Why Aren’t Enough Homes in California Being Built to Meet Demand?

The housing market in California has been characterized by sky-high prices, fierce competition, and affordability issues. While there are a few factors that have contributed to these scenarios, tight inventory is one of the biggest.

There simply aren’t enough homes in the state to accommodate for all the would-be buyers out there, which has forced many to continue to remain renters for longer than they would have liked. 

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With low supply and high demand, it’s not hard to understand why prices are so high in many centers, and continue to rise. In fact, California is home to the country’s most expensive housing markets, keeping low- and moderate-income families out of the world of homeownership.

Median home prices in the San Francisco area currently sit at $1.225 million, and a whopping $2,537,126 in Newport Beach, to name a few.

Overall, the median home value in California is $463,600, an increase of 6.2% over the past year. That’s twice the national average of $232,500. While price hikes have slowed somewhat, they are still expected to continue to increase by another 2.1% within the next year.

To put affordability issues at bay and meet the high demand, more houses need to be built. In fact, in LA alone, a million more homes need to be built just to keep up with demand.

So why aren’t they? 

Builders are forced to contend with incredibly stringent regulations in the state, including building codes, land use regula­tions, environmental laws, impact fees, and administrative fees to enforce these reg­ulations.

This, in turn, generates exorbitant costs to build, which can significantly delay and even halt altogether any plans of future development that’s in dire need right now. And along with such regulations comes major expenses. It’s simply too costly for builders to have to go through all the red tape associated with getting the permission to build on land across the state.

Regulations come in many different forms, and can be enforced by various levels of government. County, state, and federal fees can add tens of thousands of dollars to a new home’s price tag. According to a report from the National Association of Home Builders, regulations imposed by the government add a sizeable $84,671 to the final price of a new single-family home.

Considering how expensive it is to contend with these regulations, developers just don’t have the motivation to build. If they did, they would inevitably have to price their homes higher in order to cover their costs and make a decent profit, which would severely limit the pool of buyers who can actually afford the homes.

So far, the powers-that-be in California have only come up with temporary fixes to deal with housing affordability issues, including subsidizing a handful of low-income housing programs. But these programs are marginally effective; they merely put a cap on housing choices at the expense of the hard-working taxpayer.

The obvious solution is to revisit restrictions and regulations, and identify areas that can be eased up on in terms of limitations and expenses. Building more homes can safely help to alleviate housing affordability and the squeeze on supply, but builders need a break on the cost associated to acquire land and build.