The High Cost of Houses: Who’s to Blame?

Who is to blame for the high cost of housing in Southern California today? Developers and home builders? Speculators? Market forces? Or growth and government restrictions?

Some would lead you to believe it’s the fault of “robber baron” developers who are reaping enormous financial rewards while leaving middle- and lower-income people struggling to own their first single-family, detached home.

Developers are an easy target, but as with most complex issues, the finger of blame cannot be pointed at just one group. The reality is that affordable housing in Southern California has become trapped in a tangled web of economic, political and even emotional factors.

The prevailing anti-growth, “not in my back yard” sentiment, passage of taxing initiatives, environmental reactionism, cuts in federal funding, the rise in developer fees--all have worked together to hinder development in Southern California to the point where affordable housing has become almost impossible.

The passage of Proposition 13 in 1978 was widely hailed as the Boston Tea Party of its time. This “taxpayers’ revolt” meant that the amount of money local government can raise through property taxes to provide new schools and community services would be severely limited.

Federal Programs Slashed

About the same time, the federal government cut back on subsidies to state and local governments, forcing them to become more self-reliant. Later, revenue sharing was eliminated, and federal grants were either cut back or abolished.

As a result of these changes, government agencies became financially strapped and politically trapped. What’s the solution when funds are severely limited, yet the public still demands the same quality of services it has enjoyed over the years?

Do we forgo badly needed fire stations, schools and traffic signals? No, we cannot afford to. New, innovative ways to generate the necessary dollars must be designed.

And so the developer fee was born, a special exaction levied on developers and home builders tied to new development of residential and commercial properties. Over the past decade, developer fees have become an extremely popular way to fund everything from new highways to day-care centers.

All well and good, except the building industry is not the goose that laid the golden egg. Developer fees have increased over the years to the point where the industry cannot absorb them all.

Affordable Housing Study

In 1982, Kenneth Leventhal & Co., a major public accounting firm, prepared a study on affordable housing in Orange County for the Building Industry Assn./Orange County Region.

The report was commissioned to determine what it would cost to build a 124-unit attached project in Lake Forest. The project was built by a consortium of builders as a test of the actual costs to develop the project in 1981.

The BIA went back to Kenneth Leventhal earlier this year for an update on what the cost would be today for the same project.

The results show that the most significant rise in the cost of the total project was in the area of construction permits and fees. In 1981, a total of $257,238 was paid for fees and permits. If the same project were developed today, the report estimates that fees and permits would be $1,245,111, a 384% increase in eight years.

High Cost of Land

Some of the fees that would impact the project today were unheard of in 1981, including fees for the proposed Orange County transportation corridors and other regional transportation facilities.

The second biggest increase in the report was a 61% rise in the cost of raw land in Orange County. As the land value increased, so did taxes--at the astounding rate of 3,672%. Taxes in 1981 were $1,052. In 1989, they would be $39,680 for the same project.

The point of this exercise is to emphasize the effect developer fees have had on the cost of housing. In some areas of south Orange County, for example, these fees and permits are adding as much as $20,000 to the cost of a new 1,600-square-foot home. In one case in South County, total per unit fees have exceeded $30,000.

Developers are being charged for new highways and access roads, fire stations, schools, libraries and parks. Moreover, they’re often required to pay not only for the services their developments directly impact, but also for infrastructure for the surrounding areas unrelated to the project.

At times, the exaction system borders on the ludicrous. One developer tells a story of having to pay for the installation of traffic signals for a new community. Four years later, long after the first residents had moved in, the signals have yet to be installed.

Finds Fee Ironic

My company specializes in the development of commercial facilities as well as day-care centers, preschools and private schools.

Recently, I was putting together my costs for development of a new day-care center in south Orange County and, of course, found some significant fees attached to its development. I find it somewhat ironic that in developing a day-care center, I must pay a “school” fee to the local school district when that is, in effect, what I am building.

Builders determine the final price of a home based on a number of variables. Besides the market forces of supply and demand, various cost components make up the price of a new home. These components include land, labor, materials, financing, profit, administration and overhead.

Over the last few years, the variables that have shown the highest increase are land costs and financing. The availability and cost of land determine what type and price level of housing will be constructed. Finished-lot prices have soared in recent years due to strong market demand and lack of availability.

The atmosphere of slow or controlled growth as well as concern for environmental issues of both great and little importance have also contributed to the depletion of land.

Two Classes of Homeowners

Now add the fact that developer fees have skyrocketed over the past few years, and it becomes a little clearer why the cost of housing has gone out of sight.

The real inequity is that the developer fee system has virtually created two classes in our society: existing homeowners versus new home buyers.

Under this system, the new home buyer foots the bill for not only themselves but for the existing homeowner who also benefits from the new and necessary facilities, particularly roads and regional services such as fire stations and schools.

Yet new home buyers don’t have a voice in what they are paying for. They’re not around during the construction of the housing developments and have no way of expressing their opinions in a public forum.

So what is the best way to share the cost of new services in our communities?

Bond Financing

In the opinion of many legislators and planning officials, the Mello-Roos Community Facilities District Act is one of the most effective means of passing a fair share of the cost of new services to those homeowners who benefit from them.

The Mello-Roos Act was passed by the state Legislature in 1982 in response to public funding limitations imposed by Proposition 13. The Mello-Roos Act establishes a method for cities, counties, special districts, school districts and other municipal corporations to form a separate district to finance public facilities through the selling of bonds.

Typically paid off over 25 years through a special tax levied on property owners, the bond sale must be approved by a two-thirds vote.

The Mello-Roos Act covers such facilities as parks and open space, recreation services, schools, libraries, utility construction, police, fire, flood and storm protection.

The difference between Mello-Roos and a more traditional bond is that the taxing authority in Mello-Roos can only levy a tax against the benefited property. With a general obligation bond, the taxing authority can levy against all taxpayers in the jurisdiction.

Positive Demonstration

The use of Mello-Roos debt financing for the Foothill Circulation Phasing Plan in Orange County, a transportation plan providing for more than 133 miles of arterial roads and improvements of 40 intersections to help alleviate traffic congestion, is a positive demonstration of a cooperative effort between the building industry, the government and the public.

The challenge we all face today as builders, politicians or members of the public is to seek solutions to the lack of affordable housing in Southern California. The concern for where our children and growing senior population will live has become very real.

We must move into an era of thoughtful and deliberate cooperation. The continued passage of initiatives such as Proposition 13, which limit funding of needed services and facilities and place added financial burdens on one class of citizens--new home buyers--is not the answer.

Nor does the all-too-common public attitude of “I’ve got mine and the heck with you” resolve the issue at hand. The funding of community services and facilities--be they new roads, libraries or fire protection--must be balanced between the government, the building industry, the business community and the general public, with everyone paying his fair share.