The Promise and Limits of California’s Housing Reform

- Good afternoon everyone. My name is Richard Green. I am the director of the USC Lusk Center for Real Estate, and this is "Lusk Perspectives". In advance of this year's Casden multifamily conference, which will be taking place on Wednesday, December 3rd, we have a terrific guest who will be participating in that conference, but before I introduce him, let me encourage you to register for it. The registration online closes on November 30th. It is a terrific conference. It will be at the Beverly Hills Hilton this year, and it will be about all things multifamily housing. So, please consider coming and joining us. And with that, let me introduce my friend from UCLA's Lewis Center, Shane Phillips. Shane is very well known for, knowing a lot about housing in California in particular, but also about housing in general, and particularly the rules under which housing has to operate. I'm gonna just list a few of his recent publications and it will give you a flavor of the sorts of stuff he works on. "Modeling Inclusionary Zoning's Impact on Housing Production in Los Angeles: Trade-offs and Policy Implications." "Does Discretion Delay Development? The Impact of Approval Pathways on Multifamily Housing's Time to Permit." "The Future of Housing and Community Development: A California 100 Report on Policies and Future Scenarios." And my favorite title is a piece he wrote in the Atlantic Magazine, "Renting is terrible. Owning is worse." And we will come back and ask him about that title a little later in the podcast. I also-

- Of course, one of the only titles I had nothing to do with.

- Oh, okay well, in the event- But before we get going, I also need to mention that Shane is a, I hope, proud alumnus of the University of Southern California. So, Shane, thank you for very much for being with us today.

- Yeah, glad to be here. I did my undergrad at University of Washington as well, so I've made my way through a lot of the former Pac-12 at this point.

- Yeah, and the late lamented Pac-12. That's another conversation about how I think the Rose Bowl should actually work, but we'll-

- Yeah.

- [Richard] We'll not get into that too much now, so-

- We don't have time, I don't think.

- So, Shane, let me start with- So the thing that's fun about Shane is he is aware of the housing policy levers that have been pulled for good and for ill in California and elsewhere in the country. And I guess I'd like to start the conversation by talking about the slew of bills that have passed, relative to housing where the state of California has told local governments, essentially to knock it off, and stop making it so difficult to build stuff. And I'm gonna say the initial point of that was the 2015 law that basically made ADUs, accessory dwelling units buy right things to build if you had a single family property. So, could you take us a little through sort of the evolution of what's happened since then? And then we'll have a conversation about whether you think it's gonna matter very much and if so when. But let's just set the stage please.

- Sure so, I actually think those ADU laws were, there were two of them, and I think there were 2016, and they went into effect at the beginning of 2017-

- Okay, I think you're right.

- I may be mistaken-

- That's right.

- but around that time. I always like to point out that those laws were not, by any means the first ADU laws in California, the first one at least by, according to a report by California Housing Defense Fund, I think that's their name now. The first ADU law was 1982, and the state passed ADU laws every four or five years, until 2016, none of which really had any impact. And it was only with those 2016 laws that they, they really broke through and, you know, kind of went far enough to have an impact. Since that time, there's been, I mean, I don't really even know how to get through all this. I'm just gonna try to pick some that I think were particularly important. So, the one that I think got actually a lot of people really interested in housing who were not so interested before was SB 827. And that was really the first, the predecessor to SB 79 was just passed a few months ago. And this is a transit oriented Upzoning bill that basically says you have to allow buildings between usually five and eight stories, within a half-mile of rail transit for the most part, and a few very high quality bus services with dedicated lanes. So-

- Like the Orange Line in the San Fernando Valley or the Silver Line.

- Yeah, I think that's like one of the only places where it's valid other than at rail stations. And so, that was 2017, that failed. SB 50 came the next year and tried to fix some of those problems, that failed as well. And really we did not try something as aggressive as that Upzoning bill around transit until 2025. In the meantime though, many, many things were done, many of them very important. So, I think an important one, a really worthwhile one to mention here is SB 828, and I think that was actually the same year as 827, but it did pass. And what it did was say, that cities when estimating how much housing they're gonna need in the future for their regional housing needs assessment arena, which is kind of the first step in the housing element plans that cities have to generate every eight years, to be in compliance with the state. Those estimates of housing need to actually be based on something. And they need to generally be a lot more ambitious than they had been. And so, just illustratively, the city of Los Angeles for its fifth cycle housing element, the arena assessment of how much housing they would need to build over an eight year period was about 82,000 units. And for this sixth cycle, which goes from 2021 to 2029, that increased to about 456,000 units. So it increased eightfold, and that, Los Angeles was not unique in that regard. So, that changed a lot of things going forward about how we had to plan. And, another law that came about a few years later was SB 35, or maybe it's just one year later. And what that did was say, if cities are not meeting those requirements, if they're not actually keeping up with that target, then certain kinds of projects are gonna get approved, they have to be approved by right, with minimal delay without any, you know, you can't really hold them up very easily. And that was mostly limited to, you know, projects that had some affordable component, or even in some cases, they might have to be 50% affordable, which is, you know, really only with subsidized kinds of projects. But those are kind of more planning oriented policies. And I think we can come back maybe and talk about the difference between those kinds of laws and something like SB 79, which just says like, cities, you have to allow this kind of project, rather than giving them more flexibility about planning. There have been some other big ones. So, AB 2097 was the law from I think 2021 or so, that made it- prohibited cities from requiring parking within a half-mile of transit, by and large. there was AB 1482, which I think is a 2019 law that enacted a sort of anti-gouging, a very weak form of rent stabilization and also, eviction protections for most multifamily housing, unless I think it's 10 or 15 years old. There's, what else? Just this year we passed really the first big CEQA reform relevant to infill housing, and that was a really, really big deal. Basically any project under, I think 85 feet tall that is being built on previously developed land is exempt from CEQA because it is just presumed correctly-

- And tell the audience what CEQA is, please.

