Our Cameo in LAist - Revisiting Home Ownership in LA
Policymakers are not learning the right lessons
Earlier this week, our family was briefly featured in a series that David Wagner did over at the LAist (LA’s NPR affiliate):
The series was on millennial families and the struggles to access housing in Los Angeles - a premise similar to a piece I wrote back in early 2023.
One of the big takeaways from the piece is quantifying just how deeply millennials are struggling to buy family housing in LA - according to Redfin, only 9.4% of millennials own a three-bedroom+ home, while baby boomers with no kids at home own 23.7%. In other words, for every millennial who owns a three-bedroom+ home, there are 2.5 people of their parent's generation (with no kids at home) who own a three-bedroom+ home:
This isn’t entirely surprising - older people tend to be homeowners simply due to their accumulated savings. But LA and California are unique in just how significant this disparity is. Wagner cites data that only 11% of area residents can afford the median home price (as it stands right now), and to afford the median 3-bedroom rental at $3995, you would have to have a household income of almost $160k a year.
Wagner also highlights ED1 (which I recently wrote about ) and how the majority of the dedicated affordable units built are not big enough for families:
Wagner highlights our family towards the end, where he cites some solutions, like ADUs, that have enabled homeowners to bring to housing supply onto the market. In our case, our solution was to buy a duplex:
While lawmakers and policy experts debate the finer points of how to build more family-sized housing, some L.A. families are creating their own solutions.
Thomas Irwin and his wife, both 31, were renting a backyard accessory dwelling unit in East L.A. when they had their now 4-year-old son. Buying a home was way out of their budget. But staying in their 600-square-foot rental couldn’t accommodate their growing family.
“We knew it wouldn't be long-term,” Irwin said. “We were planning to have a second kid. And we just weren't going to have the square footage in the house to be able to have a whole family.”
That’s when Irwin started thinking about a different path to homeownership: splitting the cost of a duplex. He and his wife had a friend of nearly 10 years who was willing to team up. In 2022, shortly before their second child was born, Irwin and his wife co-purchased a duplex in City Terrace with that friend for about $800,000.
Again, you can read the LAist piece that features us here, and read the other parts here and here. In case you missed it, I wrote more extensively about our journey in a post last December:
Unfortunately, too many policymakers are not learning the core lessons they need to learn to reverse this trend. To actually to make the lives of young families easier, they need to learn three things:
1) Supply is the problem - not demand
Back in 2022, while we were searching for a house, I was frustrated that California was rolling out a program called the “California Dream for All” to assist first-time home buyers with down payment assistance. I had a chance to publish that story in the Washington Post, which you can read below (as reposted on my blog):
My big gripe with the program was four-fold:
It was clear that the amount allocated would only help a handful of families, with no guarantee that they would be the most in need. I think it's fundamentally unfair to have safety net programs that do not have the funding to help everyone - so instead, they help hold a lottery and offer HUGE amounts of help to 0.1% of people while the other 99.9% in need are left out.
Research into programs that subsidize demand by giving down payment assistance or mortgage deductions shows that in a market with constrained supply, the subsidies push up prices for everyone - thus, the 99.9% would not only have no help, but they would be worse off!
The people most in need of cash assistance in California right now are poor families who are RENTING and on the verge of homelessness - they are not going to be able to get into homeownership anytime soon.
The way to fix the problem is to fix the supply.
Since that piece has been published, the program launched in March 2023. Not to say, “I told you so,” but it went poorly. From Cal Matters:
California lawmakers marketed its new loan program for first-time home buyers as a “Dream For All.” But just 11 days after applications opened, the initial pot of money is tapped out, sucked dry by eager house hunters.
How many people received money from the program?
About $288 million in initial funding will be provided to 2,564 homebuyers, according to an internal document obtained by CalMatters.
Were these particularly needy people? Nope:
The program was meant, in part, to help address California’s ethnic and racial wealth gap…But those figures also show that the program was disproportionately used by white homebuyers.
It continues:
“I would guess that 30 to 50% of the people who are using it could qualify or buy without it because I had plenty like that,” said Matt Gougé, a Sacramento loan officer, referring to his own clients.
The news of the program opening also appears to have been leaked locally in Sacramento before other parts of the state, leading to a disproportionate number of Sacramento residents benefiting:
Gougé, the local loan officer, said news of the program spread by word-of-mouth throughout the capital community in the days before the state officially launched the program on March 27. The regional rumor mill may have been churning especially quickly given how much more plugged-in locals are to matters of state bureaucracy.
