UCLA Anderson Forecast - June 2018

Building in a Zoning Constrained City

Written by Peter Strauss of Iconic Investments

Iconic Investments attended the June 2018 UCLA Anderson Forecast for which the topic was Building New Homes in a Zoning Constrained City. The economists gave their usual predictions about GDP, interest rates and unemployment. When the discussion turned to the main topic of solving the housing and affordability crisis in LA, however, the forecast quickly became very contentious.

David Shulman/Senior UCLA Economist

Mr. Shulman’s predictions for the national economy were in line with previous forecasts. He predicts that the Federal Reserve will raise interest rates two additional times, totaling four raises in 2018. He predicts three to four rate increases in 2019, with the Fed ending increases in 2020 once the Fed Funds rate hits 3-3.25%. The era of very low interest rates is over, resulting in higher inflation and rising budget deficits.

GDP is being fueled by business investment in equipment as housing lags. GDP growth will be 3% in 2018, 2% in 2019 and 1% in 2020. We are seeing significant wage growth as a result of low employment and that is causing higher inflation.

The biggest risk to the U.S. is a trade war. Tariffs, he said, will increase — rather than lower — our trade deficit since the U.S. relies on cheap goods as we import far more than we produce. Mr. Shulman repeated throughout the forecast: “Tariff is a Tax ... The people of the U.S. will lose.” Tariffs and the impending trade wars, he said, will result in higher prices and lower output.

William Yu/UCLA Economist

Driving through areas like Hollywood or Koreatown, it’s hard not to notice the growing number of homeless encampments. The homeless rate in Los Angeles has increased from .30% in 2012 to .52% in 2017. This means that currently five in every 1,000 people are homeless. Of the .52% (53,000 people), .40% (40,000 people) are unsheltered, meaning they live on the streets. Los Angeles has the second highest unsheltered homeless rate across all 50 U.S. states. In addition to other causes, like substance abuse and the mental illness, Mr. Yu believes that high housing prices, high rentals costs and low household incomes explain why Los Angeles has the fourth highest homelessness rate in the U.S. Other cities, like New York, have higher homeless populations but lower unsheltered rates. Mr. Yu’s policy suggestion is to improve affordability and availability of housing and rental housing by offering more government programs/subsidies or building new housing.

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Where Should Affordable Housing Be Built?

The main focus of this forecast was affordable housing in California and Los Angeles. Where are we today, and what’s the solution to this growing problem? Is the solution to go vertical and build in infill urban areas or develop in outside areas, like Lancaster or Palmdale, and offer public transportation into the City. This topic was argued by the UCLA panel, which provided a number of different viewpoints about the direction of affordable housing and Senator Scott Wiener’s controversial Assembly Bill 827.

Since 2010, rents have increased by 27%, while employee compensation has risen 19% and overall CPI 15%. Rent increases exceeding wage and CPI growth has resulted in a larger number of households being rent burdened. Unfortunately, many of the economists were not optimistic. They believe that the increased cost of land and construction make it difficult for developers to build units other than Class A. Therefore, new construction will not put a dent in the affordability issue. Here are the panel’s perspectives:

Moderator Stuart Gabriel/Professor of Finance at UCLA

Mr. Gabriel’s opinion was that we need more affordable housing in all areas across Los Angeles. If you focus on affordable housing in certain areas, he said, those areas become exclusionary. Exclusionary areas with low rents have low amenities, bad schools and high crime rates, and they tend to be located close to freeways. This ends up costing cities more money with increased expenditures, like police and social services.

Scott Wiener/California State Senate Senator

Senator Wiener discussed his highly controversial Assembly Bill 827, which would reduce local government control of zoning and increase development along public transit stations. His main focus is to close the housing deficit. The question is where do the homes go?

In California, the senator said, we have a shortage of 3.5 million homes — equal to all other states combined. He believes the old theory of pushing people out of the City is not sustainable. It’s not good for families or the environment. People need to live near where they work.

He said government subsidies may be necessary to convince developers to build “inclusionary” housing in infill areas, where construction and land costs are high. Otherwise, the numbers won’t pencil for them.

AB 827 would allow for higher density along public transportation stations. He feels that there is no need for single-family residences in these areas. The highest and best use is for higher-density projects that would add more units.

Suzanne Fuentes/Former Mayor of El Segundo

Ms. Fuentes opposes Senator Wiener’s Assembly bill and believes local governments should have control over their zoning laws. The City of El Segundo, she noted, is already “built out,” meaning there is no room for new development. Employers, she said, should be incentivized to build in areas outside the City. Then, jobs will be exported and people can work where they live.

David Shulman/UCLA Economist

Mr. Shulman agrees with Wiener’s Assembly bill; however, high construction and land costs make it impossible to offer inclusionary housing. He feels the solution is to build outside of Los Angeles, where land is less expensive, and offer transit into the City.

Most of the panelists agreed that Wiener’s Assembly bill has scale and addresses the core housing crisis issue. However, how do you incentivize developers to build affordable housing in infill areas, and what safeguards are in place to ensure housing is inclusionary? I believe that the new TOC (Transit Oriented Communities) guidelines allowing developers up to a 80% density bonus was a good first step toward solving affordable housing.