northern California and the Greenbelt Alliance.
One reason was that much of the land, like the Quimby property in Evergreen, was zoned for far fewer units than it could hold, raising the property cost per unit and thus the sales price. Another reason was that high-end housing often generates higher profits. Builders in the Bay Area profited as much as anyone from the boom, reaping average returns in the 20 percent to 30 percent range, which in turn made land more desirable and thus more costly.
Overall, only about three-quarters of the housing needed was built.
But the shortage was worse for the less affluent, including such essential workers as medical assistants, delivery truck drivers and child-care workers. In the 40 cities, 29 percent of the housing needed for very-low-income residents was built, 36 percent for low-income earners, and 61 percent for those with moderate incomes. (The income eligibility standards are linked to each county's median income, which is so high in Santa Clara County that a single person earning up to $51,950 is considered low-income.)
Many people dipped deeper into their pockets to pay for housing or began sharing homes. Others fled to the Central Valley, enduring long commutes into the Bay Area for work.
Now that the tech boom has faded, builders are being more realistic, knowing there's a ceiling on what they can charge. At the same time, Californians refuse to free up enough land in their neighborhoods to house the growing population. Land-use decisions are made piecemeal by individual cities, with little regional or statewide planning, unlike in Maryland, Portland, Ore., and a handful of other places.
When public officials, urban planners and other experts talk about California's affordable housing crisis, the discussion quickly gets deep into issues like ``smart growth,'' mass transit and density. The most basic fact, however, is that California continues to build an insufficient amount of housing, often by choice. Bay Area residents outside San Francisco and Oakland are particularly leery of even modest high-rises, which some see as a necessary component of solving the housing shortage.
``Every time we build a house, we create a potential enemy,'' said Matt Koart of Pulte Homes. ``Once they get theirs, they want to shut the door.''
Underutilized land
• Low density: boon or waste of space
A look at an upscale development under construction next to I-680 in Pleasanton shows how the choices Californians make limit the production of new housing and raise prices.
The 521-acre property on Bernal Road was envisioned to hold up to 3,000 homes, but ended up with 581.
``I just cry when I look at an open, flat piece of land like this that is being underutilized,'' said Sunne Wright McPeak, president and CEO of the Bay Area Council, a business group that is trying to increase the Bay Area's housing supply.
But many Pleasanton residents say the land should be saved for another pressing and more local need: a public park or performing arts center. The city's population grew by about 26 percent in the 1990s, about twice the state rate. Restricting the number of units, no matter how worthy the reasons, drives up housing prices. The starting price for most of the Bernal Road homes: mid-$600,000s to mid-$700,000s.
The houses in the tract, called Walnut Hills, are expensive because land costs had to be divided among a smaller number of units. Developer fees added about $45,000 to each unit. The city required that 56 houses and 31 apartments be set aside for low-income residents, a cost passed on to market-rate buyers.
The Bernal Road land has been fought over for decades. San Francisco, which owned it, won approvals from Alameda County to build about 2,500 units there in the mid-1990s. But Pleasanton sued, claiming the city's environmental report was inadequate. Residents were concerned about traffic and the loss of open space.
Two years ago, a ballot measure that would have preserved the land for a park and taxed Pleasanton residents to pay for it came close to passing. The measure garnered 64 percent of the vote, just short of the two-thirds necessary.
But Pleasanton controls the area's sewer system, giving it leverage at the negotiating table. In the end, San Francisco donated 318 acres of the land to Pleasanton and the parties agreed to the far smaller amount of housing and some commercial development.
The story doesn't end there. Pleasanton is exploring whether to use some of the donated land for affordable housing for seniors. But local planning commissioner Brian Arkin and other residents put a measure on the November ballot that would preserve the land for public use, including a performing arts center and a park, and prevent the city from allowing housing without voter approval. The measure only needs a majority vote and is expected to pass.
``The most chronic housing shortage in the country is in San Francisco,'' Arkin said. ``Ask people about housing in Golden Gate Park, if it's that critical. This is our Golden Gate Park.''
Faced with the ballot measure's probable victory, one of the builders who argued for more housing units is now trying to capitalize on the anti-housing sentiment. KB Homes' sales information urges people to buy a house in Walnut Hills instead of in other Tri-Valley communities because of a fact of life in the Bay Area: The housing shortage will drive up resale values.
``Growth in those areas is projected to go on for many years,'' the flier reads. ``The Walnut Hills community is being constructed on one of the last parcels of land to be developed in Pleasanton. This is a much stronger position to be in with greater opportunity for investment return.''
H O U S I N G C O N S T R A I N T S
How the supply of land is limited and housing prices driven up:
• Urban growth boundaries. The Bay Area is the state's leader, with at least 20 urban boundaries restricting development.
• Local control over land use. Each city looks out for its own interests, often at the expense of the region as a whole.
• Voter-approved cap on property taxes. It started with Proposition 13 in 1978. Municipal revenue dropped as a result, prompting many California cities to demand the nation's highest impact fees from developers to pay for new schools, roads and parks. Home-buyers ultimately foot the bill with higher housing prices.
• Liberal construction defect laws. Production of relatively affordable condos and townhouses in California has fallen 90‚percent since 1994, in part because a state law allows homeowners up to 10 years to sue over construction defects.
Source: Mercury News research |
