The Challenges Facing the Affordable Housing Market
Village Heights, located in Newport Beach, CA is one of QRM Corp.’s beautiful affordable housing communities with all units dedicated to low income housing.
California’s housing crisis has reached such critical levels as to gain national, if not global attention. As discussed in our article on the Section 8 program, affordable housing is more necessary than ever before. Yet, even such a crucial housing market faces a plethora of challenges from the chasm between supply and demand, to stalls in development and funding. Let’s take a deep dive into the challenges that affordable housing faces on a daily basis to better understand the current housing shortage.
Increased Demand
Housing prices statewide are rapidly increasing. The market has become more competitive, and as home prices continue to rise, the need for affordable housing options rises with them. Average income in the state has been largely unable to keep up with climbing rent prices, driven sky high by the market. According to a 2021 study conducted by Forbes across the US, California ranked number two just behind Hawaii for the highest percentage of income spent on rent: a whopping 28.47%. (1) By contrast, just 2 years prior Californians spent only 24.08% of their income on rent. (2) At the beginning of 2023, over a third of all Californians were considered either poor or nearly poor with the poverty rate having risen 1.5% over the course of less than two years. (3) Meanwhile, the rate at which California wages have increased since 2020 has fallen sadly behind the increase in rent prices statewide. (4) As the second most costly state to reside in, it’s no surprise that residents are in critical need of more affordable options. It begs the question: Does California have the affordable housing availability to meet the needs of its residents? In short, the answer is a clear and definitive no. However, the reasons for the shortage of affordable housing supply are varied and nuanced.
Decreased Supply
In late 2023, California’s Senate Housing Committee released a statement addressing the state’s housing shortage. Emphasized in the introduction was the fact that California has a higher concentration of unaffordable housing markets than any other US State, due to the state consistently under-producing housing for over 40 years. California’s Department of Housing and Community Development has estimated now that two and a half million homes will need to be developed over 8 years with 40% of those being allocated for low-income affordable housing to make up for the loss. (5) A number of factors that have exacerbated underproduction of affordable housing specifically include land use policies, lack of funding, costs of development and management, and public opinion.
Land Use Restrictions
Zoning ordinances are laws and codes put in place by local governments to determine what specific land can be used for. These laws can prohibit land from being used for certain types of developments, building sizes, unit density etc. Zoning laws present giant roadblocks to housing developers, as the land for multifamily and specifically low income housing is very limited. California only zones about a quarter of its land for multifamily developments, as contrasted with half being designated for single family homes.(6) Often, development of multifamily, affordable, and high density rental housing receive high opposition from the public. Residents of the area may cite fears of crime increasing while local property values decrease. In reality, studies have found the presence of affordable high density housing does not have an impact on local crime and in fact could contribute to local housing values increasing. (7) Unfortunately, so long as public fears persist and local communities oppose development, land use policies will continue to side with local public opinion. This is a major stall in affordable housing development and construction across the state.
Development Costs
In addition to the difficulty of obtaining land permits, development of affordable housing faces the hurdle of rising costs. In 2022, construction of a single affordable housing unit could cost a developer upwards of $1 million. In LA specifically, the average is closer to $600k per unit. (8) This cost has spiked post-pandemic due to rises in every sector of development, from labor costs to materials and land values. One of the increases has been in construction materials, seeing anywhere from 11-22% increase over the past 5 years. (9) Couple these costs with strictly regulated rent prices and the payoff of developing affordable housing may not be able to be offset by rent revenue. This has largely discouraged developers from producing low-income friendly housing, as market value tends to be a more worthwhile investment.
Decreased Funding
Due to the high cost of development, affordable housing projects rely on government provided grants to bridge the gap between cost and revenue. Both the federal and California state governments allocate money to fund projects, incentivize affordable housing projects, and increase the stock of housing. However, there is an ever widening gap between the funds available and the funds needed to provide sufficient affordable housing. The demand of affordable housing is already exorbitantly higher than availability, pushing organizations and developers to seek additional support from government programs and stoking competition between organizations to obtain the limited funds. Recently, funding for housing projects has seen further threats through budget cuts and the passing of new laws. In California specifically, the 2024-2025 budget has reduced the affordable housing budget by two-thirds, threatening to end thousands of projects which otherwise would directly address the housing shortage. (10) This slashing of housing funding is just another cut in a long legacy of underfunded programs within the federal and state governments.
