Barriers to Prosperity: How Housing Bans Harm California’s Middle-Income Households

June 09, 2022
CAY - Middle Income Housing

Middle-income households in California face a critical dearth of housing options, increasingly squeezed by the rising costs of housing on the private market and limited resources from the public sector. A new study by Garcia et al. (2022) at the UC Berkeley Terner Center for Housing Innovation explores these problems in detail and proposes several policy solutions. Key takeaways:

  1. As housing prices continue to rise faster than incomes, housing security is increasingly a luxury for the wealthy in California. In 2019, over a third of Californians earning between 80-120 percent of their region’s area median income (AMI) were paying over 30 percent of their income on housing, and 10 percent paid over half of their income. 
  2. Fewer homes are being built for low and middle-income Californians with growing cost burdens: “While [homes for] very-low and low-income categories are the most underbuilt … only 40 percent of units targeted at those earning 80–120 percent of AMI have been built.”
  3. Building on the progress of Senate Bill 9 (2021), California cities can tackle the rising costs of development and lack of housing inventory by encouraging lower-cost multifamily housing with land use and zoning reforms.

The middle class is no longer a clear path to prosperity and material security in California, due to its severe housing shortage. Who is California’s middle class and how does it fare in California’s housing market? This study examines just how badly middle-income households are squeezed in the Golden State. First, it’s worth unpacking the definitions of middle-income households: “​​Households earning close to the median are statistically in the middle part of the income distribution, and so researchers commonly refer to households with incomes between 80 and 120 percent of AMI as ‘middle-income’ households,” Garcia et al. explain. “But this calculation often differs from the programmatic thresholds used by government agencies, which are adjusted to account for household size and housing market conditions.” 

In California, both state and federal agencies adjust their “moderate-income” thresholds (or “middle income” in some cases) according to varying household sizes and local housing market conditions; 39 percent of households in the middle-income tier were defined as “cost-burdened” in 2019, paying over 30 percent of their income for housing. (Overall, 53 percent of renters were cost-burdened, compared to 29 percent of homeowners.)

For a full 10 percent of middle-income households, their incomes did not spare them from the “severe” cost burden, paying over half of their income in rent or mortgage payments. Meanwhile, new home building has slowed and prices for “entry-level” homes for first-time homebuyers have soared, placing further strain on the rental market with more households still trying to save up for their first down payment.  California’s middle class is a growing population, with scarce housing available – a shortage less acute, but no less inequitable than the shortage of housing for lower-income households. As Garcia et al. explain: “HCD estimates that the state needs to build more than 2.5 million new homes by 2030 to meet projected needs— approximately 312,500 units per year. 

Since 2010, California has only built an average of 87,000 units per year, less than one-third of this goal.” In the last statewide Regional Housing Needs Allocation (RHNA) cycle from 2014-2022, only 40 percent of new homes projected for middle-income household needs were built. Before the passage of Senate Bill 9, which enabled duplexes and lot splits on many single-family residential parcels statewide, 75 percent of residential land in California prohibited multifamily housing. Higher land and development costs and low supply add hundreds of thousands of dollars to the price of “entry-level” homes.

Some cities have taken steps to address this aspect of the housing crisis seriously. The researchers profiled regional and city planners for four cities: Woodland, Rocklin, Irvine, and San Jose. These have a wide range of both incomes and housing costs. In each case study, land use reforms that enabled smaller lots and/or “missing middle” multifamily housing types such as duplexes saw increased production of homes affordable to middle-income households.

In Woodland, a specific area plan recently enabled single-family homes on smaller lots, while the city also saw more lots being subdivided. Additionally, the city “sought to reduce zoning constraints for infill development by reducing parking requirements, establishing higher-density mixed-use zones, and entitlement streamlining” with ministerial approval in a 2020 city ordinance. 

While some new condos for middle-income homebuyers were built as a result, planning officials also reported that “smaller, local developers that are committed to building multifamily infill developments still struggle to make their projects pencil out.” In general, these small developers faced “additional costs associated with the complexities of infill development,” often requesting technical assistance and reductions in development impact fees.

Rocklin, in the mostly rural Placer County, actually exceeded its moderate-income RHNA housing production targets. While insufficient funding is still a major challenge for low- and very low-income housing production, land use reforms have improved the odds for Rocklin’s middle-income households (for comparison, earning roughly half of the median of San Jose). Rezonings to allow for smaller lots and also enabled more single-family homes to be built with smaller yards, for households who could only afford smaller parcels of land.

In San Jose and Irvine, households with much higher median incomes face substantially higher land prices and cost burdens. Irvine still managed to build more housing for 80-120 percent AMI targets thanks to “large parcels of vacant land and a commitment to zoning for multifamily residential development.” Additionally, the city’s inclusionary housing ordinance includes a moderate-income requirement. 

However, Garcia et al. note that some of this success may be overstated, since before HCD required more rigorous tracking of affordability for moderate and low-income housing in 2018, “Irvine categorized units in projects with more than 30 units per acre as moderate-income, regardless of ultimate rental prices.”  In San Jose, while some downtown highrises have had rental prices affordable to households earning 120 percent of Area Median Income, planning officials expect to see more moderate-income housing production from Accessory Dwelling Units (ADUs), noting “incentivizing ADUs is a good strategy for the city because of its low-rise landscape.” San Jose is even considering “a grant program that would supply upfront cash to individuals to help cover the development costs for an ADU, in exchange for restricting rentals to moderate-income households for a period of time.”

With subsidies poorly targeted to provide housing for a poorly defined yet coveted “middle class,” the study highlights important strategies for local governments to increase the production of housing for middle-income households – for free.