Issues: Affordable Housing

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The free-market fix:
With more supply, housing crisis disappears

January 22, 2006

The stunning jump in California housing prices in recent years may have enriched homeowners, but it has a huge downside. When starter homes cost $400,000, homeownership can seem an impossible dream. Many people, especially new college graduates looking to start careers, have had to leave the state or accept awful commutes.

This is why it is such good news that San Diego's once-red-hot housing market has cooled. In 2005, median housing prices countywide went up 7.6 percent, to $494,000 – just a third of the 2004 increase. Late in the year, some data indicated the market was essentially flat.

What's behind this change? Basic economics. For all the readiness to treat the housing boom as a mysterious phenomenon, supply and demand explain it all. California is a great place to live. Hundreds of thousands of people move here every year. But construction of new housing isn't keeping up, so prices surge.

In San Diego, however, unlike other counties where home prices keep skyrocketing, many thousands of new for-sale units recently have come onto the market – thanks to the conversions of apartment buildings into condos that are the bete noire of City Attorney Michael Aguirre and a few activists. Having more starter homes has had a domino effect keeping down prices of all home categories.

Of course, the arguments of condo-conversion foes who worry about displaced renters never held up from the start. There is no shortage of rental units; 17,000-plus are vacant in the San Diego area. Nor have rents soared due to conversions. As of December, the average rent for a two-bedroom apartment in the city ($1,158) and the county ($1,107) was only up about 5 percent over a year earlier, the San Diego County Apartment Association reports.

This is not to deny the obvious: The cost of housing in California is extreme, both for renters and buyers. But it is just as obvious that 40 years of government-led efforts to develop "affordable housing" here and nationally have done little good. So what can be done?

This too is obvious: Make it easier to build new housing. Revamp the costly, difficult regulatory process. Make rezoning much easier. Most of all, do something about California's crazy tax system, under which cities must rely on sales taxes for revenue and thus crave retailers and shun home builders.

Why? Because "if the land is available and there's a profit (in building apartments and homes), the market will fill the need," says Steve Frates of the Rose Institute of State and Local Government in Claremont.

Unfortunately, too many people still think bureaucrats can solve this problem. Many also hate growth but can't grasp that their opposition helps make housing so expensive. But if these folks really cared about poor families struggling to pay the rent or young adults being forced to leave their beloved California, then they should welcome an assault on the housing status quo.

The free market is the engine that made America the richest nation on Earth. If unfettered, it can solve California's housing crisis. Let's give it a chance.

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