- Sorry, yes, the California Environmental Quality Act, which is a requirement that cities have to study the environmental impacts of any public project. And because of a whole series of judicial decisions in the past, it was decided that anytime the city is basically making a decision about approving a project, even a fully privately financed multi-family development that is now a public project, and therefore potentially subject to CEQA, and therefore potentially subject to a whole bunch of lawsuits that can slow things down or kill projects entirely. And so, that is just mostly off the table for infill projects, which, you know, if people aren't familiar with that term, that just means projects built in, you know, relatively urban areas on land that's already been developed. It's really just in contrast to if you're building, you know, on agricultural land or something like that. So that was a really big one. Man, there's so many others. Another one I think this year that represents something different is, I actually can't- I think it's AB 253, but this is the permitting, third party permitting review, which allows developers to have a third party, you know, not affiliated with the city, review their projects to receive the permits to begin construction if the city is not able to deliver that, their decision within I think 30 days. And so, that's one that gets into a whole other arena where we're not talking about zoning, we're not talking about affordable housing subsidies, whatever. It's really the process after a project is approved. So, those are some- I guess that's the last one that's really-

- I think that will do us just fine in terms of conversation, going forward-

- I did wanna say there's just been dozens more ADU laws as well. And that's something maybe also we want to talk about, just how effective ADU laws in particular have been relative to the other reforms, and maybe what some of the lessons are from that.

- So that was a really good segue because in fact, the next thing I wanted to talk about was the effectiveness of ADU laws. Now we just put out a report called, SOLACHAN, for State of Los Angeles County Housing and Neighborhoods. And one of the many striking things in that report is, and in a part of the report I didn't write, so I'm permitted to say it striking, is that, the number of ADUs we're building a year in Los Angeles County is roughly quadrupled since before that 2016 law. And there are two very distinct cycles is, as you noted, is, we've kept having to refine ADU laws. And so there was a 2016 law, and then I think the next law was passed at 2020 or 2021, and you saw jumps in ADUs at both of those points. And so LA County went from, building roughly 2,500 ADUs in a year to 10,000 ADUs in a year. So, fourfold. But, I guess I have three questions. One is, does this mean we should be optimistic about some of the more recent stuff that has passed? Two is, and maybe what I'm gonna get at here is reasons to be less optimistic, and one is, some of those just regularized units that were there in the first place. So, I mean, it is a good thing to legalize housing that was illegal, but it doesn't really add to the stock. And third, the ADU is just cannibalizing other houses that otherwise would've been built, so really didn't do much to move the overall needle. So let's start by talking about that, and then we'll get into the likely effectiveness of some of these other reforms we've been talking about.

- Sure. And I think it's worth pointing out too that, I've looked at ADUs just in the city of Los Angeles, and you said it went from about 2,500, to 10,000 in the county.

- Yep.

- In the city, it was under a thousand in, you know, 2016 and earlier. And in the past two years, well, in 2024 it was over 8,000. And in 2025 it's on pace for a little over 8,000. And so it's, you know, octupled, and it represents the vast majority of growth in ADUs even though the city is only 40% of the county by population. But I mean, I think there's positive things and negative things about this. I think the positive things are, it has shown, you know, for one thing that state reform really can work, but it has to be, or at least the lesson I've taken from it, is it has to be pretty simple. You have to make it relatively easy to build. And that's particularly true, more true for ADUs than really anything else because, the people building ADUs are homeowners, they are not developers. They are probably gonna build this one ADU in their life and never build anything again. And so, you can't rely on kind of, institutional knowledge or experience that's been built up over time. You have to make it possible for people who have never done this before to successfully navigate the process. And that means making it, you know, the standards objective, rather than discretionary or subjective. It means minimizing fees and delays from utility connections and things of that nature, and making it as easy as possible to use existing structures which might require changing setback laws or requirements rather, or reducing parking standards. So, I think what makes me hopeful is, we can ideally apply that lesson that we've learned from ADUs, that if you make it straightforward, and simple, and inexpensive, people will actually build these things and bring that up to fourplexes, and eightplexes, and twelveplexes. And I think we would say the same thing if it were similarly easy to build. And I think, those are small enough scale projects that there's no reason they shouldn't be similarly easy to build for the most part. The downside I will say, or the concern is, you know, the biggest one is just that, from what I've seen of surveys of ADU owners, probably only about two thirds of the ADUs are actually occupied by long-term residents. And, some of those are probably just, you know, kids, or parents, or someone, who might have just been living in the main house anyway. And so it's not, it's, as you said, it's still valuable to have that extra space, and you know, a lot of people would rather live in a separate building on the same property than in the same building on the same property as their, you know, different generation of family members. But it's not the same. It's not adding to the housing stock, and allowing household formation and these kinds of things in the same way, as a new multifamily building and all the units in that would, 'cause those units are not gonna be vacant as many ADUs are. So, that's one concern. I have a smaller concern, but one that I think is worth thinking about, which is, when you build an ADU in your backyard, you've increased the value of that property, based on, you know, its current use. And the value to a developer has not changed. You know, they're gonna pay some amount of money for every unit they can build on that property. And, let's say, it's worth a million dollars to a developer and you have a home worth $800,000, and you add an ADU that's worth $400,000, now your property's worth $1.2 million, to someone who just wants to live in it, and if you rent out the other space. The developer still only values it at a million dollars. So whenever you sell that property, instead of it going to a developer, if you only had the single family home, 'cause they're gonna pay more, now it's gonna go to someone who's just gonna live there and occupy those two units, when it might have been, you know, possible to redevelop it into 20, and those would've been a lot more affordable than the single family home in the ADU and it would just be more homes overall, which is important too. So, I really have no idea how big a problem that is, but I do think it's something to at least be aware of.

