California's housing problems is not going to be solved by increasing population density

For years, virtually all Californians heard one word from political leaders when it got here to solving the state's housing problem: density. Now it's time to ask how this works. Answer: Not so good.

Overall, California issued just 111,221 recent permits last 12 months, a 6% decline from 2022. This included an 8% reduction in single-family home construction permits. Even within the areas with the very best prices, builders applied for fewer permits than before. So Newsom and the Legislature should know that they will pass laws promoting density all they need, but those recent laws won't do much if enough developers don't respond.

The San Francisco-Oakland-Berkeley market, known for its extremely high real estate prices, saw a 32% decline in permits last 12 months, greater than the 6% to 12.3% decline in permits in the various cities within the Los Angeles-Long Beach area. Anaheim Market.

Mid-sized metropolitan areas also experienced permit losses, with permits falling by 17.8% in Oxnard-Ventura and a staggering 43% within the Stockton region. Smaller areas reminiscent of Napa-Sonoma and Santa Maria-Santa Barbara also saw declines. These numbers come from Point2, a national real estate research firm that analyzed information from 384 cities in every state in 2023.

Obviously density doesn't work. One reason for that is that despite persistently high emptiness rates, industrial property owners, mostly real estate investment trusts, are reluctant to convert buildings with rental potential into condos and apartments because employees are still reluctant to return to the office. Renovations would generate numerous one-time income, but not the long-term money flow that comes from high rents.

A key result has been the worsening of California's long-standing housing shortage, which, while expected to drive up prices, has not yet done so on a big scale. If rents – and profits – rise sharply, permits could increase accordingly, but rents are already so high that recent construction suffers from high emptiness rates and few takers. This leads to developers' profits being lower than expected, and so they respond by moving more slowly than before.

Insurance is one other factor. Much has been reported concerning the insurance industry's reluctance to put in writing recent or renewed policies on homes in known or potential wildfire areas. Even when homeowners invest heavily in “hardening” their properties with fireproof cladding, roofing and other measures, insurers remain wary. That's one reason consumer groups at the moment are pushing for a law that might force insurers to cover such homes.

Then there may be density itself as an insurance issue. A California newspaper recently reported on homeowners in San Francisco whose policies are being canceled due to excessive neighborhood density. One affected area is the stylish Noe Valley neighborhood, where classic Victorian-style homes have sat side by side for a long time without major insurance problems.

Suddenly, some homeowners there have been receiving cancellation letters from corporations like Liberty Mutual Insurance, claiming homes were situated “in a region where housing…is too densely concentrated for us to cover.”

In Noe Valley, densely populated for greater than a century, not much has modified aside from the addition of relatively few ADUs (accessory dwelling units or “granny flats”), which a current state law allows for construction with almost no veto power in cities .

These small units represent one of the crucial significant additions to the state's housing stock. But now insurers fear the fires could quickly spread to dense picket structures in some neighborhoods. High renovation costs are one more reason why some insurers are withdrawing from such areas.

So housing density will not be a panacea. It may help ease pressure for brand spanking new units in some places, but not if insurance firms don’t write or renew policies. That means Newsom and his allies like state Sen. Scott Wiener, D-San Francisco, long the state's leading density advocate, can have to adopt a special tactic.

Perhaps now could be the time to incentivize the conversion of office buildings, as that is the safest and fastest approach to create recent housing with minimal impact on the environment and far faster than constructing recent buildings.

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