As California comes to grips with housing crisis, Texas real estate rises in 2020

Texas and California represent opposite poles on the spectrum of government ideology⁠—the Golden State’s Democratic supermajority versus the conservative Lone Star State’s regulation-averse independent streak⁠—and in recent years, starkly different results when it comes to housing policy and production.

Predictions for this coming year highlight the divide. According to the recently released Texas A&M Real Estate Center’s outlook for 2020, the state’s homebuilding industry will still have a banner year, despite forecasts for muted economic growth.

“Both the Texas and U.S. economy will likely slow in 2020 yet still register solid growth,” says Real Estate Center research economist Luis Torres. “With uncertainty around trade wars and the current crude oil trajectory, two of the strongest economic drivers for Texas will decrease economic momentum. In contrast, one of the star performers of the 2020 economy will be the housing market, with double-digit growth in new home construction for the first time since 2017.”

California flips that idea on its head. Instead of attracting residents with a surfeit of new housing options despite low growth, it’s posting job growth above the national average, even beating the economies of many European nations when it comes to growth and performance metrics, yet still pushing away many residents⁠—making it harder for lower- and middle-income residents to stay—as a result of soaring housing prices and continued difficulty building new supply.

Texas on a roll

Because of less red tape and a tendency toward sprawl, Texas has been able to keep up with demand and build more units over the last decade. The state’s rate of new construction and single-family housing permits has trended well above the national average since 2000, according to Texas A&M research, and the gap has only widened since 2010. Between 2010 and 2016, Dallas and Houston combined created at least twice as many housing units per year as Los Angeles plus the entire Bay Area. New supply is one reason the median home price in Texas is currently $207,301, while in California, it’s nearly triple that, $605,280.

California’s drought in new home production has been caused in part by land-use regulations and the state’s myriad environmental laws. Between 2010 and 2016, Up for Growth found that for every 100 households formed, 74 housing units were built; the state’s population was growing, but the housing stock wasn’t keeping pace.

These states are representative of their regions. Per the National Association of Home Builders, of the 6.8 million home starts across the country in the 2000s, 54 percent occurred in the South, with only 23 percent in the West.

These trends will only diverge more in 2020, according to analysts. Even with the large amount of new housing that’s already been built, it’s still a good time to be a homebuilder in Texas. The Texas A&M report projects sales of single-family housing to increase 6.4 percent in 2020, with a 5.3 percent increase in price per square foot. A Zillow-backed survey of economists and housing analysts predicted that in 2020, Texas’s relatively affordable big cities (Houston, San Antonio, Dallas, and especially Austin) will outperform the market average in home value growth, while overpriced California metros like San Francisco, Sacramento, and Los Angeles will fare poorly.

The state’s apartment market isn’t expected to do quite as well, with Texas A&M forecasters predicting a 6 percent drop in number of units sold. But that’s in part because builders have strained to keep up with demand in many cities. Houston is projected to add roughly 16,000 units this year alone, according to a report from commercial real estate firm JLL, with another 23,000 in the pipeline and overall city occupancy at 90 percent.

California’s dreaming

The California housing situation, on the other hand, is a multifaceted mess. Prices have skyrocketed. A new apartment in San Francisco costs an average of $700,000 to build—including materials, labor, and land—triple the cost of a decade ago. The average value of a home in Los Angeles County is $635,000—almost double the median price in Austin and nearly triple the median price in Dallas—and many neighborhoods have seen average prices more than double in the last decade. According to the United Way, one in three Californians, or 3.3 million families, don’t have incomes to meet their basic cost of living, and most struggle with high housing costs. The state’s 150,000 homeless residents represent a quarter of the nation’s homeless population. The nonpartisan Legislative Analyst’s Office estimates it would cost “in excess of $250 billion” to provide affordable housing for all of the state’s 1.7 million rent-burdened households.

Gov. Gavin Newsom made affordable housing one of his policy priorities after being elected in 2018, promising his own “Marshall Plan” to tackle the issue. But lack of action in the state legislature has shown he was overly optimistic. Take California state Sen. Scott Wiener’s crusade to alter regulations and expand housing production in the Golden State, a somewhat Sisyphean task that’s become a metaphor for the state’s continued inability to build more housing.