- Well, so let's talk a little bit about SB 9 then, which I don't think in your recitation of what's happened, you mentioned.

- No.

- It's a law that allows homeowners to subdivide their property and create four units. So, you basically could take your lot, tear down your house, create two lots, and build two main houses and two ADUs, is my understanding of how the law works.

- Really it's, you can build, you can do different things, but I think the main intent was, two lots a duplex on each, but you can use other ADU laws and things to get four units in other configurations, including that one.

- And, it brings home to me a kind of uniquely California problem, which is our property values. And let's not talk about on the coast, okay? Our coastal property values are like Manhattan. But, in this, in our valley, San Fernando Valley, San Gabriel Valley, property values are very high by American standards, but they're not like, San Francisco, Boston, New York property values. And what does that mean? It means that, the economics of tearing down a single family house and replacing it for four units, probably is not there, right? It is, let's say your current house is, you have a single family house and it's all-in worth a million dollars, the land and the property. And you tear it down and you build four apartment buildings or four, two duplexes or something like that. And of course you're gonna get something that's worth more than a million, but you gotta subtract that, the construction cost and when all is said and done, you get like 800,000, and you're gonna say, well, I'm not gonna destroy a million in order to get 800,000. And so, and I think this is very common in a lot of southern California. So, the ADU is, it's easy because you're basically not having to destroy anything you're just adding on. But from the standpoint of redevelopment, what is the point at which it is worth it for people to tear down what's there and put up something new? Does it need to be 20 units or is six units enough? But I don't think we've thought enough about calibrating this given where property values are in Southern California. I'm curious on thoughts about that.

- I have many thoughts on this and I've never fully developed them. I hundred percent agree with that. And, at some level it doesn't entirely make sense to me. It seems to me that even in, you know, let's say central Los Angeles where land values are quite high, they're not Santa Monica high, but they're pretty high. Even there it seems like, if you have a home that's worth a million dollars and the land is more than half of that, it seems intuitively like, a four unit redevelopment would actually make financial sense. But, we basically never see that happen. And, I think part of that is just the high cost of construction, which we kind of tend to-

- And that's addition to the lower residual land value.

- Right, it does, yeah. It does not leave you much for buying that property as land again, you know, when you're competing with other people who just might want to live in it as a single family home. And so, where that line is drawn, one thing I've come to appreciate from the work of Nolan Grey and Jake Wegmann and some others, is the importance of the structure type and tenure. So, I think if you are able to tear down a single family home and replace it with four townhouses that you can buy fee simple, like no condo HOA, no tenancy in common, no complex structure, or financial structure, then people are willing to pay a lot more than that, than-

- Yes they are.

- per month, than you're gonna get from someone who's just gonna rent in that building or in a, just a regular, you know, apartment unit. Even if it's the same size apartment unit, people will just pay more to be owners. And you know, in part for pretty good reason there are lots of tax subsidies. You are getting some forced savings, you know, there's real benefits to that and reasons to do so. So, I think that part matters. I don't know, I mean, this is part of why I've been interested not just in the zoning lately, but things like building code, where, you know, we have rules right now, where in most places in the US, if you want to build one or two unit buildings or town homes, then you're using the international residential code, which is just a US only code, but that's what it's called. But if you're building three units or more, you are using the international building code, which is, you know, the same code for a triplex as for a hundred unit apartment building. The requirements aren't exactly the same, but it does mean that the cost and complexity of building a three unit structure is higher than even a two unit structure that is exactly the same square footage, and dimensions and everything. There's just more things you have to do with sprinklers and all kinds of stuff like that. So, I think, again, this really goes back to construction costs. The lower we can get construction costs, the more it makes sense to do these kinds of smaller scale redevelopments. But we're just a long way from there. If I had to put a number though, I would say in somewhere like Los Angeles, if you were to allow 10 units on any parcel, you would get a lot of redevelopment in many, many places. And part of that is just, you need to, I wrote about this in my zoning buffer, brought up zoning paper from 2022. But, part of the advantage here is, if you were to rezone a very large number of parcels, lots of single family home parcels in Los Angeles, something like 25,000 single family homes sell every year, I think that's the number. And so, even if only 5,000 of those were sold to developers and redeveloped, you'd get 50,000 units, and you know, we've only been permitting around 10,000 multifamily units per year for the past decade. So it would be a huge, huge increase with only a fraction of sales. And the other point that's important there is just that, if you had many, many parcels that allowed that scale of development, the price would be set really by the people buying the single family homes rather than what developers are willing to pay. So developers might actually get some discounts, 'cause they might be willing to pay more, but wouldn't have to, and they could pass along that savings in the form of lower cost housing.

- So you bring up a point about people being more willing to buy than rent, or that stuff is more valuable under owner occupancy. And you talk about the tax code and I think there's something to be said for that, although, for most people now, the mortgage interest deduction is irrelevant. Only about 10% of homeowners take it. There is the benefit of non-taxation of imputed rent. But again, early on you don't have a lot of equity, so that's not a big deal. And Bill Wheaton points out on the rental side, basically the depreciation deduction is an enormous subsidy for owners of rental housing. So you don't get taxed all that much on if you're an owner of rental housing anyway. But, and so you say, okay, so why don't we do- but you see very few condos being built in California and what developers have told me, and I don't know if you could help with this conversation or not, but, it's the way liability is set up for condominium development in California. Have you given any thought to that? Do you think it's just complaining which developers tend to do, or do you think there's some legitimacy to what they're saying about that?

