The Register recently reported that the median home price in Orange County was $629,500 in June, the highest in seven years and not far from the pre-recession high of $645,000 in 2007. According the U.S. Census Bureau, the median household income in Orange County is $75,400. Thus, the typical O.C. family simply can’t afford the median O.C. home.
What is missing from our affordable-housing discussion is the age-old concept of the “housing ladder.” Affordable housing is created when homeowners sell – maybe upgrading, moving to a bigger home for the kids, or downsizing, as they get older. These home sales are supposed to open up older, more modest homes for first-time, often younger homeowners.
Thirty years ago, no one thought a young couple just getting started should be shopping for a brand new, just-built home. Everyone understood that your first home would probably be 20-to-30 years old. After a few more years of saving money and a promotion or two at work, the young couple might look to upgrade.
Today, local governments in Orange County and neighboring counties have ignored the housing ladder and pursued many ruinous policies in pursuit of building new “affordable housing,” believing that everyone should be able to afford a brand new, large home right now.
Subsidizing housing has long been popular in California policy circles. But, in most cases, subsidies have distorted the housing market, created more demand for purchases and driven home prices up. And then they lock recipients into their homes – owners can’t afford to sell and buy another home without further subsidies. Thus, fewer homes hit the market, and prices soar for available homes.
The most popular affordable-housing policy in Orange County has been mandating developers to sell some new homes at below-market rates. Typically, developers must sell a percentage of units at “affordable” prices in return for approval of a development, and sometimes developers are allowed to build more units in return for selling some at below-market prices. These policies are called “inclusionary housing.”
Reason Foundation studied these policies a decade ago and found that they reduced the supply of housing and raised average home prices – the exact opposite of the desired effect.
In the Los Angeles region, inclusionary housing policies led to 770 affordable units being sold over seven years, but reduced the total number of new units built by more than 17,000 and raised the average home price by about $50,000 during the same period.
Researchers at Harvard and the University of Pennsylvania have found that housing price differences between cities are not attributable to variation in land prices or construction costs but to regulatory differences, primarily zoning and building restrictions. Similar research from the Lincoln Land Institute found that “house prices in cities with stricter regulatory policies rose 30 percent to 60 percent relative to less-restrictively regulated cities over a 15-year period.” And according to National Association of Home Builders every “$1,000 increase in home price leads to about 232,447 households priced-out of the market for a median-priced new home.”
Creating more affordable housing requires deregulating markets for land and allowing market-driven densities and development, especially in the suburbs. It means simplified and reasonable building codes that serve real public safety concerns rather than special interest goals. It means setting impact fees sensibly to mitigate the real effects of more housing, such as increased traffic, not to extort design or aesthetic concessions from builders. When developers incur fees, home buyers are the ones who really pay them.
What ultimately drives housing affordability is supply and demand. Orange County has no shortage of demand for housing; supply is the problem. Everyone who buys a parcel of land should have an equal right to build a home or homes on it, so long as he doesn’t impose an undue burden on any others in the process.
We have decades of experience showing that interfering with housing markets makes homes less affordable, while working with the markets can put owning homes within reach for more people.
Adrian Moore is vice president of policy at Reason Foundation. This article originally appeared in the Orange County Register.