California may as well be synonymous with expensive. Our high cost of living is infamous, and most to blame are the state’s high home prices.
Why are home values so high in California? With an envious climate and access to many high-paying and quality jobs, the Golden State is a nice place to live. But demand alone isn’t responsible for high home prices. More importantly, the price of land makes up an unequal share of home values across the state.
Eight out of ten of the top U.S. metros where land costs make up the highest share of total home values are here in California, according to Redfin.
The problem that arises when land prices are so high is that home prices are pushed up by necessity. In order to keep up and continue to profit, builders choose to construct homes only accessible to high-income earners. Thus, the situation now common in California ensues where low- and moderate-income households are left competing for an unsuitably small inventory of homes.
Of note, while home prices are higher in, say, San Francisco than Los Angeles, the land cost share of total home value is higher in Los Angeles. Here, the price of land makes up 61% of the total home price, which averages $625,000, compared to 52% in San Francisco, where the average sale price is $1.5 million. Therefore, even though the price of land makes up a larger percentage of the total value in Los Angeles (equal to about $381,000), the price of land itself is higher in San Francisco (roughly $780,000).
Either way you spin it, land is a significant investment across the state. Why is the cost of land so high in California?
There are two factors that go into variations in land prices:
- homebuyer and renter demand, which tends to fluctuate based on how desirable the area is, including access to jobs and amenities; and
- government regulations over land usage, including zoning, permitting and environmental review processes.
For example, Redfin finds that homes built in highly regulated areas can take three times as long to complete from start to finish compared to those in less regulated regions. This drawn-out process translates to higher costs for builders.
Further, the availability of land can also impact demand and regulations. For example, consider San Francisco, hemmed in by water on three sides and more development to the south. What little new construction that occurs also needs to deal with the geographical challenges of building on the steep slopes the city is famous for. Add to that the excessive regulations which limit height and density, and the cost to build in San Francisco is enormous.
Fix the zoning
While some obstacles to growth are unavoidable — like San Francisco’s unique geographical constraints — regulations that hem in new construction and cause home values to rise out of the reach of most residents are completely unnecessary.
In California, overly restrictive zoning laws have resulted in:
- reduced construction, especially in the low- and mid-tier;
- inflated prices of both new and resale homes;
- a diminished quality of life for homeowners and renters, as more of their income goes toward paying inflated housing costs;
- reduced home sales volume, as low inventory is unable to keep up with demand; and
- stunted homeownership rates.
Add these obstacles up and the result is the housing crisis presently teeming across California.
California’s legislature is well aware of the damage done by overly-restrictive regulations. Dozens of new laws have been passed in the past couple of years to combat the housing crisis, many of which can be found here.
But efforts to increase the housing stock and bring homeownership back within reach of low- and moderate-income households don’t stop with lawmakers. Real estate professionals are uniquely positioned to make a difference by advocating for more housing. You can do this by:
- attending and becoming a voice at local city council meetings;
- showing support for progressive zoning reform; and
- staying informed about the ever-changing landscape of housing laws in California.