- No, I think there's no question it's legitimate. You know, you could debate whether it's that issue or something else. But the Terner Center had a good report on this a few years ago about construction defect liability and how it affects condos. And one stat that stuck with me was, that over the past, let's say 10 years, 40% of the units in buildings with five units or more that were built in Canada, are condos. They're owner occupied. 3% in California are owner occupied. And so, you know, more than a tenfold difference. So, there's clearly something going on here. California is not actually all that unique in this regard. The construction defect liability laws are problematic in many places. I know Washington is one. And that same report talks about some other states and parts of Canada that do things a little differently. It's not that they don't have this construction defect liability, and maybe we should define what that means a little bit-

- Yeah, I was just gonna ask you, tell us a little bit about what you mean when you say that.

- It is essentially a, I can't recall the whole history of how this occurred. I will say, I'll make a pitch for our podcast, "UCLA Housing Voice", because this is gonna be the topic of an episode coming out in a month or so.

- Okay.

- We recorded it a long time ago, but-

- we'll have a, when it comes out, we will provide a link to it that's associated with this podcast. And I don't know if you remember, but I came on your podcast a couple years.

- I do indeed.

- So that's why I felt that I had leave to have on mine.

- Yeah so, I guess without getting into the whole history, 'cause I'm not an all an expert on it, it's really a way of giving homeowners some comfort, some security against shoddy developers or contractors who don't do a good job and cut corners, and then leave the, you know, the owner, the buyer of the condo with the liability for that down the road. And so, the way that it works in California and is similar in many places, is essentially, you have the right to sue the contractor or developer for damages within 10 years of construction. And that's, you know, doesn't sound so bad, but in practice it has just evolved into this system where every condo building sues the developer at the end of 10 years. And not only that, but they are encouraged by the lawyers, and maybe this is not the lawyer's fault so much as just how the law is written, but they're encouraged to not really fix anything and let these problems fester and accumulate until that, you know, 10 years is just about up and then sue for as much as possible. And, so rather than having these things fixed, as, you know, they pop up, when the cost might also be lower, you just have this, you know, huge cost at the end. Plus there's, you know, just a very large share that just goes to the lawyers themselves, rather than to the building and fixing it. So, I mean, this has become such a problem now, just in the past few years that, some banks are not lending to these buildings, if they're coming up on that period, because they don't want to, you know, it puts the residents and everyone in a really difficult position. And so, there's a real need to fix it. the Terner Center did a follow-up report on this trying to estimate the cost, and I think they put it around 3 to 4% of project costs. And you know, that may not sound like a lot, but, when you've already got higher costs associated with subdivision and you have to build to a higher standard for condos, oftentimes, and, you know, there's just a lot of things going on with condos. So, this is not the only thing, but it's just like one more, you know, one more straw on the camel's back, and it is a pretty significant cost that, other cities, other states, other countries have shown can be done better. There's a way of balancing these things a little better through things like mediation or arbitration, through more pooling of risk rather than having everything be a single, you know, every individual building, kind of going on its own. So, it is a really big issue.

- So I could you tell a little bit more about, I guess you talked about pooling risk and so on, but I guess to me the 10 year number, seems a little excessive. I mean, if you're gonna have construction defects, does it really take 10 years for them to show up or could, you know-

- Right, right.

- three or four or something.

- One of the-

- I think nobody's gonna argue with the idea of consumer protection for something as important as a house. And there is in fact the history of the United States of shoddy development practices. So it's easy to imagine how these laws came about, but that doesn't mean that 10 years is the optimal number.

- Right. And in one of the recommendations, which I think is the practice in, it might be Wisconsin, or I forget the state. I'm sure this is true in multiple places, but they will have different statutes of limitation or whatever you would call it, for different kinds of issues. So, like a structural issue, it might actually be a 10 year term, because that's the kind of thing that just might not reveal itself very quickly. Something like the Millennium Tower, whatever it's called in San Francisco that's sinking and like tilting.

- Yes, the footings are not appropriate, yes.

- You might not see that for five years. and I don't know how long it took, but, you don't want to let people off the hook entirely. But if it's something to do with like, paint or leaky windows, that's gonna reveal itself within a few years at most, if it's ever gonna be a problem. And so, having shorter terms for these you know, these less serious problems is one part of the solution to this I think.

- So you hit upon differences between us, and Europe, and Canada with respect to condo laws. But it prompts the thought is, the way we organize our rental market is very different from what you see in Europe and Asia, maybe not so different from Canada. And that you don't have large institutional ownership of buildings. And in Europe and in Asia, the rental market is basically, somebody will buy a unit, a flat, and then rent it out to somebody. And so it's all mom and pop.

- Yeah. And in the United-

- I learned from Paavo at UCLA, a professor here, in his, you know, studying social housing in France that, the developers there are required to sell either to, I think you can sell to a social housing landlord, but otherwise it's just you have to sell to individual owners. They're not allowed to also be landlords essentially.

- Yeah so let's talk about that is, do you think the ownership model here in any way contributes to the problems we have, or does it ameliorate the problems we have is, you know, it is, there's a lot out in the atmosphere about how corporate ownership of housing is a problem. And you do have these countries where it's pretty limited if it exists at all. There's a little of it in the UK, but not very much. Do you have some thoughts on that? What is the best way to own the rental housing stock?

