Four Pillars for Housing Affordability: Moving Beyond Sacramento's Third Rail

What type of incentives or regulation would bring more affordable housing within reach of all our residents?    

Here are four pillars on which to build and retain affordable housing:

1. We need public options for housing. Just like healthcare, prescription drugs, and building infrastructure, the housing situation has gotten so big, broken and expensive to fix that we need a government led solution.  We have got to give our government the ability to respond to these crises under our state Constitution.
2. We need to help fund down payments and closing costs for first time homebuyers (including anyone who has not owned and occupied a home for 3 years even if they previously owned a home and sold it or lost it to foreclosure like so many in the 2008 financial crisis). Many residents have the ability to support mortgage payments (and currently are doing so in the form of very high rental payments) but lack the savings for a down payment and move-in costs.  Programs such as a government provided “silent second” mortgage with no payments due until a sale or financing help fund these residents into home ownership and housing stability.
3. We need to help fund move-in costs, security deposits and first months rent for renters, and to have stronger tenant protections. Almost ½ of the residents across the state are renters, and in some urban areas (like Los Angeles and Long Beach), renters are a substantial majority of the residents and voters. Over half our renters are cost burdened, and in Los Angeles more than 1/3^rd of tenants are paying over ½ their monthly income in rent (or mortgage). That is not sustainable.  Tenants are most vulnerable to displacement and housing insecurity and so helping tenants stay in place is key to addressing our housing for residents.
4. We need to level the playing field, minimize the manipulation of our housing markets by speculators, and ensure that the standard unfair competition and business practices principles apply to housing. We also need to align our tax deductions, credits and incentives with the policy goals of building and maintaining housing for residents not speculation.  

Unlike most of the world, the United States generally does not have prohibitions, limitations or taxes on ownership of housing or residential properties by entities or by persons who are neither nationals nor residents.  Ownership of and fractional interests in housing and residential real estate in the United States, and in its coastal states, trade on financial markets like bitcoin.  Residents, whether we be homeowners or renters, now compete at unprecedented levels with faceless capital buying up and holding residential properties as inventory for “investment” or later development.   

Who in LA hasn’t seen the ubiquitous (and usually illegal) signs nailed high on our telephone poles “We Pay Cash For Houses”?  Who hasn’t felt the effects of large managed REITs and landlords like Invitation Homes, Avalon Bay, Equity Residential or Essex Trust?  Who hasn’t felt the sting of having a neighborhood parcel bulldozed by LA’s 3 “C”s of development – Cohanzadeh (Wiseman), CIM, or Champion?  Unless a community, like Bel Air in the recent Mohamed Hadid McMansion on steroids case, has the money to fight in court, the result is too often a dangerous megadevelopment that disregards, or destroys the value or livability of, neighboring parcels and surrounding communities, or if the neighborhood is lucky, rises to the level of a simple eyesore.  Our neighborhoods and communities in LA have invested in the American Dream of homeownership and today, the equity in a single-family home often is the single biggest asset of and the multi-generational safety net for many Californians. 

So, getting housing policy right to build housing for people who actually live, work and vote here is key.   Ensuring that our housing puts residents first requires leveling the playing field for access and ownership with standard and sensible economic regulation. State legislation needs to be more than a top down supply-side agenda that delivers massive benefits to the private sector while leaving local government (meaning you and me as taxpayers) holding the bag to pay for common services, utilities, infrastructure and transit.  Upzoning mandated but not paid for by the state and benefitting real estate investors and speculators is a completely unacceptable policy.  And ill thought out policies too often lead to waste and absurd efforts to backfill the unintended consequences like Councilmember Cedillo’s most recent brain child to exercise eminent domain over a 124 unit apartment building to preserve 59 units of affordable housing after the 30 year agreement on affordability expired last year.  Eventually all of our chickens will come home to roost including the 55-year covenants on the limited number of affordable units being built today.  So, we really need to get this right, not just kick the can down the road to our grandchildren.   

Right now, Article 34 of the California Constitution, passed in 1950, prohibits our government from providing public assistance for lower income or affordable housing directly.  You read that right -- California cannot respond to the #1 issue on everyone’s mind – helping make housing in our state affordable and available to all – because 70 years ago, the voters of this state took away the state and local governments’ ability to provide financial assistance for lower income housing.  Yet it is clear that today’s needs require public solutions to provide and fund shelter and to provide financial assistance to help residents obtain and retain housing they can afford.  Senator Ben Allen proposed Senate Constitutional Amendment No. 1 (SCA 1) to repeal Article 34 by ballot measure in Nov 2020.  We, the voters, need to support SCA 1 both in the legislature and at the ballot box in November as a necessary foundation from which to build all other policies and solutions. 

