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The Perfect Storm That Created the Housing Crisis

PLANNING WATCH LA

PLANNING WATCH - The United States is in the midst of a severe housing crisis that is of its own making.  This crisis results from several generations of awful housing policies, some of which date back a half century to the Nixon Administration (1968 -1973). 

The housing crisis’s most obvious feature is homelessness, but it also includes overcrowding and rent-gouging.  Nationwide 600,000 people are homeless on any given night.  In Los Angeles alone there are 42,000 homeless people, and this homeless population continues to grow despite the hand-wringing.  The local programs advocated by Mayor Karen Bass, with full City Council support, only down this trend.    

This is because the national and local housing crisis did not, inexplicably, fall from the sky.  It has been created by a perfect storm of long-term and counterproductive housing policies.   These neo-liberal (i.e., unregulated capitalist real estate markets) programs are promoted by the financial beneficiaries of the housing crisis: private developers and the local, state, and Federal officials who accept their support and then dish-out favors to them

Causes of the housing crisis include the following nationwide trends: 

1)  Economic inequality began its slow rise in the United States over the past half century, especially over the past two decades.  Social scientists Fred Magdoff and John Bellamy Foster summarized these economic trends as follows: 

The working class in the United States has had an especially difficult time over the first two decades of the twenty-first century. The first decade began with a recession following the bursting of the dotcom bubble and after a short recovery was soon followed by the financial and housing crisis of the Great Recession from December 2007 to June 2009. It took over six years for total employment to return to prerecession levels, and even longer for the number of full-time workers to equal prerecession levels. It was nine years before the unemployment rate went down to the prerecession level of 4.7 percent. Millions of people lost their homes and personal bankruptcies soared. Home ownership declined for a decade, with investors buying up properties to convert to rental houses. Investors bought at least two million homes, and almost certainly far more than that, with prices depressed. Large-scale institutional investors purchased tens of thousands of homes for less than they cost to build.  Skyrocketing rents in 2021–22, along with inflation in other parts of the economy, including the rising cost of food, have been disastrous for millions of people. 

The chart below, from the World Inequality Report, demonstrates the growth of economic inequality in the United States from the early 20th century to the present.  From the 1970s to now the share of income held by the top 10 percent grew from 35 percent to 46 percent.  At the same time the income of the bottom 50 percent, who make up the bulk of the overcrowded and homeless, declined from 21 percent to 13 percent of total income.

  

2)  The termination of the Federal Government’s public housing programs, beginning in the 1970s, was also a major cause of the housing crisis. While there is a buzz about restarting former HUD programs through local funding, little has happened.  Most local governments, like Los Angeles, are financially strapped, while the Federal government reserves the right to expand the money supply, lavish military industries with cost-plus contracts, and ship – so far -- $115 billion in weapons and government bail-outs to the Ukraine for the proxy war against Russia.

3)  The dissolution of 400 Redevelopment Agencies in California in 2011-12, including LA’s Community Redevelopment Agency (CRA), was another lethal blow. These agencies had been required to devote 20 percent of their budgets to public housing subsidies.  When the California State Legislative dissolved them, this second source of funding for low cost public housing vanished. 

These two forms of public housing were replaced by neo-liberal policies and practices (deregulation combined with trickle-down economics) that made the housing crisis steadily worse.  The exception was real estate investors.  Their profits soared. 

The claim justifying this upward redistribution of wealth and income was that homelessness resulted from a housing shortage.  If cities, therefore, increased the potential housing capacity of their zoning, investors would rush in and build more housing.  As a result, the housing shortage would then end because prices would drop, and the homeless would finally find affordable places to live.  This faith in unregulated housing markets, however, ignored at least eight (8!) factors that made the housing crisis even worse. 

  • Factor 1: There is no guarantee that increasing the capacity of existing zoning automatically increases the supply of housing. For example, in Los Angeles, all commercial zoning already allows by-right apartments, and nearly all of these potential development sites are on transit corridors that also qualify for density bonuses.  Based on this zoning, Los Angeles ought to have hundreds of miles of three to six story apartment buildings on its long transit corridors.  Nevertheless, real estate investors have shown little interest in these already up-zoned sites.  Nearly all of them remain untouched. 
  • Factor 2: If real estate investors had used this available untapped zoning, nearly all of their new apartments would have been expensive market-rate units. Their rents would have been far above the finances of the housing crisis’s victims.  Despite their enormous unmet demand for shelter, their low incomes continue to keep them out of the private housing market.
  • Factor 3: If developers had overbuilt market housing, the so-called law of supply and demand would not have made rents affordable. This “law” only applies to market scenarios in which real estate investors make an acceptable profit.  If they don’t, they either walk-away from their unprofitable investments, or, more likely, request and almost always receive an economic rescue package from the Federal Government.  Either way, those who desperately need a house or apartment, do not suddenly have an affordable place to live.
  • Factor 4: Since Los Angeles does not have an Inclusionary Housing Ordinance, like Glendale’s, and LA set 1978 as the cut-off date for its weak Rent Stabilization Ordinance, the supply of low-priced private sector housing continues to decline.
  • Factor 5: The one remaining HUD public housing program is Section 8 housing vouchers. Despite the enormous demand of this housing, only a small number of people manage to secure Section 8 housing in Los Angeles.
  • Factor 6: Because real estate investors expect an annual rate of return of 15-20 percent, they build expensive, highly profitable high-rise apartments. Once built, these high rent buildings pull up the rents in nearby older apartments.  Furthermore, if these apartments were built after 1978, landlords are not subject to LA’s Rent Stabilization Ordinance.  They can charge tenants whatever the market will bear.
  • Factor 7: New, expensive residential building sites often require the demolition of existing low-cost apartments to prepare building pads.  This is the main reason why the supply of apartments subject to Los Angeles’s Rent Stabilization Ordinance steadily shrinks.
  • Factor 8: To demolish older rent-controlled apartment buildings and replace them with expensive high-rise apartments, developers usually request the waiver of zoning laws.   City Hall grants these zoning waivers 90 percent of the time

As a result of these factors, the price of housing in Los Angeles has steadily increased, even though the real wages of most Californians have barely changed in over 50 years.  This is why the homeless, overcrowded, and rent-burdened are unable to move into new, vacant, expensive apartments.  The unwillingness of elected officials from Congress to City Hall to address the real causes of the housing crisis (i.e., end of public housing, rising housing costs, stagnant wages) also explains why they resort to police sweeps to force the homeless to relocate to other nearby locations.

                                                                                                  

(Dick Platkin is a retired Los Angeles city planner who writes about local planning issues for CityWatchLA.  He is a board member of United Neighborhoods for Los Angeles (UN4LA).  Previous Planning Watch columns are available at the CityWatchLA archives.  Please send any questions to [email protected].)