- I mean, I do think there's some value in that more European approach. One thing I recall thinking when talking to Paavo and another of our guests about France's system was just how it might actually help with the NIMBY problem to some extent. If the owners of these homes and the people profiting ultimately from rentals are thought of as just kind of regular people, investing their savings, or you know, for retirement, that kind of thing. And I think this is true in Japan as well, and Japan is of course famously very pro-housing. So, I don't mean to imply that this is the only thing or even the main thing, but I think there's some advantage there. I think it was brought up to me, actually, when we talked to and I'm blanking on our other guests for that conversation, but it was about condos and gentrification. We talked a little bit about this, like why is it that Canada bills many more, was it Robert Margot, I think that's it.

- Why is it that Canada builds so many, such a higher share of condos than us and Jake Wegmann, who also listens, reached out and suggested it might actually be something to do with our, just the number of institutional investors here and their need to do something with that money and specifically to do something that is sort of, relatively stable and, you know, not high yield, not high risk, and rentals are a pretty good place to put your money for that kind of thing. On the other hand, I definitely feel like, you hear, you know, something you hear in Canada all the time is, they have a problem of not building enough rental housing. Like, and they actually have a term, that we just don't have in the United States, called purpose-built rental housing.

- Yes.

- Meaning housing that is built to be rented, not to be sold to, you know, as condos to individual owners who then might rent it if they choose to, and many do. So, I think they've kind of swung too far in the other direction, and we just need to find some happy medium between these two extremes.

- Well just, 'cause a couple thing. One is, there is such a thing of economies of scale, both in construction and in management of property, right? So-

- I've wondered how these properties are managed at the, you know, in these other countries if it's- It seems extremely inefficient.

- Well, I have a sense in Italy, which is, and this may be dated, 'cause this is stuff I was reading about 20 years ago, but in Italy, basically if you're a tenant, you manage your own property. If you wait for the landlord to fix stuff, it's not gonna get fixed. But they have very tenant friendly rental laws in Italy. So it's almost like you share in the fee simple interest if you're a tenant, which means if your stove breaks, guess what? If you want a new stove, if you don't wanna wait weeks or months for a new stove, you go and buy one for yourself.

- Yeah, yeah. When the median tenure is two years or whatever it is in the US, the idea of like fixing your own stuff and improving your unit is not that appealing. But if the normal, the average person staying there 10 or 20 years is a different story.

- No, it actually seems pretty compelling to me that, if you own a thousand units in a market, you can have your own plumbing staff, your own electrician, and stuff goes wrong, it's just very easy to take care of it. Whereas if you're a one-off, I mean, I was a landlord for a while, a one-off landlord, and it's a pain to deal with. I mean, we did it, 'cause we wanted to be good landlords, but, it's hard, right? You don't have a plumber on staff. You gotta find a plumber to go and deal with it, or you go over yourself and try to deal with it. And so it seems to me that, well two elements. One is, in the construction, I mean, there is market segmentation, right? We know that when people build condos, when developers build condos, they tend to use nicer finishes, higher quality appliances and so on. And that's fine, but if you wanna have a less expensive place for people to live, you're gonna use lower quality materials. And our apartment buildings tend to be built out of lower quality materials. People complain about them being banal, but banal creates, at least less cost in delivery. And again-

- And there's an incentive from the landlord's perspective, not just to reduce the cost, but if you don't own the place, you're probably not gonna take as good care of it on average, the typical person, and so, they get damaged more quickly. And so, you're probably gonna have to replace it more often than, you know, someone who owned the place. And again, that's another reason to go with lower costs as well.

- So I love talking about, you mentioned Japan as being a pro-housing place, and I do like to talk about Japan, but there's a trade off they've made in order to make their housing less expensive, which is they build lower quality housing. And, the typical life expectancy of a house in Japan is less than 30 years.

- Although from my understanding, that is changing pretty rapidly now-

- Okay, all right.

- as quality increases.

- Okay.

- But yeah, that has historically been the practice for-

- And well, and the other thing is, even if you go to a luxury condo in a nice neighborhood in Tokyo, it is, I mean, let me put it, the walls are thinner than you're gonna find in the US. I mean, I guess what I'm getting at is did we build a too high a standard for our standard house in the US? Is that contributing to our cost of housing problem, do you think?

- I think, probably yes. You know, it's a uncomfortable thing to say at some level-

- It is uncomfortable.

- So I'm gonna back you on this one so that we can be uncomfortable together.

- Yeah, actually the next episode we have coming out on the podcast is with Benjamin Schneider, and we're talking about his book, "The Unfinished Metropolis". And the specific reason I had him come on was because he had written this article a month or two ago, that was about Edith Elmer Wood, who, 106 years ago wrote a book about housing, the unskilled wage earner or something along those lines. And she was expressing these concerns when all the tenement laws were coming up and, you know, people were trying to solve real, like, real problems with hygiene and fire safety and so forth, in extremely crowded and poorly built multifamily housing in places like New York City. And, even then she was, you know, extremely supportive of these changes, but also recognized correctly, prophetically really that, if we were going to increase standards significantly, then we were either going to have to provide some kind of subsidy so people could afford it, or we were gonna have what she called house famines. And mostly we went with, we chose the latter as a country. We, very significantly increased standards. And again, that's all well and good, most people would like that. But, if it's a decision between having, you know, a Tokyo quality house or apartment or, you know, having to live 30 miles further away from your job in a place you can actually afford, or not being able to afford anything, or, you know, whatever. I think a lot of people would at least like the choice to have the lower quality place that they can actually afford, rather than have to live with roommates or much further away. And, you know, this is the story in particular of a Single Room Occupancy hotels, SROs, that we converted or demolished something like a million or more of. These are just, you know, individual rooms people could rent at very low cost, often, you know, shared bathroom and kitchen facilities on a whole floor maybe. This is the era, and we had lots of boarding houses and flop houses and all these different options that, you know, were violated people's sensibilities about the way people should live. But, they were also a housing of last resort for many people, preventing them from becoming homeless, allowing them to live close to work where they couldn't otherwise afford to. And if we had just given everyone enough money to live in a much nicer house, then I wouldn't have any problem with making those options illegal. But we didn't do that. We just made them illegal, and then, kind of wished people well. And the result was a lot of people's lives were unfortunately a lot worse off. And, you know, it's kind of the birth of modern homelessness among other things.

