How decades of policy failure led to California’s housing crisis—which now threatens the rest of the nation – Yahoo Finance

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Something broke in California in the 1970s, and its housing market was never the same.

In the decades since, the Golden State has grown into a gross exaggeration of every other state, complete with a housing crisis that is threatening to metastasize across the rest of the country. Its extremes are written across its largest city, Los Angeles, home to miles of posh gated communities where homes sell for hundreds of millions as well as the country’s largest skid row.

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With 39 million people powering an economy larger than that of France or Russia, California needs to build 180,000 homes per year to keep up with population growth, according to an estimate from the state’s department of housing and community development. Yet in this regard, its record is pathetic, averaging less than 80,000 homes a year over the last decade.

To understand how we got here requires going back to the 1970s, an era when the postwar boom curdled into the double shock of “stagflation,” a nasty mix of stagnant growth and growing inflation, and when two of California’s legendary Republican politicians, Richard Nixon and Ronald Reagan, put their stamp on national and statewide housing markets. Generations of California Democrats would entrench those policies, many of them for supposedly environmentally friendly reasons. Yet more than anything, experts, economists, and activists told Fortune, something more fundamental snapped in the American mind that decade: A house became worth more as a financial asset than a place to live. And when it comes to the housing market, a bigger and bigger share of America has a California state of mind.

Not a failure, but a success

For William Fischel, the 1970s were also the decade when he began an illustrious academic career, first as a graduate student studying urban economics at Princeton University and then teaching at Dartmouth College, where he remained for the next 46 years. When he started out, he says, zoning and land-use regulation weren’t taken seriously as constraints to development; he felt like a bit of a maverick for his interest. But he was struck by a seemingly counterintuitive realization that “the impetus for most land-use regulation comes from the bottom up, from residents of a community.”

Fischel, who’s written several books on the topic, says it was more democracy, not less, that made “California start to look different from the rest of the country,” in the ’70s and ’80s. Less housing was built, and prices began to deviate from the national median. Some thought it was a housing bubble, Fischel says, but clearly it wasn’t. “The problem isn’t a failure of government operation, it’s rather, its success,” he says.

He traces the root of this desire to a souring economy, as homeowners became acutely aware of anything that would adversely affect the value of their biggest investment: their single-family homes. Wealth formation thus skewed toward homeownership as housing became increasingly viewed as an investment, Fischel says—“a growth stock instead of a blue chip stock.” It helps that Proposition 13 was enacted in the late ’70s in California, limiting the property tax rate to 1% of assessed value at the time of purchase and restricting annual tax increases to no more than 2%—meaning owners of properties that were ballooning in value were spared from a corresponding spike in their tax payments.

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But the greater our distance from the ’70s grows, the more this seems like a national disease. Kurt Andersen’s career tracks that of Fischel’s, but instead of entering academia in the ’70s he dove into the New York media world. He gained legendary status as the co-founder of the landmark cult magazine Spy, which held a Gawker-like grip on 1980s New York. He went on to become New York editor-in-chief and a writer of several novels and non-fiction works, recently turning to the question of what went wrong with America in the 1970s.

“A certain kind of economic fairness was the American way,” he says, following World War II, through the 1970s, “then it was not anymore; it was all on you.”

In that decade, he argues, new norms, laws and regulations halted and then reversed a century of economic progress, with the Rooseveltian New Deal ethos being gradually replaced by a naked pursuit of profit, expressed in Milton Friedman’s famous declaration in the New York Times in 1970 that “the social responsibility of business is to increase profits.” And in Richard Nixon and Ronald Reagan, Friedman found two Californians who would carry out his revolution.

The late ’60s and early ’70s were an “electric moment of volatile change,” Andersen says. In his history of the late 20th century, Evil Geniuses: The Unmaking of America, he blames himself and other liberals for taking their eye off the ball. The latter decade launched a new economic and political cycle, he says—one that we’re still in.