Loss of Housing
In spite of the fact that affordable housing is in high demand and new developments have major hurdles to clear, affordable housing options are also threatened by the risk of being lost altogether. In fact, over 300,000 units are currently threatened to be lost entirely. What causes this loss to occur? A big contributor to the loss of affordable units are big companies seeking to acquire units that are currently affordable market rate homes, or Naturally Occurring Affordable Housing (NOAH). (11) Because these homes are currently on the market at lower rates than their competition, large management or ownership companies view them as high return investment opportunities, acquiring the property and increasing the prices to match the current competitive market rates. There is also an unfortunate lack of incentives for owners to sell these properties to companies who can redevelop it into a subsidized or allocated affordable housing property. Once this occurs, the units are considered “lost” as affordable housing, as these rates are extremely unlikely to fall below competitive market rates again. Other factors that cause loss of affordable units include expiration of contracts with HUD for Section 8 subsidies.
The challenges of meeting California’s housing needs are multifaceted, with ripple effects hitting every sector of the housing market. In spite of all these challenges, efforts to increase availability and funding for affordable housing continue to persist. Members of Congress work toward efforts to create greater allocations for subsidies and incentives. Organizations work tirelessly to educate citizens on the necessity and benefits of low-income, high density housing. Property management companies, such as QRM, work daily to provide access to high quality living for residents at every income level.
References
Schlepp, Travis. “Californians Spend Second-Highest Percentage of Income on Rent, Study Says.” KTLA, Nexstar Media Inc., 25 Jan. 2023, ktla.com/news/california/californians-spend-second-highest-percent-in-rent-study-says/.
“California Residential Rent and Rental Statistics.” Department of Numbers, Department of Numbers, www.deptofnumbers.com/rent/california/. Accessed 23 Apr. 2024.
Person, et al. “Poverty in California.” Public Policy Institute of California, Public Policy Institute of California, 17 Apr. 2024, www.ppic.org/publication/poverty-in-california/.
Brown, Ross. “California Housing Affordability Tracker (January 2024).” Legislative Analyst’s Office , Legislative Analyst’s Office, 24 Jan. 2024, lao.ca.gov/LAOEconTax/Article/Detail/793.
“Overview of Housing Issues in California.” Senate Housing Committee, California State Senate Housing Committee, Sept. 2023, shou.senate.ca.gov/sites/shou.senate.ca.gov/files/Overview of housing issues - 09.2020_0.pdf.
“Causes.” Housing California, Housing California, 2024, www.housingca.org/policy/focus/causes/#:~:text=While%20the%20availability%20of%20affordable,to%20housing%20insecurity%20and%20homelessness.
Breaux, Collin. “UCI Study Shows No Link between Affordable Housing and Crime Increase, Property Value Reduction.” Picket Fence Media, Dana Point Times, 22 Jan. 2024, www.picketfencemedia.com/uci-study-shows-no-link-between-affordable-housing-and-crime-increase-property-value-reduction/article_8600385e-2f33-52d6-9862-48894c2cc775.html.
Dillon, Liam, and Ben Poston. “Affordable Housing in California Now Routinely Tops $1 Million per Apartment to Build.” Los Angeles Times, California Times, 20 June 2022, www.latimes.com/homeless-housing/story/2022-06-20/california-affordable-housing-cost-1-million-apartment.
Obando, Sebastian. “Higher Material Prices Here to Stay.” Construction Dive, Industry Dive, 1 June 2023, www.constructiondive.com/news/falling-material-prices-expected-reverse-course/651744/.
Marcus, Justine. “Action Needed to Restore Affordable Housing Programs in California Budget.” Enterprise Community , Enterprise Community Partners, Inc., 25 Jan. 2024, www.enterprisecommunity.org/blog/action-needed-restore-affordable-housing-programs-california-budget#:~:text=The%20Budget%20Details,an%20estimated%206%2C400%20affordable%20homes.
Chen, Brendan. “California’s Affordable Housing Stock Is Dwindling. How Can It Be Preserved?” Housing Matters, Urban Institute, 9 Aug. 2023, housingmatters.urban.org/articles/californias-affordable-housing-stock-dwindling-how-can-it-be-preserved.