State Should Resist the 'Housing Cult'

[Shigley's the co-editor/founder of a respected planning journal, the California Planning and Development Report]

18 March 2010

Gov. Schwarzenegger is going around the state urging lawmakers to approve a measure that would provide $200 million in tax credits for homebuyers. The governor claims the measure will save or add thousands of construction jobs.

His claim is hardly new. But is there any real basis for it?

Earlier this month, The Wall Street Journal’s Evan Newmark posted a blog with the headline, “Don’t Be Brainwashed by the Housing Cult” in which he questioned the assumption that homebuilding is a pillar of the economy. If Newmark is right, it demands a reconsideration of how the government subsidizes home construction.

Specifically, Newmark challenged the statement by Toll Brothers CEO Bob Toll that new home construction directly or indirectly provides one-fifth to one-quarter of all jobs in this country. It was the sort of boast that we hear frequently from the industry. Newmark, however, noted that homebuilding accounted for only 2.5% of GDP last year. Even in early 2006, when homebuilding was booming (and, as it turns out, we were overbuilding by a large amount) the industry amounted to 8% of GDP.

Newmark doesn’t think much of the homebuilding industry’s ongoing demand that the federal government provide subsidies to new home buyers, or of the industry’s pressure on Fannie Mae, Freddie Mac and the FHA to continue supplying taxpayer-guaranteed mortgages to new home buyers. He notes that 14.5% of housing units in the country are sitting vacant, and he concludes, “It seems that the only Americans who really need more new houses are the American home builders.”

I might expect this sort of commentary from an environmentalist or a greenie masquerading as an academic. But Newmark, although a contrarian and a shit-disturber, is no tree-hugger or slow-growther seeking additional government regulation. He’s an unapologetic capitalist, and he has actual facts behind his argument here.

We Californians like to think our state is different. After all, California reliably adds about 500,000 new residents every year. Even last year, when the California economy was in worse shape than at any time since the Depression, the state population grew by 367,000 people, according to Department of Finance. California, the argument goes, will always need additional housing units.

I tend to accept that argument. But if Newmark’s economic analysis is to be believed, the home construction imperative is social, not economic. We should build housing because people need shelter, not in order to employ people.

One year ago, the California Building Industry Association convinced state lawmakers to provide a tax credit of up to $10,000 to buyers of new homes. About 10,000 buyers took advantage of the program, getting themselves an average credit of about $7,000. The CBIA, state lawmakers and Schwarzenegger touted the program as a job-booster. Heck, even I offered a qualified endorsement. Now the CBIA and Schwarzenegger are calling for $200 million of tax credits for the buyers of any home, new or not.

--------Update--------

The governor signed AB 183, the $200 million tax credit, into law on March 25.

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However, all of the evidence says that last year’s program did nothing more than permit homebuilders to unload inventory. According to the Economic Development Agency, construction jobs fell by 18% to 570,000 in 2009. The CBIA itself bemoans that housing starts remained at the lowest level ever recorded in 2009.

I’m going to suggest that if the government wants to subsidize new housing, it should fund the units Californians actually need – and not simply toss money untargeted into the market.

And what we need are not the three- and four-bedroom single-family houses that are the specialty of the CBIA’s members. The average household size has been decreasing for years, and the fastest-growing household segment is one- and two-person households: seniors (by 2030, 20% of Californians will be at least 65 years old), singles, childless couples and single people sharing quarters. What these smaller households want are – this is not a big surprise – smaller housing units in convenient locations.

About 57% of California’s housing units are detached single-family houses, according to the Department of Finance’s 2008 California Statistical Abstract. It’s safe to assume that most of these are suburban-style houses that were originally designed for mom, dad and their two or three kids. But this sort of nuclear family will account for only about 25% of California households by 2020. The one- and two-person household is replacing the Leave It To Beaver family. Give these small households 800 to 1,000 square feet of well-designed living space (or un-designed living space, as in a loft), preferably within walking distance of the grocery, a coffee house, the library, a cinema and a park, and these people are as happy as clams.

If the government wants to subsidize new housing, it should aim squarely at the units that we truly need. And it should do so because people need decent shelter, not for any other reason.

– Paul Shigley