California’s legacy

The 1970s also gave rise to the “slow-growth movement,” and, significantly, the environmental movement. The dilemma of the decade traces back to the oil shock of 1973 and the exploding price of gas, the big-bang moment that triggered the stagflationary economy. The fear of overpopulation and overdevelopment, both of which contribute to increased energy consumption, triggered a revolt against growth, according to housing policy analyst Darrell Owens. “The byproduct of that revolt was that it turned California into a gated community,” he says, noting that conditional-use permitting, discretionary approval, and the California Environmental Quality Act were all born out of this movement. Fischel agrees, writing in several books that local zoning and land-use regulation shifted along with the financial regime in the 1970s, resulting in a difficult climate for new development.

Owens, a California native of a later generation than Andersen and Fischel, has become a strident pro-development voice, with a Substack that includes proselytizing posts such as “Why I used to be a NIMBY.” Of course, NIMBYs are the prime suspect whenever the question is raised of who killed housing affordability in California, the “not in my backyard” contingent who famously kept San Francisco less densely developed than the Queens borough of New York City.

Anti-growth sentiment fueled downzonings across the state, particularly in San Francisco and Los Angeles. With these changes in local law, plots of land reserved for apartment buildings would now be reserved for either smaller apartment buildings or single-family homes only. While single-family zoning originated in Berkeley many decades earlier, at the dawn of the 20th century, the big downzonings in the two major cities took place in the ’70s and ’80s, says Alex Armlovich, a senior housing policy analyst for the Niskanen Center, a Washington, D.C.—based think tank.

The concept of separating business and residential areas was first tested in Los Angeles in 1908; by 1916, Berkeley had the first comprehensive zoning ordinance, beating New York City by just a few months. Berkeley’s code explicitly intended to outlaw the kind of multifamily development that would have been affordable to Black and Chinese residents, and by the following decade, the federal government was encouraging the spread of Berkeley-style, single-family zoning, with all its racially exclusive implications. It was “kind of a prototype that would eventually spread across the country,” Armlovich says.

You can still see the underlying roots of exclusionary zoning throughout the state, according to Ned Resnikoff, the policy director for California YIMBY, a pro-development nonprofit.  “Single-family-only zoning has always had this segregationist motivation behind it,” he says. That same segregationist impulse still drives anti-development sentiment, Resnikoff adds, although it’s more often expressed in terms of income these days than in explicitly racial terms.

On the road to ruin

Some of California’s layers of policy-making that inhibit new housing arose from good intentions. Jenny Schuetz, a senior fellow at Brookings Metro, cites the California Environmental Quality Act enacted in 1970, a forerunner of Nixon’s creation of the Environmental Protection Agency later that year. The law was intended to prevent or minimize damage to the environment through development, but “it has really become weaponized as a tool to block unwanted development that can be used by highly organized homeowners, not necessarily for the purpose of protecting the environment,” Schuetz says.

Owens, meanwhile, goes back further to the end of President Lyndon Johnson’s “Great Society” era, which sought to finish the racial and economic justice work that the New Deal left incomplete. Following the Fair Housing Act of 1968, exclusionary zoning became a way for communities to fight off “quote unquote urban blight,” in the ’70s, Owens says—a thinly veiled term for keeping out Black Americans that later became an excuse for all manner of NIMBYism.

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The state’s first major spike in housing costs came along the coast in the ’70s, according to a 2015 report from the California Legislative Analyst’s Office. By the 1980s, Owens argues, the state knew it was a problem, but the “Reagan revolution” was gaining strength by that point, and with it the core belief that localities knew best and shouldn’t accept state oversight on housing.

Not only born in California, Richard Nixon represented the state in Congress as both a representative and a senator before ascending to the presidency in 1969. Nixon’s legacy in housing policy is overshadowed by global economic shifts during his presidency, and his resignation in disgrace as a result of the Watergate scandal. But he marked the beginning of post-New Deal politics, as he explicitly sought to undo the “Great Society” programs of his predecessor Lyndon Johnson, a major believer in Roosevelt-style activist government.