Right now we have a number of publicly owned facilities that could be repurposed into housing and shelter.  This old idea really works at every end of the housing market.  Hollenbeck Terrace senior affordable apartments were fashioned within the shell of the ex-Loma Linda Community Hospital while NYC’s St. Vincent’s Hospital became multimillion-dollar condos (Starbuck’s Howard Schultz reportedly paid $40 million for his).   

Repurposing existing buildings is a key part of resolving our needs for shelter, supportive housing and affordable housing at every income level.   Refurbishing and repurposing existing buildings provide quicker, more sustainable, and cheaper paths to housing than demolition and new construction.   Using what we have in place where we can, while accommodating growth and new construction, is the greenest and best kind of housing supply to combat climate change.  Repurposing minimizes our solid waste disposal problems, avoids the outsized air pollution and carbon emissions of demolition and new construction, and preserves our urban canopy where trees can continue to purify air, cool overheated streets, and filter water runoff. 

Los Angeles City Controller Ron Galperin’s Property Parcel interactive map for the City of Los Angeles is a fabulous tool, but there are many other public facilities in the County that would work as well.  For example (and there are many more examples) the following sites could readily, quickly and cost effectively be repurposed:  

*The former LA County Courthouse and closed Mayme Clayton museum site at 4130 Overland Ave has sat vacant for months; and

* The 27-acre site of the long since closed Jack B. Clarke High School and Southern Youth Correctional Reception Center and Clinic, at 13200 South Bloomfield Avenue, Norwalk owned by the State of California. 

Neither of these facilities is in the City of Los Angeles so neither appears on Ron Galperin’s map. 

What say ye Supervisor Mark Ridley-Thomas in District 2 (already county owned former Mayme Clayton site) and Supervisor Janice Hahn in District 4 (state owned former juvenile facility Norwalk site)? 

Will you step up as Supervisor Hilda Solis has done with her efforts to acquire and repurpose the privately-owned St. Vincent’s Hospital in District 1? 

Will you, in the meantime, open the parking lots to overnight folks living in vehicles and/or open the buildings to a nonprofit shelter provider for the short term?

What say ye County Assessor, Jeffrey Prang – you already have the database and the information so it would be fairly simple to make public a sub-file of publicly owned parcels?  Will you follow Ron Galperin’s exemplary work and do that? 

To all our elected officials at every level of government, what do you say when we ask you to stop selling our land out from under us?   Stop selling our tax liens and our real estate assets to speculators.  Stop catering to those who rip up our neighborhoods and turn out our poorest and most vulnerable neighbors onto our streets, leaving us all worse off.  Help our residents find homes and shelter instead of passing laws to help global capital and speculators turn ever larger profits on stripping and flipping our land.  Rather than selling public land or structures to private developers, the City and the County should repurpose these public properties or else enter into a ground lease with a nonprofit developer who covenants in the lease to provide shelter or affordable housing.  That will not solve the problem by itself, but it makes for a quick and easy start on actually doing something about housing and shelter.  

The competition first time homebuyers and individual income property investors face from speculators, and the increase in overall housing costs – from higher rent payments that make it impossible for cost-burdened tenants to save for a down payment to the rise in cost of land, labor, lumber and legal requirements – make it clear that our residents need help in securing and maintaining housing.  Instead of the punitive, destructive and ineffective supply-side policies holding sway in Sacramento, our housing markets would benefit tremendously from the demand side driven production models of the Marshall Plan or Franklin Roosevelt’s New Deal. 

California should provide a revolving fund to help residents in at least the following categories:

*First Time Home Buyers[1] with down payments/closing costs (including anyone who has not owned a home in 3 years so we could help all those foreclosed out of their homes in the wake of the 2008 financial crisis), 

*Renters for move-in costs, deposit and 1st month’s rent, or to pay rent in an emergency, especially in a rent stabilized unit; and

*Heirs seeking time to settle reverse mortgages or sell the property for fair value. 

