California’s Housing Crisis and Proposition 10
By Jared Baxter
Since its founding in 2015, one of the main ongoing areas of focus of the Los Angeles Tenants Union has been the repeal of the Costa-Hawkins Rental Housing Act, a 1995 law authored by a Democratic State Senator from Fresno and a Republican Assembly member from Bellflower and signed into law by Republican Governor Pete Wilson. The immediate impact of the law was to overturn the vacancy control provisions of the rent stabilization laws passed by Berkeley, Cotati, East Palo Alto, West Hollywood, and Santa Monica, which barred landlords from raising rents to market rates after a tenant voluntarily vacated a given unit. Likewise, all California cities were restricted from implementing vacancy control provisions in the future, and were further rendered unable to apply rent stabilization and just-cause eviction protections to single-family homes and condominiums. The law also exempts “new construction” from rent control, which is defined as units with a certificate of occupancy issued after February 1st, 1995, or after the date of exemption previously defined in existing local ordinances. This is the reason why the Los Angeles Rent Stabilization Ordinance cannot be extended to properties built after October 1, 1978.
While the grounds for the strong and indeed foundational opposition of the Los Angeles Tenants Union to this law may be obvious, a brief review of the intentions and impact of Costa-Hawkins will provide critical context for understanding the newly re-invigorated repeal movement that has coalesced around Proposition 10, which goes before California voters in November. One of the sponsors of Costa-Hawkins, Democrat Jim Costa, who was then a State Senator, was quoted by the LA Times stating that the measure would “create a positive business climate for the construction of rental housing throughout the state.” Taking the argument further, then-State Senator Tom Campbell, a Republican from Palo Alto, sought to explain his support for Costa-Hawkins in the face of strong opposition from his constituents by reasoning that “removing vacancy controls will loosen up money for new construction … which will then produce additional affordable housing.”
Twenty-three years after the passage of the bill, and nineteen years after the law’s full implementation, it is clear that these arguments reflected, at best, a naïve belief that unleashing the forces of supply and demand would help produce a “market equilibrium” that would benefit tenants. On the contrary, the effects of repealing vacancy control were dramatic and went in precisely the opposite direction. A 2010 report by the Santa Monica Rent Control Board examining this issue found that 58% of their rent-controlled housing stock experienced an increase to market rate after the full implementation of Costa-Hawkins, representing a total of 15,955 units. Whereas 82% of these units were affordable to low- or very low-income households in 1999, the year the phased repeal of vacancy control went into full effect, that share had declined to 14% in just 11 years, with a decisive majority of 59% of these units now only affordable to those earning above 120% of the Area Median Income. Despite the substantial upward transfers of wealth enabled by state-mandated vacancy decontrol, the affordability of rents in the city has worsened dramatically, with recent data showing that nearly 1 out of every 2 tenant households in Santa Monica are rent-burdened. On a statewide level, the passage of Costa-Hawkins in July 1995 marks an inflection point where construction began to fall sharply behind demand, with the vacancy rate beginning a steep and steady decline from a peak of 8.5% to 4.2% in 2001. This measure only once approached its previous high, with a 7.6% rate during the depths of the recession in 2009, before once again sinking to roughly 4%, where it remains according to the most recent available data today.
Likewise, Costa-Hawkins failed to anticipate significant changes in California housing markets brought about by responses to the 2008 crash. To restore the substantial losses in homeowner equity incurred by this event, the Federal Reserve adjusted monetary policy with the explicit aim of re-inflating asset values, particularly homes. Low interest rates encouraged large-scale institutional investors to move into the market, reversing price declines, while the homeownership rate plummeted. Single-family homes were purchased out of foreclosure at bargain prices and rented out by private equity firms, with the purpose of securitizing rental income in a manner comparable to what was done with mortgages in the run-up to the crash. The impact was significant, with a 67% increase in the number of single-family rentals nationally over a ten-year period. A study by the Federal Reserve of Atlanta in late 2016 found that private-equity firms evict at higher rates than mom-and-pop landlords and smaller firms, with one such firm, Colony Starwood, moving to evict more than one-third of its renters in Fulton County, Georgia, in 2015 alone.
