The median home in Los Angeles sold for $849,000 last year, according to the National Assn. of brokers. Meanwhile, one of California’s signature zoning reforms of recent years, Senate Bill 9, appears to be having, at best, a disastrous effect on the supply of new housing, the shortage of which is driving up prices.
Los Angeles and other California metropolitan areas need abundant housing to become affordable, and they can only get it by enabling private developers to build major projects. The fundamental flaw of SB 9 is that it allows individual homeowners to add a maximum of one or two units to their home, and that is no way to build enough homes to increase affordability.
If California really wants housing to be produced cheaply, it must enable large-scale production of housing by private companies that have strong incentives to cut costs. Whether politicians like it or not, housing production is indeed governed by the laws of supply and demand.
Los Angeles is one of the most productive and inherently pleasant parts of the United States, ensuring that the demand to live here remains strong. Accordingly, during the 1950s and 1960s, Los Angeles’ housing stock grew at a healthy rate of 2.2% per year, adding more than 375,000 homes in two decades.
This kept prices affordable. In 1970, the average owner-occupied home was in Los Angeles worth $26,700 – $205,900 in 2023 dollars – and the average monthly rent today was $107 – $825. Since 1970, the growth rate of housing supply has fallen by two-thirds to 0.7% per year, and prices have soared as demand in collided with an increasingly firm offer.
How do we know that the basic economic principle that limited supply means higher prices applies to housing? Across American cities, the places that build a lot like Atlanta and Houston are not expensive, and the places that are expensive like Boston and Los Angeles don’t build much. The rate of housing construction is lower and the prices are higher in metropolitan areas where building is more regulated, according to a questionnaire by Wharton researchers. Studies have found that zoning restrictions have increased housing prices in neighborhoods by 29% to 38% in Chicago, 17% to 38% in San Francisco, and 32% to 46% in the United States.
Skyrocketing Los Angeles home prices and limited growth in supply are now an extreme burden for all but the wealthiest urbanites. By some estimates LA is the country’s second least affordable housing market. An average Los Angeles earner must spend 83% of their income on mortgage and taxes to afford an average home. Los Angeles’ large homeless population partly reflects the high cost of housing.
LA’s gentrification battles, like the battle for Boyle Heights, also reflect the deficit. Wealthier people move to lower-income areas in search of less expensive housing, driving people out of those communities. The cascade effect is visible throughout the city.
Therefore, more housing in wealthier neighborhoods would reduce economic inequality in Los Angeles. By tracking anonymous data on 20 million Americans from childhood to their mid-thirties, Harvard University scholar Raj Chetty and collaborators found that where people grow up can have a significant impact on their economic outcomes.
In conjunction with the US Census Bureau, Chetty and his team launched the Opportunity Atlasshowing that a child raised in a low-income household in the affluent Los Angeles neighborhood of Brentwood earns, on average, nearly four times more by age 35 than someone raised in lower-income central LA. areas would give more children a greater chance of success.
Building more homes in Los Angeles is also good for the environment. Research conducted with USC environmental economist Matt Kahn found that Los Angeles was the nation’s fifth greenest metropolitan area as measured by the carbon emissions of a standardized household, which is almost entirely a function of the relatively mild weather. If Los Angeles built more homes, less would be built in areas like Atlanta or Houston with higher greenhouse gas emissions.
Passed a year ago, SB 9 created a process for splitting lots and placing up to four homes on an existing lot, promising to make building in California easier. But we feared that small-scale construction – which could be hindered by local governments – would be of little use.
A year into the program, our fears have only grown. a questionnaire by UC Berkeley, researchers from 13 cities, including Los Angeles, found that as of November, a total of 53 new units were allowed under the law. Less than 1 in 5 applications in Los Angeles were approved.
California needs hundreds of thousands of new homes, and that requires building on a different scale. A major housing shortage can only be solved by large-scale production, and that almost inevitably means large private developers. When William Levitt built tens of thousands of homes for veterans after World War II, he figured out how to make housing production as efficient as Henry Ford’s assembly line. No homeowner adding an “ancillary housing unit” could be remotely so cost-effective.
Division of labor was central to Ford and Levitt’s cost-cutting assembly lines because each worker focused on one task. But specialization requires scale, and homes today are mostly produced by small firms. California has 5,247 companies with fewer than five employees building single-family homes, and only 10 companies with more than 500 employees in the same company.
Important new research by Yueran Ma of the University of Chicago and her co-authors shows that over the past century almost all industries have become increasingly dominated by a small number of large, productive firms. These companies invest more in research and development and grow by developing new technologies. Construction, with its predominantly small businesses, is a clear outlier.
The small scale of housing helps explain what economists Austan Goolsbee and Chad Syverson phone call “the strange and terrible path of productivity in the US construction industry.” Their data shows that construction value added per worker has been declining since the 1960s.
The timing of the decline in productivity reflects zoning changes that shut out large companies. Land use regulations really began to restrict large-scale housing production in the 1960s, making the industry less suitable for larger companies. Small-scale housing projects do not benefit from economies of scale and small housing producers do not have the resources to invest in research and development that can reduce costs.
The fact that California’s housing regulations guarantee small-scale housing is ironic, as the state’s iconic industries depend on global markets. What kind of movies would Hollywood have made if it had to get a separate license for every new movie for every theater?
So how can California foster the large-scale development it needs to become affordable?
Since 1969, California has required cities to create zoning plans that can meet regional housing needs. A year ago, the Los Angeles Times reported that the state found that LA needed to add more than 250,000 homes to its zoning plan by last October. LA complied Junebut the city is silent obliged to zone for another quarter of a million homes by 2024. The cost of non-compliance is quite small: the loss of access to affordable housing funds from the state. Most NIMBYs who are against housing would like to lose that money.
There is a much harsher penalty available: the so-called “builder’s remedy” contained in California’s Housing Accountability Act of 1982. The idea is to allow developers to get around zoning codes and land use plans as long as more than one-fifth of the units of a project is affordable for lower-income households. In practice, however, the potency of the remedy remains not clear. Communities will continue to find ways to deter new construction, as they have done under SB 9. Judges will stop new projects because they mistakenly believe that building in Southern California is bad rather than good for the environment.
Ultimately, to solve its affordability problem, California must be willing to remove reflexive local barriers to large-scale development. Nothing less will motivate Los Angeles and other cities to allow the housing they desperately need.
Edward Glaeser is a professor of economics at Harvard University and co-author of Survival of the City with David Cutler. Atta Tarki is the founder of ECA partners and the author of “Evidence-based recruitment.”