- Well, I mean, I don't think anyone thinks the New York City tenements were okay and I-

- Yeah, no.

- No, it is- It's absurd to suggest we should permit people to live in housing that is that unsanitary, unsafe, un-light-filled. I mean, but I think about, and I actually got into trouble with someone I had a lot of respect for, a couple months ago for advocating the idea that we look back at the Levittown house, that quality of construction, and it just had certain features. Like there was only one outlet per room in those houses. And now you have to build an outlet over so many feet. And this guy said, well, you know, we have modern appliances now, but we could actually build outlet. Those outlets could be very robust, the individual ones, but every time you punch a hole in the wall and put a new one in, it adds to cost.

- Right.

- And so it's a tough trade off. Now, on the other hand, I think the point you made about unwillingness to spend is very striking. A place that does house its people very well is Singapore, but they spend a lot, their government spends a lot of money to do it. They spend about 1% of GDP to do it. If we spent 1% of our GDP on housing subsidies, it would be about $300 billion a year. And guess what, that would be enough to make sure no one pays more than 30% of their income in rent. It would be enough if we spent that. We're spending a, I don't know what the current budget is, actually I should, but we were spending in the neighborhood of 60 to 70 billion, so not remotely close to enough. And so, yeah, I also wanna get-

- That's just for like low income housing tax credit and housing vouchers-

- And Section 8, yeah.

- And other things.

- Yeah, yeah. But I also wanna, you know, point you made about, so people living a long way away so they can afford it, but if they're living a long way away, can they really afford it? And what's the right way to think about what's affordable? Because if you're driving 50 miles from the Antelope Valley and the San Fernando Valley to go to work, and it's 60 cents a mile to drive your car, that's a lot of money. Even if you're now only coming in three days a week. And of course if you're a service worker, you're coming in five days a week. And so should we be rethinking this whole thing about affordability, to take into account the cost of living in a specific location, relative to another location?

- We definitely should, and I know that's been a focus of many people for quite a while. The Center for Neighborhood Transit, CNT has had the Housing plus Transportation Index that tries to estimate, you know, the share of income that goes to housing and the share of income that goes to transportation for every census tract. And what you see is the share that goes to housing is much higher in central areas. And the share that goes to transit is much higher as you get further out. And when you add the two together, it's actually pretty stable across, you know, from the center to the suburbs, and even rural areas, sometimes-

- Urban economics works.

- Yeah. People tend to sort themselves out along those lines. But, you know, I think one, this is why I mentioned roommates or moving further away, 'cause I think those are sort of, you can reduce your housing costs without having to change your transportation costs that much if you get roommates. The housing cost I guess goes up a little bit because you're having to get a bigger space. But that's one option. I think, what you might see with people who move further out is, they, you know, might take the bus for example, because for a lot of people it's probably easier to spend their own time than increase their income. And so, spending four hours a day on the bus is hell, but it is a way of reducing your transportation costs pretty dramatically, and keeping, you know, your income for whatever else you need it for. So I think those kinds of things are, you know, you might just take fewer trips around the neighborhood as well, or try to consolidate them, and maybe the commute is the one thing that you're doing consistently. So, but yeah, you know, to your broader point, I think we really need to be more aware of that. And even taking this all the way back to ownership, I think it's really overlooked how if you can afford to spend more, to buy a more central urban place that allows you to take transit or walk or bike more frequently and spend less on a car, then you're putting that money into something that is probably appreciating in value, and that you're paying the principle down on, as opposed to spending hundreds of dollars every month on gas, and hundreds more on insurance, and hundreds more on, you know, your loan for the car. So, I think all those things are also important to keep in mind, and we really tend to overlook that in particular.

- You know, I think it is interesting social norms because, roughly 10, 15 years ago we had a bunch of co-living companies pop up, and their idea was basically to build pretty nice apartments but with shared kitchens, et cetera. And from what I could tell, they didn't work all that well. I don't mean that the buildings weren't good. I meant that financially that they couldn't get people to pay the rent in order to do that. And it is, I don't know, it's like we are so affluent as a society that the expectation is, that you just don't live that way anymore.

- Yeah. And you know, I think it's also important to say that, those homes, because they're newer buildings, they're gonna be pretty expensive. And so they're marketed at relatively higher income people. And the SROs and boarding houses of the past were mostly for lower income people. And they were, you know, to some extent maybe new-ish buildings that had just been thrown together really poorly. But probably a lot of them were just older buildings too that had kind of filtered down over time, and, you know, been converted to that use. And, you know, maybe that's a little bit more of what we need, is converting some of these older buildings to more of a co-living structure. But, but I agree, I think there's a, you know, despite the fact that most evidence suggests, it makes us less happy to be more atomized and alone all the time. When people have money, they really do vote with their feet and tend to wall themselves off, you know, as much as possible and get as much space for themselves as they can. And I'm certainly guilty of this as well.

- Well, you know, the other thing is when people have money, this comes back to the transportation, what they do is they buy a car. So, at UCLA, even before COVID, ridership was down on LA Metro. And sort of the good news is, what was going on is the wages among lower income people in Los Angeles were rising pretty rapidly. And the bad news, I mean, good for them.

- They're using it to buy cars.