Insiders benefitting from a program that by design can only help a handful of folks is not surprising. When Inglewood tried a similar program based on a lottery in 2019, the person who benefited the most was a city employee who was also the daughter of the city budget manager. What is surprising is that California appears on the verge of…trying this again! Senator Toni Atkins, the architect of the original program, wants to add 200 million to the program's budget, this time with some assurances that each region of California will have equal access. There is even talk of exploring and expanding federal programs that would give down payment assistance.
This is just refusing to deal with the fundamental problem - we need more supply of family-sized housing. The best way to do that is by making it easier to build family-sized housing. In LA, this is at least being gestured to by City Council President Paul Kreokrian. The incentives he proposes are woefully underpowered to make a difference, but in this context, we should commend him for at least having good instincts!
If you want to make building family-sized housing in LA easier, you should make it easy to build townhomes by redeveloping older single-family homes. This won’t fundamentally alter most neighborhoods' character- townhomes are ubiquitous alongside single-family homes in the DC metro area. Most of my peers in the DC area have had a much more accessible entry into homeownership than we have here in California. I wrote about this back in 2022:
Across the US, the market is naturally pushing homes to be built on smaller and smaller lots - the only thing standing in the way is land use regulation. Houston, where townhomes are legal city-wide, has seen 100k units come online in the last 20 years alone - accounting for approximately 4% of the city’s housing units! This is a significant contribution to why Houston is the most affordable city in the Sun Belt, both for renting and owning for residents at and just below the city’s median income. Houston also has the lowest rate of homelessness of any major US city.
As I wrote in the townhouse article, in cities like LA, you wouldn’t need to tweak the zoning code that much - mainly just a little flexibility on height and parking rules in the small lot development program. The big issue in LA is simple - you cannot build townhomes on small lots in single-family neighborhoods, which are 74% of residential land in LA (even though townhomes are single-family homes!). Standard single-family zoning in LA comes with at least 5000-foot lot sizes (and 7500 in many), making lots very hard to redevelop into anything remotely affordable.
One nearly universal rule about LA is that no housing incentive program can touch single-family neighborhoods:
If you wanted to use LA’s small lot development program to build townhomes - you cannot use it in single-family zones.
If you want to use the transit-oriented community program to build apartments for families around new transit stops - you cannot use it in single-family zones.
If you want to use ED1 to build dedicated affordable housing - you can no longer do so in single-family zones.1
If you want to use state law - SB 684 - to create a subdivision on a lot, you cannot do so in a single-family neighborhood.
If you want to identify a single reason for the failure to build housing for families, policymakers' timidity to touch these neighborhoods should be at the top of the list.
2) Don’t pit family-sized housing against other types of new supply
One frustrating idea that some folks express in Wagner’s article is that the city must mandate new rentals to be family-sized. Wagner quotes a group from here on the Eastside pushing for this locally:
Eastside LEADS supports increasing the Community Plan’s existing requirement for affordable housing projects to include at least two bedrooms in 30% of their units. Councilmember Kevin de León — the area’s representative who is in a November runoff to retain his seat — has pushed to raise the recommended threshold to 60%.
But Agustin-Anguiano said building larger apartments isn’t enough. She said they must also be affordable to families earning 15% of the area’s median income, or $14,750 per year. Previous income cutoffs for affordable housing went no lower than 30% of the area’s median income.
“That is not the income of Boyle Heights,” Agustin-Anguiano said. “A majority of the residents that we organize with earn less than $20,000 a year.”
Now as is pointed out in the article by a separate expert, this will likely mean very little new construction could be permitted in Boyle Heights going forward:
An analysis performed for the city by consulting firm AECOM concluded that increasing the two-bedroom Boyle Heights mandate from 30% to 40% would “further limit project feasibility and decrease the overall potential number of housing units … undermining citywide housing goals.”
The unfortunate reality is that given where land and construction costs are, it is just not market-feasible for even subsidized housing to offer those sized apartments at those rents at any meaningful scale, let alone a for-profit developer building an ED1 project. And some activists may be ok with that - since many progressive activists are skeptical of new housing across the board.
But the truth is that mandating large apartments would be a disaster for families - building new apartments that are studio and one-bedroom is going to help families in the long run. This is because building newer small units can be a way to incentivize non-families to leave family-sized housing for newer, less expensive housing.
