California is home to 12% of the U.S. population and only 10% of the U.S. housing stock, according to the U.S. Census. This may sound like an insignificant difference, but it translates to hundreds of thousands of missing units needed to meet demand from California homeowners and renters.

The home inventory shortage is well documented. The shortage is especially felt in mid- and low-tier units within reach of low- and moderate-income households. In fact, roughly half of California’s for-sale inventory in 2017 is in the high tier.

As of mid-2017, total inventory for sale was lower than a year earlier in all of California’s large metropolitan areas. For example, home inventory for sale was 29% below a year earlier in San Jose and 25% below a year earlier in San Diego.

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California’s for sale inventory continues to fall

The solution to the inventory shortage requires a combined effort from builders and government. Some of this work has begun, as several bills recently passed in California to increase housing for low- and moderate-income residents. These bills include action to revamp local zoning codes to:

  • increase density in appropriate areas;
  • streamline the approval process; and
  • develop strategies for sustainable communities.

Researchers at University of California Los Angeles (UCLA) have another idea: graduated zoning changes. UCLA researcher, Donald Shoup, coined the term graduated zoning to highlight a two-step process: the government makes zoning changes to allow for more housing and private developers respond. Graduated zoning is in contrast to government use of eminent domain to seize property for another use.

For example, say the government wants to add a low- and moderate-income housing development in an underused part of downtown, but a few dilapidated single family residences (SFRs) stand in the way.

In the case of eminent domain, the government will seize the properties and compensate the owners. But graduated zoning helps the city reach the same level of desired density organically, with developers buying out the SFR owners and building the units. The change is more gradual and fueled by private enterprise.

Zoning changes incentivize owners

UCLA recently analyzed the impact of graduated zoning on local economies. Researchers identify the first city to adopt a graduated zoning plan, Simi Valley.

In this example, graduated zoning was introduced in an underused part of the city. Within four years of the zoning change, this 31-acre site went from housing eight SFRs to over 200. The local government changed the law, and private developers did the rest. This benefited the residents it housed, the builders who profited, the construction workers who were paid to complete the project and ultimately the city which benefits to this day from new taxpayers (not to mention real estate professionals).

The UCLA report also studies the zoning changes made in Glendale, which changed design limits of multi-family units. This zoning change allowed buildings wider than 90 feet to have higher density and building height. Since most of the city’s buildings were smaller than this width, the zoning change incentivized builders to build wider buildings, making better use of the space available, a type of infill housing.

Graduated zoning is one of the best ways to encourage builders to build low-tier housing. In California, the cost of land is so high that only very dense (or far inland) areas make sense for low-tier homes. Local governments may provide tax incentives for builders to include certain percentages of low- or moderate-income units in new developments. But the drawbacks to this approach include the loss of taxes for the city and only a small dent in the overall housing shortage.

Graduated zoning may take longer to take hold, but is ultimately the best weapon in local governments’ defense against a rapidly shrinking housing stock.