Consider the 1973 housing moratorium. That year, Nixon’s Department of Housing and Urban Development announced that it would freeze all new spending on subsidized low-income housing programs. Essentially, federal funding to build housing was replaced with voucher programs—and with funding eliminated, public housing production for low-income families stalled. The moratorium “morphed into a permanent national anti-public housing policy, severely limiting any new public housing production for very low-income Americans,” Nicholas Bloom, a professor of urban policy and planning at Hunter College, wrote this year, on the moratorium’s 50th anniversary, calling it the first step of today’s housing crisis. “The scale of the federal commitment to low-cost housing has never recovered, canceling out millions of potential units we could use today,” he said.

Enter Ronald Reagan, who was elected governor of California in 1966 and re-elected in 1970 before attaining the U.S. presidency in 1981. The Reagan administration reduced the Department of Housing and Urban Development funding and lessened the Section 8 voucher program, which was authorized by Congress the year following Nixon’s moratorium; some estimate Reagan cut HUD’s funding from $32.2 billion to $7.5 billion, from 1981 to 1988. With that, the private market had very little reason to develop low-income housing. In a 1992 paper written by three Tulane University professors titled, Unhousing the Urban Poor: The Reagan Legacy, they said: “the homelessness problem worsened in the 1980s and the federal response did very little to dampen the trends.” Others have linked Reagan-era housing policies to a rise in homelessness as well.

Andersen described the Nixon-Reagan transition as “among the most liberal presidents of the post-war era, economically…. to the beginning of this conservative regime.” It wasn’t simply an economic regime change that followed Nixon’s resignation, but a shift in the American mindset by Andersen’s account.

Politicians Ronald Reagan (R) and Richard Nixon campaigning. (Photo by Dirck Halstead/Getty Images)

Politicians Ronald Reagan (R) and Richard Nixon campaigning. (Photo by Dirck Halstead/Getty Images)

More than just zoning

California is home to just 12% of the nation’s population, yet it’s also home to 22% of the nation’s homeless population. On any given night in Los Angeles County, an estimated 75,518 people are homeless; in the Bay Area, on any given night, 38,000 people are homeless. “The worst version of this is just widespread homelessness,” Resnikoff says.

The state’s housing crisis is even bigger than its staggering homeless problem. For one, a majority of California’s renters pay more than 30% of their income toward rent, and nearly a third pay more than 50% of their income toward rent, classifying more than three million households as “rent-burdened” and more than one and a half million households as “severely rent-burdened.” With a median rent for all bedrooms and all property types in California close to 40% higher than the national average, it shouldn’t be difficult to understand why homelessness is spiraling out of control in the state—to the extent that it sometimes feels like there’s no way out. Meanwhile, the average home value in California is more than double the nationwide average.

Other states are approaching California’s problem, but “no other state has nearly the level of self-imposed affordability problems as California,” Schuetz says. They’ve followed California’s example, including enthusiastically adopting its zoning. Still, the discretionary process that’s given homeowners, or simply local residents, the power to halt development isn’t unique to California, although it seems to be more prevalent among blue states. While engaging communities on issues started from a good place, Schuetz says it’s “evolved into this process where extremely wealthy homeowners dominate…and poor people, who are supposed to be prioritized, are in fact not a part of that.”

To be sure, California’s government, aware of these failures, has made some progress: easing the building of accessory dwelling units, permitting streamlining for non-market housing, and encouraging more affordable housing developments. Recently, California Governor Gavin Newsom signed 56 bills into law intended to incentivize housing development. “The state government is taking a bigger role and pushing back against just unfettered local authority over land-use,” Schuetz says. But it will take years to see real impact, and upzoning is just the tip of the housing iceberg—the cost of construction, materials, and permitting, all need to come down to promote development.

