“Affordable housing” has become a commonly used phrase in California because there is so little of it. Activists demand it and policymakers promise they can produce lots if it through their clever legislating. But their plans usually include housing where they want it (near public transit centers), not necessarily where buyers want it, and built to suit their preferences (often high-rises, which don’t work for all), which brings up an important question:
Whatever happened to “starter homes,” those modest dwellings that met the growing demand during the postwar boom and are a key part of housing’s “missing middle”?
The concept of starter homes picked up after World War II. They were built with first-time buyers in mind. Developers knew that if they could “build and sell new homes for two-and-a-half times median household income in a neighborhood, people line up around the block to buy them,” says Builder magazine.
Starter homes are small “two-bedroom houses with one bathroom and few frills,” according to Realtor.com. They often are around 1,000 square feet and tend to be rather plain. Often they are located on small lots.
But they’re not being built. “The share of entry-level homes in overall construction” says Freddie Mac, fell from four in 10 “in the early 1980s to around 7% in 2019.” The Home Buying Institute finds that the problem hasn’t improved in the last seven years, with starter homes “steadily disappearing from the U.S. housing market.”
While as late as the 1990s developers were still building starter homes, they have since become “a forgotten path to affordable housing,” says Strong Towns. Houses that can be characterized as starter homes in California in the 2020s are hardly inexpensive. They’re about $400,000 in Riverside but can cost more than $900,000 in San Francisco and San Jose, where buyers would have to earn more than $300,000 a year to get in the door.
Land has become too expensive to accommodate starter-home construction. The margins for starter homes in California are thinner than they are for larger homes, so there’s little incentive for builders to invest in them.
This explanation is incomplete, though — it doesn’t tell us why land has become so costly. Generally speaking, land has been made artificially expensive due to zoning rules. This is particularly relevant in California, where zoning has been historically restrictive.
The landscape is slowly changing, however. Bills passed in recent years have been giving property owners more leeway to build what they want on their land. The aim is to add multifamily housing and increase density, but in a more relaxed policy framework, developers can also take large lots that had been zoned for single-family housing and rather than build apartments, instead put multiple smaller starter homes on the site.
Other causes that inflate construction costs in California include stubborn energy codes that are especially devastating to housing that is price sensitive, and the California Environmental Quality Act (CEQA), which has long been a malign presence in the homebuilding sector.
All of these add up to exorbitant construction expenses in California. For instance, it costs about $430,000 to build an apartment unit in the state, almost three times as much as it does in Texas, where the cost is roughly $150,000.
“A privately financed apartment building that takes just over two years to produce from start to finish in Texas would take over four years in California,” says Jason Ward, a RAND researcher who co-authored a report that produced the numbers above.
“It takes twice as long to gain project approvals” in California “and the construction timeline is 1.5 times longer.”
A number of factors raise construction costs, says the report, including municipal impact and development fees, which are $29,000 per unit in California but average only $1,000 per unit in Texas.
The Rand report also notes that contractors who build publicly subsidized affordable housing in California are required “to pay substantially above-market wages and unusually large architectural and engineering fees.”
Now apartments aren’t starter homes. But the comparison can’t be overlooked. Building starter homes under California conditions too often doesn’t make financial sense, particularly if affordability mandates are applied.
Not quite a year ago the Starter Home Revitalization Act of 2021 was amended and the new law went into effect. It doesn’t fully open the door, but it does allow builders to put as many as 10 units on a vacant subdivided lot, reins in CEQA review, public hearings and appeals, and in general speeds up the permitting process.
A follow-up bill introduced this year goes a bit further. It would deter local jurisdictions from blocking starter-home construction through obstructive rules, such as height limits, excessive setbacks from streets and inflexible parcel size requirements.
Starter-home construction in California isn’t booming. It’s ranked as the worst state in the country for finding a starter home. But continued efforts to defang the regulatory and legislative environment, and free builders from government restraints would go a long way in this housing-starved state.
Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.