- What do poor people do in LA as soon as they have some money, they buy a car. And so that's the other thing is-

- And having a car, you know, my our faculty director Evelyn Blumenberg's work has really shown this, like, having a car, especially in a place like Los Angeles and even more so in less dense cities and suburbs is extremely important for your economic mobility, and ability to earn money. And it's really challenging to keep a job and, you know, move upward and so forth, and have that flexibility in your career if you don't have a car in a place that pretty much demands it.

- So, we're talking about a world in which, okay, let's imagine a world where, you can redevelop your single family lots into 10 unit buildings. Okay. That world, cars don't work in that world, right.

- Eventually, yeah, once we get to a certain density, it's too much.

- It's too much.

- And you can't build a bunch of parking on all those sites, 'cause there's not room for it.

- Right. So, how to, and this is not a rhetorical question, but, is there an example of a place that has made the transition from a car dependent to a transit based city? And I think for LA to solve its housing problem, it also is gonna have to do that.

- Yeah.

- But I think that's a really hard thing to do. And so, can you think of a place that's managed to do it?

- I am terrible at these, kind of, tell me the place I should look to questions. But the first thing that does come to mind actually is, because I think part of the transition has to be making an extremely effective bus network. And one of the first steps in that has to be dedicated lanes so that people who don't drive, choose not to drive, can't drive, can't afford to drive, have an alternative to congestion. There's just, you know, the only ways to reduce congestion in a place as dense as Los Angeles are price the roads, or give people an alternative to it. And that means, dedicated right of way, basically. So, I think, and that's something you can do almost immediately, whereas if this is all dependent on building out a rail network that touches every corner of the county, then, you know, we're looking at something 30, 40 years away. So, and I don't think that's our timeline, hopefully. So, I think that is the vision for me, what we should really be prioritizing, at the same time-

- John Cain is smiling down on you, right?

- But I, you know, and it's not to say we shouldn't build rail, we shouldn't do other things, but I just think that's like, low cost, extremely effective, would make a huge difference. And part of what has, you know, influenced my views on this, and I apologize that it's been so long, I cannot at all remember who did this work. It might be familiar to you, but, shoot, it's looking at per capita transit ridership in different parts of North America. And the finding is just that, it is so much higher in Canada than the US with the exception of New York City, despite the fact that Canadian cities mostly do not have very good rail networks, they just have a lot of bus service. They don't even really have a lot of bus lanes, they just have frequent service that covers many, many places. I think Toronto is kind of the exemplar here, but that kind of thing can really, really make a difference. If, you know, you think about what it's like to get around in Los Angeles, a lot of times a day driving is, you know, I should put it the other way, taking the bus is two or three times as slow. It takes two or three times as long if not more as taking a car. But if you were able to bypass traffic, they would be much closer to parity at many times of the day. And people would happily choose that option if they didn't have to deal with parking at the end of it, they didn't have to deal with the cost of driving. It allowed them to live somewhere, where they didn't have to park their car and pay the extra cost of the parking structure, or monthly pass or whatever. So I think that is, if we're serious about building the housing we need, not choking the city with more cars, then buses have to be the priority. The last thing I'll say on this is just, I almost wanna write like a, I don't know if it's a book or something much shorter about this, but, my, sort of, vision for how we plan cities is, what are the choices we would need to make so that as we grow things work better rather than working worse, and transit is really at the heart of that. When you have more people and more density transit works better, because it just supports more ridership and you can build more in those areas, which just further supports ridership, and you get more fares that, you know, it's just a virtuous cycle whereas cars are exactly the opposite. And so I think that's like the question we just, we need to ask, and at every turn really for cities like Los Angeles.

- So it's- I say that's sort of interesting to me is, and I just came back from there, is Chicago, because in the city of- So suburban Chicago has probably amongst the worst transit of any place in America. I mean it might as well be Phoenix. But the city, within the city limits of Chicago, you have really good both rail and bus transit. And one of the things I noticed this time that I think makes a really big difference in terms of the appeal, is when you get on the train at O'Hare airport, you could now see this army of people who are cleaning the cars is they come in and go out. So they're also pleasant to be on. But I think, you know, I guess it's fashionable to put down Chicago right now, but it seems to me that they actually do a pretty good job within the city of moving people around, and again, allowing people these options to live in, these very, sort of, amenity rich neighborhoods without a car.

- Yeah, yeah. I think you're right that, between the, I think the CTA and the Metra, which is the local transit system, and the commuter rail, it covers a lot of ground, especially within the city itself. And so you can get to, from many places, to many places, which is, you know, is valuable in its own right. Where it's not entirely reliant on, you know, you have to go downtown to get to any other neighborhood, which is true of many transit systems. I mean I've only been to Chicago two or three times, but I've loved the times I spent there. It's really only been in the core. And the one time I had to go out to the suburbs was because I had lost my debit card and had to go up to like Evanston or something to the nearest bank that would actually fix my problem. That was not so fun taking the bus all the way up there. But I mean, I think it's a beautiful city and you know, I know it has its problems, but it really is one of the few places in the country where you can have a truly urban lifestyle, and comfortably live without a car.

- Yep, and afford the housing.

- Yes, yeah. Which is, I can't really say that that's because they're doing anything right. It's just, you know, their population is still well below its peak and, you know, it's not like Detroit or something, which has lost more than half of its population. But, there's a demand element to that, even more so than supply I think.

- You know, that, it really helps is- I've talked to the people in Vienna about their housing, which people look at as a paragon, but what they told me is, when Vienna's population was shrinking and it basically shrunk between the end of World War II, and about 20 years ago, housing was easy to deal with.

- Yeah.

