Special report: Can we build our way out of the housing crisis?

The Union-Tribune examined if San Diego County can build more housing to slow the pace of rent and home price increases.

What we found:

- Zoning changes, emphasis on townhomes and reduced regulation would likely speed up construction;

- Biggest hurdles continue to be anti-growth sentiments and lack of land zoned for housing;

- Solutions for the future may include streamlined permitting processes, a change in parking requirements and a greater mix of housing types

San Diego County housing: Here’s the full story

San Diego County should be awash in new housing projects.

Unemployment is low and wages are rising. Many millennials are marrying, having children and aiming to buy. Their parents want to downsize.

But the market is not responding.

Last year only about 10,000 housing units were approved, and most were for rent, not for-sale homes and condos.

Norm Miller, a real estate economist at the University of San Diego, recalls attending a recent community meeting of Morena Boulevard-area residents.

They gathered to talk about development plans around the Tecolote Road trolley stop opening in 2021. Nondescript big-box stores, industrial buildings and parking lots dominate the site.

Miller expected residents would welcome high-density housing, new retail and office development, steps from mass transit headed to UC San Diego, San Diego State University, downtown and parts south and east.

“Boy was I wrong,” he said. “They were vehemently opposed to development.”

On the rental side, vacancy rates stand at only 2 or 3 percent in most neighborhoods when at least 5 percent is considered optimal for a balanced market.

Miller said that unless things change, the county homeownership rate, now at 53.2 percent, will sink to a historic low of 50 percent, a point reached years ago in the city of San Diego.

Newcomers arriving for jobs nearly equal the number moving away. And those who can’t move and lack adequate income and support risk becoming homeless.

“There’s not much supply and you wonder why it’s not more,” Miller said. “The only answer is we’ve been going more than a decade where we haven’t added much to the supply to the middle or lower market where it’s so desperately needed. From what I can tell, it’s true up and down the coast.”

The simple answer is that demographics are changing and industry and government have not responded.

After years of doubling up in apartments and delaying household formation, the state’s economy has produced enough jobs to liberate singles and couples to strike out on their own and that has pushed demand up for housing.

But from the supply side, the peculiarities of planning, building and marketing housing have not resulted in more production, so supply is lagging.

What actually gets built is aimed at the upper end of the market in both rental and for-sale housing. That’s where the most profit margin lies, given the restrictions imposed by lenders after the real estate collapse a decade ago.

“When a developer comes along and has got to the pay the fixed cost, whether it’s a starter or luxury home, he’s going to pick a luxury home every time,” said Gerd Welke, a real estate professor at Cal Poly Pomona and assistant director of the Real Estate Research Council of Southern California.

If it takes as much time to entitle and build a $1 million luxury home as a starter home selling for $300,000, a builder logically would gravitate upscale to cover overhead costs and eke out a 10 percent profit, the number local real estate consultant Gary London said is what developers and their lenders expect.

Bill Davidson, an award-winning home builder in business since the 1970s, said he long ago decided to concentrate on luxury properties.

“We got kind of pigeon-holed into the higher end," he said. “It was not my business plan, but the market looked at us and we said we’ll take the upper end and KB Home (and other developers) can take the lower end.”

He also said he has expanded outside the county after failing to find infill sites locally.

“We need more work, quite honestly,” he said. “We’ve been looking at other markets in Northern California and looking again at Riverside.”

Many of the recent changes to housing policy, including a series of bills signed by Gov. Jerry Brown in September, have been aimed at boosting homes at the low- and middle-income brackets.

“There was a sea change in the issue with Gov. Brown finally acknowledging that the housing crisis is due to a housing shortage and we’re not going to be able to subsidize our way out of it,” said Matt Adams, vice president of the San Diego County Building Industry Association. “We’ve got to build our way out of it.”

But Chris Thornberg, economist and founding partner of Beacon Economics, said increased government interference in the housing market is not the answer. Building more housing — of all types — is what’s needed.

“If you deny 2,000 high-income families the new housing they want, guess what, they are going to go down the street and outbid your cherished working-class family and take their housing units,” he said. “You can’t win by not building at the high end.”

San Diego has faced housing crises in the past. In 2002 the San Diego City Council declared a “housing state of emergency” in the face of rising unaffordability.

It adopted new fees to build more subsidized housing and streamlined permit processing.

In the past decade, even taking into account the housing downturn during the recession, the average rent has gone up 40.6 percent and the median household income, 18.9 percent. However, looking at it by dollar amount, it seems to have made less of an impact — Income went up $11,233 while rent increases were up $6,036.

