Where’s the IE Housing Boom?

LA needs a housing boom. That, we know beyond a doubt.

However, housing is a regional market, and the SoCal market includes the Inland Empire, which has historically been an outlet for housing demand in LA County and Orange County. The IE does have some apartment development, but it’s best known for its single-family residence (SFR) subdivisions, where houses are considerably cheaper than in LA-OC.

SFR construction in the IE is probably a pretty low priority for most urbanists, but there’s a pretty good case it’s not a bad thing. For one, growth in the IE provides at least some measure of new housing to check price and rent increases in LA-OC. Second, The IE is projected to be one of California’s fastest growing employment centers, and those folks will need housing close to where they work. Last, given how much of the IE is already developed, many projects are effectively suburban infill. Since regional density is more important than local density in determining vehicle miles traveled (VMT) per capita, one of the best ways to reduce VMT per capita is for the IE to look more like LA.

If you went back to 2012 or 2013 and asked housing market watchers, they likely would have expected more growth in SFR construction in places like the IE by today. (Some little corners of Twitter can hardly wait to shove an SFR boom in people’s faces; you know who you are.) To be honest, I expected suburban growth in the IE to have returned full force, and ended all the speculation about the death of the suburbs. That expectation was not based on supposed Millennial housing preferences or demographic shifts or gas prices or anything like that, but on land use policy realities: people would move to where housing was cheap, and housing would be cheap in the IE because it’s so much easier to build new SFRs there than to redevelop land in LA-OC.

Despite steadily increasing prices, though, there’s no sign of an SFR boom. Calculated Risk has the run down on housing starts at the national level as of September. Happily, after tapering off earlier this year, multifamily starts have picked back up. Single-family starts are still lower than at any time since 1969 except the brief, sharp recession of 1981-1982, and are only increasing slowly despite over 6 years of very low construction levels.

This is true at the local level too. While multifamily starts in LA-OC are at least back to prerecession levels (though still much lower than in the 1980s, and they need to be even higher than that), SFR starts are incredibly lame: less than 1,000 permitted per month, worse than even the early 1990s recession that pummeled SoCal’s economy. You could, to some extent, argue that’s about land: the only places in LA-OC with any appreciable amount of land for SFR construction are Irvine and the Antelope Valley, and Irvine actually does have an honest-to-goodness boom. The Antelope Valley is too far from job growth centers; its boom in the 1980s was related to the local defense industry, and SFR construction there is practically non-existent today as there is no price support.

On the other hand, there’s plenty of land in places like Ontario and Fontana, both for large master plans of the type that exploded in Eastvale in the 2000s, and for small infill subdivisions. Lack of suitable sites is not the issue. And yet, SFR construction in the IE is going nowhere.

The IE economy was badly damaged by the recession, but job growth has resumed and passed the prerecession peak.

In addition, LA-OC has had fairly strong job growth, which should create spillover effects in the IE housing market.

But IE housing construction is very weak. Why is this?

The new SFRs that are being produced are high end houses. Bloomberg reports that nationally, starter homes are increasingly beyond young people’s grasp. Anecdotally, keeping an eye on what the suburban home builders are offering, you almost can’t find any new construction in Eastvale, Chino, Ontario, Fontana, or Jurupa Valley for under $400,000. In a region with a median household income of about $55,000, that is a luxury product. If you want to find new construction below $300,000, you’ll have to go to Menifee, Perris, or places east of the 215, which is impractical if you work in LA-OC.

This situation is perhaps even more surprising given that the IE has had no real wage growth. It’s not like people are making lots more money and looking to buy bigger.

The lack of cheaper SFR construction has been attributed to just about everything under the sun, from materials costs to labor costs, from tight lending conditions to municipal reluctance to permit cheaper housing, from Millennial preferring cities to home builders preferring to target the top of the market. Whatever the cause, so long as SFR construction in the IE remains weak, it is even more imperative that we solve our housing construction issues in LA-OC, to keep the region from becoming ever more unaffordable.

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Freeway Ramp Removal – the 134 at Colorado

Recently, we took a look at an opportunity to improve access to the LA River and create space for building a bunch of badly needed housing by eliminating some ramps on the 2 that were probably causing freeway congestion anyway.

There’s another set of ramps on the other side of Eagle Rock that could go, and while eliminating them wouldn’t do much for the freeway (which is rarely congested there anyway), it’s perhaps an even better development opportunity. If you know the area at all, you’ve already guessed that we’re talking about the long ramps from Colorado to the 134. As Walk Eagle Rock explained, these ramps are leftovers from an early interim terminus of the 134, when the state planned to run the freeway through Eagle Rock rather than the through the hills above it.

Like its companion on the 2, this interchange provides very limited function for traffic circulation. Traffic exiting the 134 westbound could exit at Figueroa, the same off-ramp with a terminus a little over a half mile away; traffic entering the 134 eastbound could simply continue on Colorado, turn left on Figueroa, and use the Figueroa on-ramp. According to our friends at Caltrans, the ramp volumes are pretty unimpressive. Assuming all the traffic from the Colorado ramps went to Figueroa instead, the combined ramps would certainly be the most heavily-travelled ramps between the 2 and the 210, but still well less-used than the 134 ramps in downtown Glendale.

