Affordability is a pressing topic for Americans, particularly in California, where rents and home values are some of the most expensive in the nation.
As Pomona College prepares to host a California gubernatorial debate on April 28, Associate Professor of Economics Bowman Cutter discusses the state’s housing market and what policy changes might make rent and home ownership more affordable.
Why has housing become so expensive in California, and what are the main forces driving the affordability crisis?
The major force driving house prices in California is a lack of supply. There is also a demand side force. The number of households is increasing, and household size is getting smaller—fewer families, more singles—which means, per capita, people are demanding more housing because people are not grouping together in housing units. So, despite the relatively small population growth in California over the last 10 years, the number of households is increasing.
Is the current housing crisis primarily a market failure or a political failure?
The lack of supply is primarily a political failure. Mainly at the local level, there are many regulations and policies that all have the effect of making housing difficult and expensive to construct. This is evidenced by the almost complete lack of reconstruction after the January 2025 fires.
There’s also an economic element where housing becomes increasingly more expensive to build in denser neighborhoods. Building in dense neighborhoods requires all kinds of infrastructure changes and additions that building in green fields does not. Therefore, as California has gotten denser and more urban, there are fewer places to construct inexpensive housing.
How do rising rents and home prices affect neighborhood stability and mobility?
California's regulatory regime is so strict that you can think of it as almost a fixed supply of houses. Any household that wants to move into the expensive urban areas of California must pay enough for housing so that somebody else will move out of that urban area. The price of housing in California is not set by the cost of building additional housing supply. Instead, it is set by how high the prices must go, both rental and house prices, in order to force somebody out.
How should we think about fairness in a housing market where many longtime residents are priced out while others benefit from rising property values?
One should think about fairness in much larger terms than a single market. In general, on all levels of government, we spend far more money on the elderly than we do on children or young adults. We can think of our tax system as one that takes money from working adults and families raising children and transfers large amounts to older people. This older demographic is already wealthier than those working adults and families. Regulations that restrict housing construction are an additional mechanism to transfer wealth to older people.
If you think that the United States already transfers too much money to older demographics at the expense of children and working adults, then policies that restrict housing supply look unfair. However, if you take a more expansive property rights view that people who live in a neighborhood have the right to influence the type of development that will happen in that neighborhood, then the regulation might be fair.
Looking ahead, what changes would need to happen to make housing more accessible for more Californians?
Los Angeles recently passed a set of policies that are so punitive to housing development that virtually no multifamily development has gone forward in the last year. The major one is the mansion tax, which assesses 5.5% of additional taxes on any property sale over $5 million, including multifamily. A smart investor may look at Los Angeles as the vanguard of California housing politics and take all their money elsewhere. My priority would be to reverse all these recent Los Angeles policies that punish multifamily development. A key point to remember is that any prospective real estate investor can take their money and spend it in Houston or Nashville or Austin instead.
The lowest hanging fruit is to dramatically increase the competence and speed of local government housing approval. A major driver of housing costs and consequently lower supply is that developers struggle to get a clear answer regarding the regulations.
A harder but necessary change is to drastically reduce tenant protections across the board. Multifamily developers must write off a huge amount of money from the start because they know that many tenants will be able to live rent-free for six months or even a full year while going through various legal processes. While these processes were designed to combat real abuse by landlords, they now are used by many people who seek to scam the system.
The final clear necessity is to take a chainsaw to the local zoning and regulation codes. The main issues here are height, parking, open space, affordable housing requirements and setbacks. I would like to see local governments designate neighborhoods that are going to be high density and then remove all these regulations.