Regardless, residents are feeling the squeeze. San Diego County is now rated as the 11th least affordable housing market worldwide, according to this year’s Demographia International Housing Affordability Survey.

Median home prices have risen 10.3 percent over the same period, but with the October median of $529,750 says the California Association of Realtors, only a quarter of county households can afford a median-priced, single-family home.

Since 2000, the county population has grown by 310,383 while the housing count is up by 161,468 units — the equivalent of the current total in Chula Vista, Oceanside and Poway.

That sounds like a lot, but it falls 40,500 homes short of what projected population growth would dictate, said San Diego real estate analyst Gary London.

We should be building 16,500 homes per year over the next decade to make up for the shortfall and cover continued growth, he said.

That’s about 60 percent more than what was built last year.

And by 2050, according to the San Diego Association of Governments, the local population will grow by 22.7 percent and require 290,000 more homes to keep up.

Essentially it’s the land price that dictates much of the cost. And the demand: The climate and coastal setting make this a popular place to live. San Diego is probably destined to always cost more than Phoenix, Austin and Atlanta.

The price premium between San Diego and the national average has widened from 30.6 percent to 157.4 percent, census surveys show. Last year, the average value of a San Diego County house was listed at $527,600, compared with $477,500 statewide and $205,000 nationwide.

Land and entitlement costs: Real estate consultant London polled his developer clients and concluded that, on average, the biggest cost drivers are buying the land, getting it approved for development and paying building permits and fees.

London found that 40 percent of the new home’s price relates to pre-building costs. If you bought a new house in October for $529,750, about $211,900 represented land and entitlement costs. Those costs can vary widely, depending on location and construction type.

“There are still issues with impact fees -- they continue to escalate,” economist Lynn Reaser at Point Loma Nazarene University said. “You don’t need to scrap all the fees if you could just stop some of the increases and make the increase at the margins.”

Beacon Economics’ Thornberg said it is true that entitlement costs and regulations are higher in California — but builders aren’t suffering.

“They make a hell of a lot more money than they pretend,” he said.

Construction costs: Labor and materials in San Diego do not veer much from the national norm and take up about 30 percent of the cost, London said.

But another expert, Peter Dennehy from Meyers Research said builders install higher-priced fixtures and finishes to attract move-up and well-heeled buyers.

“What we put in houses has changed a lot,” he said. “ The materials and our expectations of what goes in a home has evolved to a more fancy base level.”

Labor shortages may escalate in San Diego, said USD’s Miller. The devastation from this year’s hurricanes will lead to a big upsurge in repairs and rebuilding in Texas, Florida and Puerto Rico, where permit processing, incidentally, is much faster than in California.

“Same thing for labor,” he said. “If I’m a carpenter, you’ll find me in Texas where I can get 10 to 12 percent more than I could get here simply because of the push of increased demand.”

Litigation: Nat Bosa, the Canadian-based developer of numerous high-rise condo towers downtown, said construction defect litigation is one of the main reasons more projects like his are not being built or are selling for $1,000 per square foot or more.

“It is so frustrating,” he said. “We build the finest product you can buy but lawyers, when it comes time to sue, will tell homeowner associations, nothing to worry about, we’ll get you money.”

The Legislature previously passed new laws aimed at reducing defect lawsuits but Bosa said challenges invariably arise within the 10-year statute of limitations.

On paper, there are thousands of homes that could be built locally based on existing community plans, master plans, zoning allowances and subdivision maps.

But only a limited number of buildable lots are authorized at any given moment. So builders who acquire those sites spread out construction in phases over several years so they can stay in business.

Land availability: Although the county is large, about half of its 2.7 million acres has been set aside for habitat, parks, steep slopes, farm land, floodplains and wetlands.

Some of that land, especially unproductive farmland, could conceivably be opened for development. But that would require huge investments in water, transportation and other infrastructure costs.

Labor shortages and building reviews: Construction last year lagged the average for the last 17 years by 6,000 units countywide even as population rose.

Architect-developer Jonathan Segal said one of the reasons for the slow pace of development is the lack of qualified construction workers, who exited the industry during the Great Recession and lately have been busy building elsewhere.

Shea Homes’ San Diego President Paul Barnes said the building review process adds to the delays in responding to demand:

“We could sell homes homes — we just can’t get them built,” he said. “Every touchpoint where a builder is trying to get something through the regulatory system, it’s paralysis.”

The inventory of resale homes on the market has dwindled: There is only about a two months' supply of homes for sale — six months is considered ideal — as would-be buyers scoop up the few properties available.

If things don’t improve, total sales will slide further, said Mark Goldman, finance and real estate lecturer at San Diego State University.

