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Why California’s ‘affordable’ housing costs $1 million a unit - Pacific Research Institute

Why California’s ‘affordable’ housing costs $1 million a unit

By John Seiler  |  February 10, 2023

A friend of mine is an executive in the construction industry. His company sometimes works on government projects, especially in Los Angeles. As a non-union shop, his company works under the rules of Project Labor Agreements, which according to the AFL-CIO are “collective bargaining agreements between building trade unions and contractors. They govern terms and conditions of employment for all craft workers – union and nonunion – on a construction project.”

 

They not only set wages but reduce competition from nonunion labor. PLAs effectively double the normal wages made at this company, to about $68 per hour on average, including benefits, with variation depending on the particular skill and experience. That jibes with the list of PLA wages put out for Los Angeles County by the California Department of Labor Relations. For example, a drywall finisher on the list makes $65.07, while a glazier makes $70.85.

 

Overtime comes to time-and-a-half, which is common. The contractor likes using his experienced workers instead of new hires at a lower wage. Understandably, the workers love these jobs and commonly put in 12-hour days. So that $68 per hour becomes $102 for those extra four hours. One day can mean a haul of $952. Sometimes seven days a week.

But that’s not all. This is subcontract work.

The contractor for the overall project also hires a special firm to make sure the PLA paperwork is correct, or the government imposes fines nobody wants to pay. That also imposes another layer of paperwork for my friend’s company.

 

So it’s no wonder a Los Angeles Times review last June of state data found, “More than half a dozen affordable housing projects in California are costing more than $1 million per apartment to build, a record-breaking sum that makes it harder to house the growing numbers of low-income Californians who need help paying rent…. But their exorbitant price tags mean that taxpayers are subsidizing fewer apartments than they otherwise could while waiting lists of renters needing affordable housing continue to grow.”

 

The city of Los Angeles has a new mayor, Karen Bass, whose first action in office was to declare a “state of emergency” to deal with the homeless problem. In the November election, Bass was outspent by her opponent Rick Caruso – a billionaire developer who largely self-funded – by $92.3 million to $12.5 million.

However, 38 unions listed on her campaign website backed her candidacy. These include eight locals of the Service Employees International Union, the International Brotherhood of Electrical Workers Local 47, the International Union of Painters and Allied Trades District Council 36, the Laborers International Union of North America Local 300 and the United Union of Roofers & Waterproofers and Allied Workers Local 36.

 

The city is probably not going to see any reform of PLAs, even for low-income housing. It has to keep its priorities straight.

 

Another factor in the high cost of building low-income housing is, of course, the cost of the land. That high price also is a result of government regulations that limit the availability of developable property.

The sky-high property prices in Los Angeles and other coastal cities have dropped somewhat as the Federal Reserve Board has boosted interest rates, but not by much. The real-estate firm RE/MAX reported in December 2022 that the city’s median sales prices for single-family homes dropped 4.7 percent, to $810,000. In San Francisco, it was a 5.1 percent drop, to $985,929. Contrast that with $415,000 in Phoenix.

 

Then there’s the return of inflation. The best gauge is the Producer Price Index for Building Materials and Supplies Dealers, calculated by the St. Louis Fed. This has bounced around since the pandemic began three years ago. But if we go back to Feb. 2020, it was 152.2 – about the average of the previous two years, so a stable number. In Dec. 2022, it was 210.13. That was an increase of 57.93, or 38 percent, in less than three years. (On the positive side, the 210.13 was down from the 259.21 of March 2022.)

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I haven’t even begun to list the other perennial reform ideas to remove impediments to building reasonably priced low-cost housing. That begins with reforming the California Environmental Quality Act, which almost every politician in the state ostensibly favors including Gov. Gavin Newsom. But little if anything ever is accomplished – except for giving CEQA exemptions to the sports arenas benefitting billionaire team owners and millionaire players.

 

As in all areas of life, dealing with California’s homeless problem is a matter of priorities. And the state’s priorities involve boosting wages and other social and environmental aims. One has to look beyond the rhetoric. The reality is nothing will change. The unions won’t allow suspending PLAs. The environmentalists won’t allow the reform of CEQA. Congress isn’t going to stop spending trillions of new dollars that sparked the inflation that drove up prices for everything.

 

The minor pause in the increase in property prices will end once the recession kills enough jobs to satisfy the Fed, which then will cut interest rates again. That could push housing prices to new record levels.

 

One thing that actually might help the crisis is if the exodus from the state continues. According to the U.S. Census Bureau, the state lost another 114,000 residents last year, an improvement over the 340,000 lost in 2021. Reduced demand for anything usually leads to lower prices. Fewer people require fewer housing units, opening space for those who remain.

 

The irony is the state’s inability to solve the housing crisis may turn out to be the only thing that makes housing slightly more affordable. Meanwhile, the construction industry will continue to churn out inflated “affordable housing” that costs as much as $1 million a unit.

 

John Seiler is on the Editorial Board of the Southern California News Group.

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