STATE OF CALIFORNIA -BUSINESS, TRANSPORTATION AND HOUSING AGENCY ARNOLD SCHWARZENEGGER, Governor DEPARTMENT OF HOUSING AND COMMUNITY DEVELOPMENT DIVISION OF HOUSING POLICY DEVELOPMENT 1800 Third Street, Suite 430 P. O. Box 952053 Sacramento, CA 94252-2053 (916) 323-3177 FAX (916) 327-2643 www.hcd.ca.gov

The State of Housing in California 2009:

Supply and Affordability Problems Remain

Despite improved affordability, California is still lacking an adequate supply of housing, in the right locations and affordable to families, the workforce and special needs populations. Prior to the current economic downturn and foreclosure crisis, California had experienced decades of undersupply, contributing to significant price escalation and the affordability crisis. This long term lack of supply has not been mitigated by record foreclosures and current market conditions.

The factors contributing to California’s continuing housing supply and affordability problems are highlighted below: • California continues to experience significant rates of population growth. Even

encompassing the recession of the early 1990s, California’s population has grown by an average of 450,000 people annually and is projected to continue to show significant gains over the next decade. In fact, California is projected to continue to experience an above-average share of the nation’s population growth. The State is projected to have 20 percent of U.S. population growth in the decade ahead. While market downturns are an inevitable part of the business cycle, demographic trends play a central role in housing demand. As a result, despite the current market crisis, Californians continue to have babies and expand their families and as noted below, Californians are living longer (a good thing!). The longer life expectancy however, means a slower turn over in the existing housing stock for new households.

• Over the next decade, the greatest population growth is projected for residents aged 55

and over. This trend is significant because older Californians have the highest housing demand per 1,000 people – the result of divorces, separations and deaths. Baby boomers are projected to dominate changes in the housing market until at least 2030. A rapid increase in one-person and older households is likely to continue for the next several decades -- driving the need for more housing and different housing products.

• The current inventory of foreclosed units does not eliminate the need for more housing.

The sustained housing supply deficit is not eliminated with the current stock of foreclosed units. California has already fallen behind in its housing need relative to population and employment growth. A decline in new construction in the 1990s directly led to dramatic price increases and increased overcrowding. By Census 2000, California had 1.7 million overcrowded households; two-thirds of these were renter households. Since 1999, residential new construction has averaged less than 160,000 permits per year, compared to an annual average need of 220,000 units. Just when residential construction began to approach the average annual need to accommodate growth, the bottom fell out of the financial sector with the foreclosure and financial crisis.

The State of Housing in California 2009 Page 2 September 2009

• The rate of new home construction continues to decline. In February 2009, residential permits were issued at a seasonally adjusted annual rate of 28,847 units, down more than 62 percent from a year earlier. Single-family permits were down 48 percent, while multifamily permitting was down 74 percent. But by the spring of 2009, the for-sale housing stock had fallen below a six-month supply, implicating the need for increased supply. While housing construction traditionally leads the economic recovery, the dramatic drop in home construction is a significant barrier to reviving California’s economic engine. For example, a 2006 report identifying the contributions of the homebuilding industry during a time when the market was strong showed the entire housing industry generated close to $273 billion in economic output, supported about 960,000 jobs, and accounted for approximately 11 percent of all economic activity in the State. The health of the housing construction industry is critical to the health of California’s economy.

• The State’s chronic housing affordability gaps, particularly in higher cost urban areas,

have not been solved despite the improved affordability of ownership housing due to the foreclosure crisis. With the collapse of the housing market, homeownership rates declined in 2007 and 2008. The most recent reported affordability index for first-time homebuyers remained at less than 50 percent in many counties, and between 30-40 percent for several populous counties. These conditions have swelled the ranks of the homeless, with many families struggling to meet food, housing, and transportation costs. While housing prices have been dropping, the market has not yet stabilized and interest rates will rise.

• There is a large unmet need for rental housing affordable to lower-income households.

For example, only a quarter of eligible households nationally actually receive tenant-based rental assistance, leaving a large proportion of renter households paying too much housing, doubling up, or living in substandard conditions. A full 64 percent of lower-income renter households have housing cost burdens exceeding 30 percent of their income. While in some markets, homeownership has become more affordable, rents are still too high for many lower-income families and workers. A 2009 study by the Center of Housing Policy found that 7 of 12 least affordable rental markets are in California. Unfortunately, the foreclosure crisis has only exacerbated rental housing needs, as an estimated quarter of foreclosed units were rentals.

• There is a mismatch between the existing housing stock and the demand for housing by

type and location. Despite vacant foreclosed units, much of this housing does not meet consumer demands. Today’s young adults have a stronger preference for urban living than their predecessors and demand for smaller homes close to services and transit is rising. In addition, many older Californians desire or need smaller sized units, close to amenities or services. Yet vacant foreclosed units in outlying suburban areas will not meet the need or demand for more infill housing accessible to jobs and transit in more central locations, necessary to reduce the costs of energy, transportation and greenhouse gas emissions. Nor does the existing housing stock meet the need for different housing types including “greener” development, smaller homes or mixed-use housing.

Swift and aggressive action to increase the supply and affordability of housing and support the home construction industry is critical to ensuring California can retain its competitive economic edge, improve the quality of life for its residents, and maintain its leadership role in addressing climate change and environmental quality while adequately housing workers and families. For more information or questions, please contact Cathy Creswell, Deputy Director or Linda Wheaton, Assistant Deputy Director, of the Division of Housing Policy Development at (916) 445-4728.

The State of Housing in California 2009 Page 3 September 2009

Sources: California Economic Growth 2008, Center for the Continuing Study of the California Economy, Steve Levy, 2008. Construction Industry Research Board, Historical Residential Permit Data, Burbank, May 2009. “Housing in California,” Hans Johnson, PPIC, Sept. 2008 California Association of Realtor’s, “Trends;” Vol. 30. No. 4. May 2009. U.S. Housing Trends: Generational Changes and the Outlook to 2050, Pitkin, John and Myers, Dowell; Prepared for Transportation Research Board, National Academy of Sciences, Washington, D.C., May 2008. The Economic Benefits of Housing in California,, Sacramento Regional Research Institute, SACTO-Sacramento State, June 2006. “Most to Least Expensive Rental Markets,” Paycheck to Paycheck, Center for Housing Policy, Washington, D.C. 2009: http://www.nhc.org/chp/p2p_2008_q4/Rental_Rankings.pdf