Consider a hypothetical scenario where rental housing is literally auctioned to the highest bidder.2 In this scenario, imagine a four bedroom rental house is being auctioned in a middle-of-the-road LA neighborhood. You have two bidders - a family who can pay $4000 or four college students willing to pay $1250 each to rent a room. Who is going to win the auction? The students will - they can put up $1000 more dollars in aggregate for the same unit.
This is what is happening right now across LA - when there is not enough new construction of smaller units, single adults will outbid families for larger units, that will then be split up among roommates. Recently, the LA Times wrote about the neighborhood around USC, and how the expansion of the University is putting pressure on the housing market in the neighborhood. I briefly lived in that area and still have friends in the area, so I think the article did not 100% right and wrong - but I do think it captures this housing phenomenon.
Consider this new property at 1181 Rolland Curtis, a couple of blocks from USC and the E Line:
The house appears to be a new townhome built where an older 3-bedroom single-family home used to be. Instead of being rented to a family, each floor is rented to four college students. So you get 12 students living in a family-sized home, all playing 1200 or 1300. It doesn’t take a lot of math to see that this is a better deal for a developer than renting to a family.
If you, like me, do not like this outcome, there are two options to try to limit its spread. The first option is to try to ban it - as the LA Times article suggests the local city councilmember wishes to do. The problem is that this may backfire further by pushing students to live in even less dense existing homes, displacing more long-time residents. Alternatively, you can ask how to create alternatives for young single Angelinos that don’t involve taking family-sized housing off the market. I think there is a fairly straightforward answer. If you allow new construction of co-living apartment buildings where you leverage density, you could build new buildings with, say, 300 people living in co-living apartments where the density allows for amenities like gyms and community rooms at a similar price or even lower price.3 This better deal would likely entice those students out of the family housing unit - while also having a smaller land footprint, probably in a commercial corridor, meaning less displacement of existing residents. To me, this is the far better choice.
The same can be said on the other side of the spectrum - the best way to entice older homeowners locked in place with a low-interest rate and massively unfair discounts on their property taxes via Prop 13 is to build new housing geared towards the needs of older adults. This could look like condos in neighborhoods designed around the needs of older residents - or some form of ADU or missing middle housing built on their property.
3) Homeownership access is at odds with wealth-building
Americans often do not realize how home ownership in the last 50 years or so in California differs from home ownership in the first 40 years. One of my favorite movies is “It’s a Wonderful Life,” a movie that dramatizes, among other things, the effort to help working-class families afford homes. Here is the well-known scene where Mr. Martini and his (quite large) family move into their new home:
What is telling about the movie's depiction of homeownership is that nowhere is there any talk of “appreciation” or “wealth-building.” There is a financial benefit to ownership, but that benefit is about stability, not getting rich. Owning a small home and some land allowed the working people of Bedford Falls to not worry about the fluctuations of home rents they would have to pay to their unsavory landlord (Mr. Potter). In the words of George Bailey himself to Mr. Potter:
"you said that they -- What'd you say just a minute ago? They had to wait and save their money before they even thought of a decent home. Wait? Wait for what?! Until their children grow up and leave them? Until they're so old and broken-down that -- You know how long it takes a workin' man to save five thousand dollars? Just remember this, Mr. Potter, that this rabble you're talking about, they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath? Anyway, my father didn't think so. People were human beings to him, but to you, a warped, frustrated old man, they're cattle. Well, in my book he died a much richer man than you'll ever be.”
The irony, of course, is that the home and neighborhood used to film that scene still stand to this day. The street certainly is leafier, and the house has been remodeled through the years but is not much bigger than when it appeared in the film - a house that people would have considered modest when it was built. But because the city where it is located (La Canada) has become one of the most exclusive in Southern California, it is worth an eye-popping 2.2 Million dollars:
What changed? Something happened in the 1970s to change this vision - something that has been called by land-use scholar William Fischel the “Homevoter” Revolution. In this era, many restrictions were placed on building new homes - and the existing homes in many neighborhoods suddenly started appreciating rapidly. This created a negative feedback loop: the more homes appreciated, the more the owners were incentivized to put more restrictions on new supply (in the fear that they would see their investment go down in value). These restrictions led to more price appreciation, which led to more restrictions until Martini’s house was worth 2.2 million. Housing suddenly became less like a consumption good for which price stability was the most important factor, to a growth stock akin to your retirement fund, where not only do you get to live in it, but you get to profit off of its ever-increasing appreciation without even having to lift a finger to improve the home! Somewhere George Bailey is rolling over in his grave that his lifelong effort to help undermine the evils of Mr. Potter created an army of homeowners who collectively have far more power than Mr. Potter ever had.
