The Housing Charade

Al Jacobs

A fascinating Letter to the Editor just appeared in one of the newspapers I subscribe to. The writer bemoaned the number of residents vacating California, criticized the politicians he considered responsible for ignoring their responsibilities to make our State a more habitable place to live and concluded his commentary with the phrase: “The state must build more affordable homes.”

It’s somewhat hard to dispute a portion of the comments he makes. Most certainly many of our occupants packed their belongings and headed elsewhere. California’s population fell by more than 182,000 last year, the first yearly loss ever recorded for the nation’s most populous state that halted a growth streak dating to its founding in 1850 … on the heels of a gold rush which prompted a flood of people to seek their fortune in the West. Moreover, for the seventh straight year, more people left California than moved in, according to new census data. Over 86,000 people left for Texas, nearly 70,000 en route to Arizona and about 55,000 headed to Washington.

We have steadily lost people to other states for years. From 2010 to 2020, about 6.1 million people left for other states while only 4.9 million arrived from other parts of the country, this according to an analysis of census data by the Public Policy Institute of California. Furthermore, things are not easing up. In a recent University of California, Berkeley poll, 52% of registered voters said they’ve considered leaving the state … with 71% citing the high cost of housing.

Whether we may place all of the blame on our politicians for failing to make the Golden State a more habitable place to live is questionable. Admittedly, our political leaders are responsible for much we find objectionable, but there are others not in governmental positions with a powerful hand in shaping the malfunctions bedeviling us.

These include self-designated social champions functioning as principals in notable private-equity and venture capital firms. There are also wealthy individuals such as Microsoft co-founder Bill Gates and media magnate Mark Zuckerberg, as well as other persons, dedicated to advancing impressive-sounding causes they simply happen upon. When using their positions and influence to promote legislation, propositions and projects they often understand only vaguely, they are as culpable as any elected or appointed official for the harm they do.

As for the final contention that the state must build more affordable homes, we run into a complex predicament: There are economic considerations we dare not ignore. I’ll describe some of the factors making affordable homes impractical.

The first reality we must consider are the rules and procedures California adopted to resolve what is now described as a critical shortage of affordable housing. Since 1969, our State required all local governments – cities and counties – to adequately plan to meet the housing needs of everyone in the community. Local governments respond to this requirement by adopting housing plans as a part of their general plan – the latter serving as their blueprint for how the city and/or county will grow and develop.

California’s housing-element law acknowledges that, in order for the private market to adequately address our housing needs, local governments must adopt regulatory systems to meet state-mandated goals to provide housing at all income levels. The State’s housing department uses a process called the Regional Housing Needs Assessment (RHNA) to determine how many housing units are needed in various regions of the state in cycles starting every four to eight years.

Local governments within each region then divvy up the total number among all of the cities and unincorporated county areas. Each jurisdiction’s total RHNA goal is divided into four categories: (1) Very-low income housing, affordable for people making less than half of the median income in their area. (2) Low-income housing for people making 51-80% of median income. (3) Moderate income housing for people making 81-120% of median income. (4) Above-moderate-income housing for people making more than 120% of median income. It then becomes each local government’s obligation to designate areas within their geographic boundaries where such housing will be located.

As we’re aware from the reports received, the program is not functioning as we might hope. During the 2000 RHNA cycle, 1.16 million new homes were designated. To meet this goal by the end of 2020, 940,000 should have been permitted, but only 740,000 became added. However, as for affordable housing, the real failure is not the shortage in number, but the distribution. The jurisdictions permitted only 18% of them as very-low income units and 26% low-income – a mere fraction of the state mandate. At the same time above-moderate-income housing garnered 43% more permitted units than needed.

The permit data illustrates how far out of reach affordable housing is for lower-income residents. And of particular note, it reveals how unlikely home ownership is for them. For one thing, California builds more apartments and multiplexes than it does single-family detached homes – in 2020 about 52,000 vs. 44,000 respectively. In specific numbers, only 1,050 homes permitted statewide last year were considered affordable for purchase for the 5.3 million low- and very-low income households. Does this reveal how the governmental cards are stacked against the impoverished?

As a concluding view of RHNA, each city and county is graded on how effectively they meet their given goals for the housing they designate to be added, and specifically which would be affordable to residents in the four categories. Jurisdictions are required to send annual progress reports to California’s housing department.

An overall grade, from an A+ at the top to an F at the bottom, determined by adding the category scores and bonus points, and then dividing by the number of categories, is then issued by the State. As to the grade’s significance, I’ve searched numerous websites and publications to determine what rewards or penalties a jurisdiction receives for the grade assigned. To date I’ve not managed to find anything. As nearly as I can tell, there is no reward for a high grade and no penalty for a low grade. This may give us some indication as to exactly how the program is administered and what it will accomplish.

And the one fact we may not ignore is that neither RHNA nor the local jurisdiction actually constructs anything. Unless a builder chooses to build a unit – or is hired to build it – to be sold or rented on the cheap, it will never exist. Irrespective of the legislation enacted or the rules enforced, government does not actually create housing.

Let us now bid farewell to the official state program for tackling our affordable housing dilemma and beam in on the practicalities experienced in actually providing habitable residences to persons with meager income or assets. One thing appears obvious: Without some sort of financial assistance or subsidy, massive numbers of low-income Californians will be unable to secure suitable living accommodations.

For a brief view of reality, what must a workman earning $15 per hour pay to rent a Los Angeles apartment. Presuming a deduction of only the unavoidable 7.65% FICA tax, his 40 hours per week generates monthly take-home pay of $2,382. Though it may seem implausible, as of November 2021, average apartment rents in our most populous city are $1,996 for a studio, $2,637 for one bedroom, and $3,442 for two bedrooms. What else need be said?

This now brings us back to the assistance which must be provided to millions of our fellow citizens, to do nothing more than enable them to occupy a livable residence. I’ve analyzed the various programs, proposed and employed over the years, and found only one actually serving a useful purpose: the federal Section 8 program, wherein qualified low-income families occupy commercial rental housing at fair market prices, for which they pay no more than 25 percent of their income, with the government picking up the balance. Instituted in 1965 during the Lyndon Johnson administration, it’s federally funded and locally administered. It works superbly; this is where all low-income housing funds deserve to go.

Though the numbers I’ve selected will be valid through much of the nation, it gets dicier here in Southern California, as monthly rents under $1,000 are less easily found. This means subsidized tenants may not reside in pricy cities. They can, nonetheless, live in more modest, but thoroughly respectable areas elsewhere. You might note some of my rental properties in the Inland Empire cities of Hemet, San Bernardino and Indio currently rent for less than $1,000, and all are well managed and maintained. It can be done on the cheap if we really try.

A final thought: As you see, my proposed approach is designed to be as simplistic and inexpensive as possible. I’m convinced the more complex and costly a program becomes, the less effective it will be.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at


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