Further, in an unprecedented move, the largest of these private-equity landlords, the Blackstone-owned Invitation Homes, received federal guarantees for its rental debt in 2016, marking the first time in history that Fannie Mae has shared credit risk with an owner of rental properties. The Urban Institute has argued that “affordable housing requirements” should be imposed on institutional landlords receiving taxpayer-backed funding, but it would be preposterous to expect any of the options available at the federal level to be implemented by the Trump administration. Rent control and just-cause eviction protections would be an obvious state-level solution for the 12,990 California homes owned by Blackstone as of the fourth quarter of last year. Yet Costa-Hawkins, passed at a time when no one could have foreseen either the 2008 crash or the subsequent evolution of private-equity owned single-family rentals, prevents our lawmakers from taking reasonable actions to ensure that the same constituents who would be on the hook for Blackstone’s losses are adequately served by its risky and untested business model.
Of course, this intervention would be limited in scope compared to the full range of options made available by the repeal of Costa-Hawkins. The example of Blackstone nonetheless opens onto a broader point. By and large, the conversation about how to address California’s housing crisis has focused on questions of supply and demand. There is no dispute that California housing prices have for many decades exceeded national averages and that lagging construction played a role. Yet supply and demand is a theoretical abstraction, and its explanatory and predictive utility is constrained by the fact that all actual markets are to a greater or lesser degree distorted, by virtue of existing in the real world. In particular, the events of 2008 revealed that America’s housing markets had been distorted significantly. Lax or fraudulent mortgage underwriting standards and predatory lending, conducted in service of a booming secondary market in mortgage-backed securities and other derivatives, had pushed home prices far beyond sustainable levels. Ten years after the crash, a recent report by real estate firm CoreLogic found that the Los Angeles housing market is again overvalued, highlighting the continued distortions in ongoing “demand.”
We note that any consideration of these factors is entirely absent from the mainstream supply-side analysis of California’s housing affordability crisis. As an exemplary instance of this viewpoint, we take the California Legislative Analyst’s Office widely cited 2015 report, “California’s High Housing Costs — Causes and Consequences.” There, the situation is fundamentally attributed to “households bid[ding] up the cost of housing in coastal regions” that have failed to add adequate supply, with the “unmet demand to live in [these] areas spill[ing] over onto inland California, driving up prices there too,” as well as high building costs. While the conclusion suggests that roughly doubling California’s expected housing production could “seriously mitigate the state’s problems with housing affordability,” the basis for this analysis is the author’s calculation of “how many additional units California would have needed to build in order for its home prices and rents to have risen only as fast as the rest of the country,” where 47.7% of all renter households are rent-burdened today.
Indeed, the affordability crisis at hand is national — in a recent survey, 51% of U.S. mayors cited housing costs as the main reason why people move out of their city — and international, and is by no means a phenomenon derived solely from California zoning laws and local politics. Though the author acknowledges that “factors … beyond policy makers’ control” will likely result in “home prices and rents” remaining “above-average for the foreseeable future,” the report stops short of explaining how any policy changes would create an incentive for private markets to produce enough units to meaningfully lower rents for the most vulnerable. Indeed, the UK-based New Economics Foundation argues that in areas where land prices are high, such as coastal California cities, developers are compelled to build costlier homes to assure a decent profit, and must also guard against the risk of building so many homes that it “could have the effect of lowering prices.” In consequence, they argue, “there is therefore a perverse incentive for developers to trickle out housing supply, in order to keep local prices up.” Even if the California Legislative Analyst’s recommendations would plausibly bring California home prices and rents closer to national averages over time, it is clear that this would not resolve the crises faced by the most vulnerable renters in either the short- or long-term.
At root, the compounded problems of soaring housing costs, nearly half a century of flat wage growth, skyrocketing inequality, and declining social mobility have one and the same cause — neoliberalism, and more broadly, capitalism itself. Above and beyond the specific goals sought by Costa-Hawkins repeal, it is imperative that we use this opportunity to make plain that private markets cannot and will not deliver the social good of affordable and stable housing for all. Indeed, where there is scarcity, incumbents landlords like Blackstone are powerfully incentivized to maximize their gains by preserving and exploiting the status quo. While our long-term horizon remains the de-financialization of housing on a global scale, we must also work to deliver meaningful victories to Los Angeles tenants here and now, including through the success of Proposition 10 and the expansion of our rent stabilization system.
Jared Baxter is a member of the Los Angeles Tenants Union’s Policy & Research Committee. You can follow the L.A. Tenants Union on Twitter at @latenantsunion
Originally published at konkret.la on October 24, 2018.