- And, but now it's become a very popular place and people are moving there, and now they're starting to face the same problems that everybody else does, so-

- Yeah, yeah.

- So, you wanna be a place that people wanna live, but that makes it hard to do housing rent.

- As soon as you succeed, then you have to deal with the fact that people wanna live there, and people wanna move there. I always, like, I always say though, that, you know, it's much better than the alternative. You would much rather be the place where people wanna live than the people where people don't, and they're leaving because, you can harness demand, you can turn that into better things, new amenities for your community. If people are leaving, there's very little that can be done.

- So, let's finish with, I just, 'cause the title is so, even if it wasn't your title, the Atlantic piece, "Renting is terrible. Owning is worse." Tell us about that.

- So, there's sort of two elements of that. Well, I'll focus on the report that has followed from this, it's actually coming out in, within a month, and it's been three years in the making, but it was funded by the Chan Zuckerberg Initiative. And I think what motivated me to write that article and a blog post that preceded it was, just this feeling that, I didn't love how much we focus on home ownership in this country, and how that feels like, for, you know, for me and for many people, the only way to build meaningful wealth here, just our, you know, safety net is so oriented around you gotta own a home, and have that as your nest egg. And, I just felt like, what if renting could somehow at least help you to build wealth? You wouldn't necessarily expect it to do the same as ownership, because ownership involves a lot more risk as well. And so, you know, you would expect higher returns because you also bear the risk of losing everything. But, which is another reason that we shouldn't force everyone to buy a home if they want security, 'cause it's actually not that secure in many places at many times. And so, I was thinking, you know, what would it take to make it so that renting built some wealth? And the idea I came up with, I don't even know if that article really gets into it, 'cause it's evolved over time. But my thinking has evolved to believing that something like the FHA loan that is available to homeowners, could be provided to landlords and developers of multifamily rental housing, to essentially very significantly reduce the amount of equity they have to put into a project. And equity is the kind of upfront, early investment that is gonna require a higher return on investment, with the rest of the funding for the project coming from debt, from a loan, from a bank usually, that's gonna be lower interest. And so, you're able to, essentially, you know, the same amount of profit on a project, same dollar amount, say a project earns a million dollars in profit. If I only have to put $50,000 or $500,000 into that project instead of 3 million, then I'm earning a much higher return on my investment from making that smaller equity contribution. And that in theory leaves some money aside that I could give to the tenants, just by nature of living there. And that's really the heart of the idea for me.

- But then it's also a riskier investment.

- For who?

- For the developer.

- Just, in so far as like if you are, you could go underwater easily and-

- Yes.

- Yeah.

- Well it's, I mean, levered investments are always- so, think about it this way is, suppose I buy with equity and there's a 50% chance that my value goes up 20%, and a 50% chance that it goes down 10%.

- Yeah.

- Okay. So, on average I'm ahead, what 50% times 20 is 10, 50% times minus 10 is 5. So, 5% net return, right? If I borrow 90% of that, at 3% interest, okay, my average return is going to be higher than that 5% for the reasons that you just gave. But if I draw that 50% negative, 10% in value, I'm completely wiped out, as opposed to losing only 10% of my money. And so, you know, this is for every benefit you get from leverage, there is this cost of the greater risk that you're taking on. And the way that would flow through the tenant is, well if there's no, if they lose everything, I mean, is the tenant held harmless? I guess that could be how you set it up.

- Yeah, yeah, but then that's the idea with the proposal that we've come up with. But you're right, I mean there is, it is always possible that, you know, they rent, and another kind of key idea here is, you don't want the tenants paying more to live in this housing than similar, multifamily, kind of rented traditionally where they're not building wealth, but there is gonna be pressure to charge more, 'cause like, a tenant would pay more, 'cause if they think they're gonna get something back.

- Get some offset, yeah.

- Yeah but the idea is, the worst that could happen is, they're paying the rents they would anyway, and they get nothing. So it's no different than living in a traditional rental. There's lots of, you know, assumptions that go into that. And you know, one thing we've realized is, even if this were possible, or one thing that would have to happen to make it possible is you would have to get SEC approval, in the same way as condos-

- Sure.

- were not legal. They were considered, you know, something that only an accredited investor could buy until the sixties, or whenever when the SEC said, no, this is more like buying a regular house. And so that kind of thing would have to change too. There's a lot of assumptions, there's risks. I think there's also upside for sure. You know, one thing that I emphasize is, if you have more kind of a sponsor led project, instead of the investors taking the bulk of the equity contribution, then, the sponsor becomes the one who's getting the first tranche of that waterfall of returns, and not having to wait until you achieve some, you know, the 10% return or whatever it takes to get into that second tranche. So I know we're getting deep in the weeds here, but there's also just, you know, there's the reputational benefit of like, a lot of people, I think would, especially if it did not make them worse off, if it was not making, if they didn't have to take a hit to their profits, a lot of people would very happily do something like this where it allowed them to actually build wealth for renters rather than just offer a product. That is valuable, but, you know, is not helping people get ahead in the same way.

- Well, I guess the key thing to think about it, because if it's an FHA loan it's effectively is a subsidy from the government, right? They ensuring the risk. And so, if you set this up properly, both the developer and the tenant could split the benefit from that subsidy. Right, so-

- Yeah.

- Anyway, Shane Phillips always a pleasure to talk to you. Thank you for spending some time this afternoon with us. I just wanna remind everybody again that Shane will be with us for the Casden Multifamily Conference on Wednesday, December 3rd. Again, online registration closes on November 30th. There will be walk-ins available, but there are gonna be a lot more expensive if you walk in, because we need to plan. And so, register by the 30th, you'll save some money. And, this is "Lusk Perspectives".