An aerial view of the downtown skyline and cityscape in January 1975 in Los Angeles, California. (Photo by Ron Eisenberg/Michael Ochs Archives/Getty Images)An aerial view of the downtown skyline and cityscape in January 1975 in Los Angeles, California. (Photo by Ron Eisenberg/Michael Ochs Archives/Getty Images)

An aerial view of the downtown skyline and cityscape in January 1975 in Los Angeles, California. (Photo by Ron Eisenberg/Michael Ochs Archives/Getty Images)

Symptoms of a crisis 

As cities across America have grappled with their own crises of affordability, the Golden State has served as a cautionary tale. No one wants their state to become the next California, and several states are moving to curb what they’ve identified as the problem: local control over land-use. Several states have become “much more acutely aware of this problem of local control,” Fischel says. But to be aware of a failed policy is one thing; to fix it is another thing entirely.

Atlanta, Miami, Tampa, and almost every city in Texas promote themselves as business-friendly, light on regulation, and growth-oriented; in reality, they all have zoning that’s not far off from Los Angeles in the 1990s and will eventually run out of physical room to grow, Armlovich says. Sun Belt boomtowns, whose populations are growing much faster than their housing stock, will need to grapple with multifamily zoning in a way that until recently was confined to coastal regions

Miami, for instance, is contained by the Everglades, a natural urban growth boundary that limits how far it can sprawl. “If they don’t change their zoning now, before they run out of that last bit of sprawl supply, they’re going to become California,” Armlovich says. Miami is already much less affordable than it used to be; its home prices skyrocketed during the pandemic, and so did its rents.

Then there’s Atlanta, which has more restrictive zoning than Los Angeles and has been relatively unchanged for years, despite the metropolitan area adding 66,730 residents between April 2022 and April 2023, bringing the 11-county region’s population to 5.16 million people. Atlanta’s boomtown identity is one that is “at imminent and under-recognized risk,” Armlovich says. “As soon as Atlanta runs out of commutable space on the highways…prices will begin to soar, just as prices soared in Los Angeles after L.A. sprawl hit the limit of the mountains,” he says.

“One by one, more cities will either hit their physical limits,” Armlovich says, or build too far out, and they’ll be in the same spot as California—having to rethink their zoning and land-use regulations, while attempting to regain control from localities.

Rather than maneuvering to avoid California’s fate, other states are now repeating its same mistakes. Arizona’s state senate voted against a bill in March that would have modified current municipal zoning requirements and limited local control. Resnikoff called the measure a critical opportunity to avoid California’s fate—one that Arizona fumbled. In Colorado, a senate bill that would have effectively removed single-family zoning in several cities across the state was amended extensively before being killed; its opponents stressed that local governments were best suited to address the needs of its communities. In January, New York Governor Kathy Hochul unveiled an ambitious plan to build 800,000 new homes in the state over the next decade, but local opposition meant the plan stalled in budget negotiations, and has since been scaled back dramatically.

Roughly five years ago, Minneapolis eliminated single-family zoning; this was part of a plan called Minneapolis 2040. Seventy percent of the city’s residential land allowed only single-family homes, and that changed with this package, which not only eliminated single-family zoning, but also allowed for denser housing near transit, eliminated minimum off-street parking requirements, and increased funding for affordable housing. It was the first city in the country to ban single-family zoning, but recently, a judge ruled (in favor of the plaintiffs: two environmental groups) that the city’s land-use regulation could cause “irreparable harm to the environment.” However, the city is appealing the ruling after being ordered to halt its plan. Still, according to the Minneapolis Fed, the Twin Cities metropolitan area has met its goal to build 18,000 new housing units annually as of last year, and it’s on track for the decade. Not to mention, it has been previously reported that the city is the first to rein in inflation, with a rate falling below the Federal Reserve’s 2% target—partly because it is building lots of housing.

But with the great reshuffle of the last few years, fueled by the pandemic and remote work, more small towns and suburbs are experiencing this California problem of not enough housing for an influx of people. The big question, says Fischel, is whether it’s a temporary phenomenon or a structural change—and if it’s the latter, what America can do to fix it.

After all, the cost of California’s housing suppression is severe, measured in an exploding homeless population, renters who pay the majority of their income for a roof over their head and, increasingly, residents who are leaving the state altogether. There’s also a moral cost, Resnikoff says, putting California’s reality in stark contrast to its espoused progressive values. Turns out,  it’s not actually a welcoming place unless you’re very wealthy.

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