People aren’t listing their homes because they can’t find a replacement.

Renters aren’t voluntarily moving because they, too, can’t find a decent apartment when the vacancy rate is half the desirable 5 percent level.

Resistance to growth: Critics of loosening development approvals say San Diego has failed to keep up with growth, and more growth will just make things worse.

Tom Mullaney, who has been active in controlling growth locally for nearly 30 years, disagrees with the fundamental premise that San Diego is suffering from a housing shortage.

“Yes, population is rising at a faster rate than the number of homes,” he said. “That doesn’t mean that there’s a shortage. It means there are slightly more people living per home.”

Ballot box planning: It is common for homeowners to be wary of new projects because those developments can increase traffic or change the character of a neighborhood. They use the California Environmental Quality Act, environmental impact reports, initiatives and referendums and litigation to stop or force reconsideration of numerous projects. Developers try this route, too. Just this month, Poway voted against a plan, promoted by the property owner, to convert his golf course to a housing tract.

When it comes to housing, no single law, tax or politician holds the key to expanding the housing supply. Some ideas:

Accelerate construction: To make a dent in the supply, builders have to ramp up production from the current rate of about 10,000 units per year. “We have to overbuild in the short term to ease the pain and get back to a reasonable pace,” said Rich Gustafson, president of CityMark Development, currently developing several infill projects. However, Gustafson said, that may becoming increasingly problematic as banks begin to slow down construction loans because they detect a market that’s overheating. In his case, lenders are requiring a 35 percent equity stake, up from 25 percent.

Build more townhomes: Alan Nevin, director of Xpera Group’s economic and market research, said family housing is the most sorely needed product type. But since traditional, newly built single-family homes are going for upwards of $800,000, townhomes at $500,000 and below would help deal with that problem. “The reality is families don’t want to buy in a vertical project,” Nevin said.”They want to be in a townhome. They accept them … If you stay below $500,000, you can sell them all day long.”

Greatly expand granny-flat production: The state and local jurisdictions are easing rules and fees to build “accessory dwelling units” -- suites carved out of existing homes; additions to the homes or garages, converted garages and detached “tiny homes” in the backyard. They’re meant not just for aging grandparents but also college students, young couples and boomerang kids who can’t yet afford to move out on their own.

Streamline permit processing: When cities like San Diego charge applicants by the hour instead of a flat fee to review projects, there’s no incentive to move fast. “If we are the crisis, which I think everyone would now admit to, you have to take some bold steps,” said Shea Homes’ Barnes. “If we continue doing what we’re doing, we’ll continue to have a completely constrained housing market, prices will continue to go up and people will be frustrated.” San Diego also charges extra fees to expedite review, but if every applicant pays the fee and the staff isn’t expanded, the wait time doesn’t budge.

Live where there is more supply: Thousands of people are already commuting from Tijuana and Riverside County each day to jobs in San Diego. As long as people know that working in San Diego means living somewhere else, it could shift focus to better commuting solutions. The median home price in Riverside County in October was $171,750 less than San Diego, and Tijuana has been increasing its vertical residential building for several years.

Cut regulation: Builders grumble in good times and bad about new rules and standards that they say invariably drive up costs. State and local lawmakers mandate ever tougher energy and water savings, impose design and height controls and require community review. Skeptics say past regulatory relief has not resulted in faster housing production or lower costs — just fatter profits to builders.

Discourage litigation: Opponents often rely on the California Environmental Quality Act, environmental impact reports and sometimes lawsuits to stop or downsize housing projects. Once in a while, opponents launch a ballot measure to kill a project or require voter approval of major projects. Opponents often say if builders would work with them early on, confrontation could be avoided.

Build in overlooked places: With most residentially zoned land already spoken for, infill developers and architects have many sites to consider such as tired strip malls and parking lots. Some big-box stores at shopping centers could be replaced by housing. Within unincorporated San Diego County, at least 48,000 acres of agricultural land has been downgraded as “inferior” over the past 20 years and could eventually be used for housing, said London Moeder Advisors.

Change parking standards: A common objection holds that more density increases traffic and reduces parking for current residents. But with the advent of car sharing and driverless cars, parking lots and garages may become a thing of the past and thus free up more land for housing and reduce building costs. The question is will residents in these new developments actually give up their cars and call Uber?

Correction: An earlier version of this story gave the incorrect number of rent and income increases for 2006 to 2016. Rent increased by 40. 6 percent, or $6,036, and median income increased 18.9 percent, or $11,233.

phillip.molnar@sduniontribune.com (619) 293-1891 Twitter: @phillipmolnar

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