Why Do Homeowners Choose to Build ADUs?

December 15, 2020

Accessory Dwelling Units (ADUs) have been touted as a secret weapon that could make a big dent in California’s housing shortage. As regulators work to promote them, we must continue to investigate: what conditions actually lead to more ADU construction? A new working paper from Sarah Thomaz, a PhD candidate in Economics at UC Irvine, sheds some light on this mystery.

The key takeaways:

  1. In Los Angeles, parcels with higher land value and larger homes (though not necessarily on larger lots) saw more ADU construction.
  2. Adding an ADU increases the value of a property by about 50%.
  3. Proximity to amenities such as public transit are strong predictors of homeowners choosing to embark on future ADU construction.

ADUs are sometimes dismissed as mere “granny flats” or “in-law units,” but they offer a powerful tool to increase housing supply amid California’s surging demand; they also generally encounter less political resistance because they don’t visibly increase the density of a neighborhood. In her paper, Thomaz offers an analysis of this phenomenon focused on Los Angeles County.

It’s particularly noteworthy that LA issued over 20 times as many ADU permits in 2017 as the year prior, thanks in large part to statewide ADU reform. Thomaz uses the 2016 passage of SB-1069 and AB-2299, which streamlined ADU permitting, as an instrumental variable to study the economic environment of ADU construction.

Her study assembles data from 2013-2019 from the county’s Office of the Assessor, as well as over 10,000 permit records from the same time period, and GIS data on demographics from the US Census, in order to ask one simple yet powerful question: which neighborhoods build more ADUs, and why?

Thomaz first details some findings that she considers unsurprising. ADUs are more likely to be built on parcels with higher land and property values, with larger square footage and more bedrooms, though not necessarily more square footage on the parcel itself. “A larger square footage could mean that the family has more ability to comfortably convert part of their home, such as an attic or basement, into an attached ADU,” Thomaz explains. “At a higher land value and total value, there is a greater opportunity cost to using the yard or home for their own consumption rather than building an ADU and renting it out.

More surprisingly, ADUs were less likely to be constructed near the airport, Central Business District, or the beach, and more likely to be built near universities, suggesting that the market for ADUs may be stronger with student populations and commercial district professionals rather than tourists or white-collar professionals. Additionally, homeowners are more likely to build an ADU if they have aging parents still living with them, but less likely in neighborhoods with more children. These also correlate more with white and Latino neighborhoods than neighborhoods with a higher black population.

However, racial disparities in property values make it more difficult for social scientists to estimate the effect an ADU has on property values. Thomaz notes, “constructing an ADU clearly has a dramatic effect on property value, but simply comparing medians could be misleading; a more rigorous estimation is required for identification.”

Using a linear regression model, Thomaz estimates that an ADU may increase property values by an average of 45-46%, but this is likely an underestimate. When accounting for the independent variable of 2016 state ADU laws, the effect may be as high as 58%.

Why this wide discrepancy? One possibility: “If an individual is quite frugal and interested in passive income streams, he or she is much more likely to be interested in constructing an ADU, but is also less likely to own an expensive home,” Thomaz explains. “This trait would not be captured by any variables currently in the regression.” Another potential reason is especially enticing: “the burst of people who invested in ADUs after the law changed may have been unable to afford to get past the previous barriers.”

A few things seem clear, and going forward, policymakers should consider how this evidence factors into future ADU legislation. Given that ADUs are likely to increase property values, how can homeowner constituents be reassured that the opposite won’t happen if their neighborhood permits more ADUs? And given the amenities that some amenities correlate with increased ADU construction, how can future ADU reform be paired with better investment in local infrastructure?