This is a large area, so rather than detail a development concept, let’s just look at how much space we’d have to work with in general terms. The following table shows the freeway parcel areas (according to ZIMAS), and the number of housing units that could be developed on each at R3 (classic dingbat) and R4 (small podium) zoning density.

Of course, it’s probably not practical to develop the entire area as residential buildings; we are talking about 10 acres of land after all. Some roadways for circulation would be needed, and a little open space wouldn’t be bad despite the proximity of some other parks. Still, you could reserve 40% of the space for other uses and produce about 650 units of housing at R4 density, all without demolishing any existing buildings. R4 is probably not an unfair assumption, as some nearby commercial zones are C4, which allows R4 uses.

In addition to bureaucratic challenges, you’d have to get rid of the existing pavement and utilities, which shouldn’t be a huge deal. The ramps are elevated, which means you’d probably have a large amount of earth to move, but there’s an old saying in civil engineering that earthworks are cheap, and there’s always someone looking for good fill. While it wouldn’t help freeway operations, this project would take six bridges off of the Caltrans roster, and they can’t be the newest bridges around, so maybe there’s some long-term maintenance savings there.

All in all, it seems like a possibility at least worth exploring in more detail.

Development Fees are an Inefficient Way to Fund City Improvements

The City of LA is proposing a change to its Quimby (parks) development fee, and from the sounds of it, it’s bad news. The recommendation is to implement fees of $12,500 for houses and $7,500 for apartments. Apparently, even the report itself acknowledges that the increased fees – though less than the $18,000 per unit that is purportedly required – will stifle residential development. This will worsen the region’s housing crisis – the last thing we need to be doing at this point. The city is having a public hearing on October 22, and if you care about housing affordability, I strongly implore you to attend and voice your displeasure with the inevitable negative consequences of this fee increase.

Digging a little deeper, let’s think about why the fee increase will worsen the housing crisis. Despite what you frequently hear, development impact fees are not “passed on” to buyers and renters. Rather, they are functionally no different than taxes on developer profits. Since the impact fee is fixed in absolute terms, it is far more burdensome on affordable developments than on luxury developments. If your profit margin is 10%, a very modest $250,000 apartment unit yields $25,000 in profit, of which 30% would be taken by the fee. On the other hand, if you’re building $2,500,000 houses, you only take a 5% hit to your profits.

The outcome is obvious. The increased fees will be little more than a nuisance to luxury developers, but they will push a considerable number of modest market-rate developments into unprofitability. This is not what we want to be doing! We should be making it cheaper and easier for small market-rate development to be profitable, so that more of it is accomplished.

If we keep digging, it’s clear that the rationale behind these development fees – like most of the byzantine schemes passed in the wake of Prop 13 – is preposterous.

The NIMBY argument in favor of development fees is that “newcomers” should pay their own way, and fund new schools, parks, and so on. For this argument to make any sense, you have to make the ridiculous assumption that existing residents never move. If every new housing unit goes to a new household, and the fees for that new development go towards facilities serving only that new household, then maybe there’s a case (though not really, as we’ll see).

This is, obviously, not how the world works. New housing units might go to a family who already lives in the community but is moving up. Existing housing units might go to young people just starting families. Children might move out and start their own households in the same community or a different community. The possibilities are endless. What if your parents paid the fee; should you have to pay it when you move out? What if you already paid a fee to a different community; should you have to pay again? For that matter, what if you never use a city park; should you still have to pay the parks fee? What if you never have kids; should you still have to pay for schools?

As we can see, in a real world situation, the case for development fees doesn’t hold water. There’s no way to possibly correlate a generic new household with a specific need for public improvements. If the argument is that the new resident has access to parks and schools even if they don’t use them, well, the NIMBY in favor of development has access to the new parks and schools even if they didn’t pay for them! A far simpler understanding would be that if a public facility is worth building, it is worth having everyone in the public pay for. If the city’s population grows to the point that we need a new park, then we all should pay for that park.

Not surprisingly, the use of development fees rather than general public funds to pay for public facilities has negative impacts low-income communities. First, low-income communities are denied access to newer housing units, because low-rent projects are the most marginally profitable and are the first to be obliterated by development fees. Second, partly by that mechanism, low-income communities are often denied access to the public facilities in question, because no impact fees are generated in the neighborhood. For example, in 2007, the LA Times found that the city was sitting on $77m in unspent parks fees, and 6 years later, KCET found that little had changed, and no funds were available for parks improvements in low income communities like South LA.

You could perhaps argue that the problem here is the city requirement to spend the parks fees within a mile or two of the development. But in that case, you no longer have a plausible argument that the fees are for parks facilities required by the new development. A new development in Hollywood doesn’t create a backlog of parks maintenance in South LA, or require it to be fixed. I’m all for putting in the money to improve parks in low-income areas, but that’s a societal goal worth pursuing and we should all be paying to help do it.

There is, of course, one class of people who benefit handsomely from the wildly inefficient system of development impact fees: existing homeowners. In a normal housing market, there are about 6 existing home sales for every new home sale. So, assume that an approximate parks fee of $10,000 raises home prices by $10,000. For every $10,000 that goes to parks, another $60,000 ends up going to some of the worst rent-seekers around. This is a really inefficient way to fund city improvements, and in a rational policy scheme, it wouldn’t last for a second.