Good news for moderate-income workers.

A new law allows California cities to count recently converted moderate-income housing units in their annual reports for Regional Housing Needs Allocation (RHNA). Beginning in 2022, Assembly Bill (AB) 787 allows recently converted moderate-income units in existing multi-family developments to count for up to one-quarter of RHNA moderate-income housing quotas.

A similar program already exists that credits the conversion of low-income housing to local RHNAs. This new law addresses the need for housing in the mid tier.

AB 787’s shift helps local governments meet their RHNA quotas while encouraging conversion of existing housing to income-restricted units. But it does not add to the existing housing inventory.

Potential inventory growth for a struggling middle

California’s housing market has been dominated by low supply which has continually worsened over the past decade. The tightest inventory of both rental and for-sale property is found in the low- and mid-tier markets — where market value is least able to be met.

Moderate-income workers depend on housing in-line with their incomes, but with so little inventory available, it can be impossible to find. Converting existing multi-family units into housing which matches the wages of workers in the moderate-income category is a band-aid solution for a problem that keeps on growing.

Suitable housing for the missing middle opens up the floor for a much more wide-range area of potential homebuyers. The population of the moderate-income is slowly, but surely decreasing, as we’ve seen:

  • in 1971, 61% of households were middle class;
  • in 2000, 55% of households were middle class; and
  • in 2014, 51% of households were middle class.

The middle is not dropping off the face of the Earth, but where exactly are they going?

Most are not joining the upper class, which remains a small population that continues to grow only in terms of funds. The majority of the disappearing middle is gradually filtering into the lower-income population.

This new law offers temporary solutions — none of which have long-term sustainability. Solutions do not fix everything overnight, but investing in more residential construction is the only long-term fix. There is a vital need to build inventory to meet the continued increase in demand – especially in the income range of the disappearing middle.

The creation of more multi-family housing has helped boost low- and mid-tier housing in the last couple of years, but the biggest obstacle remains restrictive zoning. Loosing zoning regulations allows for higher density residential construction in the most desirable areas, enabling builders to meet demand. Legislators continue to pass a range of laws each year to loosen zoning and encourage more construction. But more needs to be done.

As gatekeepers to housing, real estate professionals are ideally situated to become involved in encouraging more housing for the middle class. Advocates can start by attending local city council meetings and letting their voice be heard.

Related article:

California residential conversions limited by outdated zoning