We also should be incentivizing residents (existing and future) to use our existing housing capacity throughout California.  We have areas that welcome investment and the additional density and that have affordable housing for the jobs created.  Recent polling confirmed that more than 80% of Californians, from every part of the State support investment and growth into the capacity and the promise of our underinvested and less densely populated cities and urban areas.  California could establish an incentive program for leveraging the federal opportunity zones in lower density areas, allowing local governments to apply to have any federal opportunity zone in their jurisdiction made eligible for density bonuses and state tax incentives.  Thus, Modesto, which has been promoting its opportunity zones, might well apply while San Francisco might choose not to do so. 

Incentivizing employers, investing in universities, art and culture, protecting and promoting the natural beauty of our inland areas and making those areas a priority and comfortable destination for existing residents who want to move, including retirees, and for the newly arriving population cramming into the ever-smaller available living spaces and pods of our coastal cities is a legitimate policy.  It is an important part of a solution and deserves far more serious consideration than the derisively dismissive "sprawl" misnomer used by industry acolytes in Sacramento. 

We also need to update our existing laws to extend to residential housing as a business because it has become a big business and not just a place to call home.  California should: 

1. Require each county in California to create a public parcel registry searchable for publicly owned real estate and for residential rental properties. Counties already have the property parcel tax database and records so the public land registry should be relatively simple and inexpensive.  The rental registry can be created by requiring landlords or others offering accommodations or rentals to register with the County.  Public lands and tax liens should be administered by a community trust in a manner that facilitates providing housing to meet demand.
2. Extend Existing State Antitrust and Unfair Practices Laws to real estate ownership and rental. California state law already prohibits cartels and undue concentration in the markets for goods and commodities under the Cartwright Act and both under that act and under the Unfair Business Practices Act, prohibits price fixing, anticompetitive behaviors and other unfair business practices in the sale or rental of articles or products.  It would be a simple matter to add the words “housing and residential real estate” into the definition of the markets for the universally bad business practices that have gone unchecked in the world of real estate investment and speculation.
3. Require transparency in ownership of residential rental real estate.  Any LLC or other private entity owning residential rental real estate should be required to disclose its direct and indirect owners and beneficiaries.
4. Expressly limit all incentives and benefits to multifamily housing and expressly defer to and preserve local zoning in all circumstances where the proposed development is to build a single-family residence or single-family compound. Single-family residences do not need incentives. 

Finally, I have specific suggestions for raising the funds needed to make all of the above happen.  Since the only way to raise public funding is through taxes or debt, it can be difficult to strike the right balance.  It is impossible to discuss housing without discussing the infrastructure that housing requires and it is difficult to have that conversation without discussing transit.  Therefore, the balance I would strike is to use California’s debt capacity for a significant long-term infrastructure and transit bond to obtain that necessary funding while interest rates are still at historic lows.  The other programs should be funded from a combination of one or more of the following sources of revenue:     

1. Impose vacancy taxes and nonresident transfer taxes on residential real estate, like Vancouver has done.
2. Expand our existing sales tax to pick up services, as well as goods, like 45 states and the District of Columbia have done.
3. Eliminate noncash tax deductions like depreciation of the purchase price for residential rental property, preferably in all cases but most particularly in the case of single family homes. The corollary would be that large outlays and improvements would have to be either expensed when incurred or still permitted to be depreciated against future income.  

Although this last suggestion might sound radical or novel, it is neither.  California has already made the principled decision to treat earnings from labor and capital gains from investment the same so there is no lower capital gains tax rate.  California also has resisted much of the special interest carveouts for tax free income: bonus depreciation, accelerated depreciation, Section 179 ($25,000 cap v. federal $1,000,000 cap) and real estate professional designations.  Now we just need to take that last step and call out depreciation in general for what it is – a special income exclusion only for those owners of our built environment who lease or rent it to others.  Depreciation effectively treats rental real estate like a tax-free bond – the cash that you get as interest or rent is reportable but not taxable.  And the suggestion to cap or eliminate this deduction is from someone (the author) whose taxes would definitely go up if the proposal were to be enacted. 

Hydee Feldstein is a retired attorney who often writes and speaks on pending legislation related to housing and land use.  This article is written in her individual capacity and represents her own individual views and not those of any organization with which she is associated.  More information and resources are available at https://betterwayca.org/ 

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[1] Our existing state program for home buyers assistance, CalHFA, is going in exactly the wrong direction and by public notice dated February 3, 2020 just gutted the public benefit program.  At the same time, the supply side of the program is going strong with CalHFA selling our home loans as additional inventory in the secondary markets, the same folks who foreclosed, rented our own homes back to us and made outsized profits off our home equity in the years surrounding the 2008 crisis.