First introduced in 2018, Wiener’s bill, which would allow for more dense residential construction near transit lines, was introduced last week for a third time during an event in Oakland. Originally known as Senate Bill 827, then SB 50, or the More HOMES (Housing, Opportunity, Mobility, Equity, and Stability) Act in 2019, the bill, which would supersede local zoning laws and allow denser construction in select areas across the state, now faces a tight deadline. Due to some political maneuvering in the Senate Appropriations Committee, the bill needs to pass the entire state senate by the end of the month to advance.

When Wiener first began his crusade two years ago, he told Curbed just how important it was to build more homes in California to help alleviate the state’s dire shortage of affordable housing. The situation has since only gotten worse: A Quinnipiac University poll released late last year found that 53 percent of Californians don’t believe they can afford to live in the Golden State. That sentiment jumped by 10 percent from a similar poll taken last February.

“Over the 20 years I’ve lived in San Francisco, I’ve seen the human carnage caused by our bad housing policy,” Wiener tells Curbed. “This isn’t an academic exercise. This is real. This is about people who are struggling and who are at risk. And we need to pull our heads out of the sand.”

In order to pass the bill, Wiener wants to provide localities with a two-year grace period to create new zoning plans that could meet housing production goals, as determined by the state’s Regional Housing Needs Assessment process, or RHNA, before the new law’s provisions kick in.

That may be a politically smart move to reduce pushback from local city officials, who want to protect their own power over housing policy. But those same leaders don’t have a track record of delivering on promises to build. According to a Southern California News Group analysis of the RHNA process, 97 percent of cities and counties statewide were behind in issuing permits to hit their RHNA goals, two-thirds of those locations are less than halfway to their 2025 goals, and half of localities are behind in every affordability category of homes, including very low income. And, thanks to a weaker national economic forecast, a recent UCLA analysis predicts even fewer new homes will be built in the state in 2020.

According to real estate consultant John Burns, California “is all talk and virtually no action” when it comes to housing construction. As he told the Orange County Register, “Most cities and counties celebrate economic growth, yet don’t permit enough housing to accommodate the additional workforce, resulting in high home prices, high rents, and worsening traffic. Anti-growth stances seem to be the key to getting reelected in many cities.”

A denser California is within reach

California’s backsliding housing construction is especially frustrating considering the potential impact of even small changes to restrictive regulations. Economist Issi Romem recently analyzed the impact of rezoning, and what would happen to housing capacity in major U.S. cities over the next two decades if they allowed multiple units on each lot currently limited to single-family homes. The impact of zoning shifts, and the market forces they unleashed, could be immense.

For instance, say Los Angeles rezoned just 20 percent of its single-family lots right now so they could each be permitted an extra housing unit. With that change, Romem estimates that by 2040, there could be up to 775,000 additional housing units built in LA beyond what’s expected and possible under existing regulations. Say the city upped the ante and allowed four units on those lots. That would open up the possibility of constructing 2.3 million more new homes by 2040 then currently expected. Same thing applies to San Francisco. If just 20 percent of the city’s single-family lots were permitted to house an extra unit, that would give developers the potential to construct 200,000 additional homes in the city by 2040.

California has defied gravity in many ways for much of the last decade, gentrifying statewide in ways that impact the housing market. (Continued economic growth and more high-paying jobs add more overall wealth, but leave many residents struggling.) And the state still saw an increase in population thanks to inflows of immigrants from outside the U.S. and high-income domestic migration. But the stark growth in Texas, contrasted with slowing population growth and the continued outflow of many native Californians, does say something about how these states’ approaches to housing will impact their futures.

If predictions about housing production in California this year are true, the state will once again fall far short in its goal to reverse the trends of the last decade and start building the housing that it so desperately needs. More years like that will only add more economic stress to Californians who want to stay where the good jobs are, but increasingly can’t afford to.