There is a current tendency of some on the Progressive left to get mad about news stories about institutional investors buying single-family homes - and for many politicians, blaming these investors for the housing crisis. California senate candidate Katie Porter blamed our state’s housing crisis on Wall Street. Jeff Merkley of Oregon created a bill trying to tax corporate owners of single-family homes heavily. Current California representative Nancy Skinner has a bill trying to stop institutional investors, as does Alex Lee
This is frustrating to me for two reasons. First, it’s frustrating because the scale of the problem is vastly overestimated. Unlike a recent TikTok video that claimed that Wall Street bought 44% of the homes in 2023, the data shows that Wall Street firms have bought a fairly modest 2-5% of home sales, depending on the jurisdiction and exact time frame.4 You might find that concerning - there are various reasons to think institutional investment of homes has downsides, like their higher propensity to evict tenants rather than negotiate. But in terms of prices, it’s very hard to argue that institutional investors are causing a fundamental shift in the market. After all, small-scale investors have been investing in these homes for years with little controversy.
But it is also frustrating that those upset about this trend fail to ask the simple question: why are the investors interested in the first place? Institutional investors cannot magically cause their investments to go up - if you think they can, I recommend reading about the We Work Saga. Instead, institutional investors' strategy for making money is to spend years scouring the world for opportunities where markets have been shielded from competition and are thus likely to be profitable. Investors have discovered that buying existing homes in a supply-constrained housing market can be very profitable. If you want investors to stop investing, you should build enough housing to stabilize housing prices. Stable home prices still make owning a home a good investment for a family - because if you need housing in the long term, having a stable fixed mortgage payment is a really helpful asset! However, a stable market would no longer be a target for private equity firms. Investment could then shift to forms of housing investment that are more socially beneficial, like experimenting with innovative construction methods instead of buying and passively holding existing properties.
Kevin Erdmann wrote about this well:
Since home ownership provides excess profits, and these profits tend to go to households with the most access to capital, we tend to think, wouldn't it be fair if everyone could get access to those profits? This is wrong-headed. Profits (accounting for liquidity and idiosyncratic risk) only exist because there is limited access to the market. If everyone gets access, the profit goes away. The solution is to get rid of the profit. But the irony is that, if we get rid of the profit, then moving households into home ownership is not necessarily a benefit. The only equitable outcome for housing policy isn't to subsidize more homeowners, it's to make all households indifferent to home ownership.
The best housing policy is one where people have a choice - a family in a stable season of life can opt for the price stability of owning, while a young single person can opt for the flexibility of renting.5 Housing policy should aim for price stability - No one gets rich (unless they are taking a risk and developing new homes), and no one becomes impoverished when prices go up astronomically.
Until policymakers grasp these three lessons, families in California will not be getting a better deal any time soon.
You could in the original - until Karen Bass caved under pressure last spring.
Obviously the real rental market does not actually involve auctions - but an auction is a helpful mental model for how markets work in the aggregate.
If this sounds like a dorm - that is essentially the idea.
To get into the weeds - often people who talk about the scourge of corporate landlords, they look at the percentage of homes bought by LLCs, as this Knock LA piece does. The problem is that the vast majority of properties owned by LLCs are ultimately owned by individuals and families who want a liability shield on their real estate investments. They are a poor proxy for “Wall Street” - LLCs are a better proxy for the more general question of rentals vs homeownership.
It is also worth noting that there is a racial justice aspect to this - much of the white/black wealth gap in the US is rightly attributed to those who had access to housing in these neighborhoods. For many, the solution to the wealth gap is often cited as increasing access to homeownership so that marginalized individuals can build wealth through the “growth stock” of homeownership. But because building wealth in this way is a zero-sum game, this just extends the privileges to a narrow elite, while most people in the market, including the poorest renters, are made worse off.
I got into an argument on Reddit about rent control/Prop 13/housing, and someone made this point about how older people were hogging all the houses. While I agreed with him, my question was, "where are they supposed to go?"
All we can do is keep increasing supply of whatever kind of housing we can, and let people sort this out for themselves.