McMILLIN ALBANY v. S.C.

Amicus Curiae, California Infill Federation, California Building Industry Association, and Building Industry Legal Defense Foundation, Supplemental Materials

Cal.Jul 29, 2016

SUPREME COURT COPY No. 8229762 IN THE SUPREME COURT STATE OF CALIFORNIA McMILLIN ALBANY, LLC,et al., Petitioners VS. RECEIVED SUPERIOR COURT OF KERN COUNTY Respondent JUL 2.9 2016 CLERK SUPREME COURT CARL & SANDRA VAN TASSEL,et al., Real Parties in Interest After Decision By The Court of Appeal, Fifth Appellate District, Case No. F069370 Kern County Superior Court Case No. S-1500-CV-279141 Honorable David R. Lampe, Presiding Judge, Dept. 11 SUPPLEMENTAL MATERIALS TO AMICUS CURIAE BRIEF BY APPLICANTS CALIFORNIA BUILDING INDUSTRY ASSOCIATION, BUILDING INDUSTRY LEGAL DEFENSE FOUNDATION AND CALIFORNIA INFILL FEDERATION IN SUPPORT OF PETITIONERS Attorneys for Proposed Amici Curiae California Building Industry Association, Building Industry Legal Defense Foundation, and California Infill Federation KATHLEEN F. CARPENTER,Bar No. 124982 AMY R. GOWAN,Bar No. 283311 Donahue Fitzgerald LLP 1646 N. California Blvd., Suite 250, Walnut Creek, CA 94596 Telephone: (925) 746-7770 Fax: (925) 746-7776 kcarpenter@donahue.com | agowan@donahue.com No. S229762 IN THE SUPREME COURT STATE OF CALIFORNIA McMILLIN ALBANY,LLC,etal., Petitioners vs. SUPERIOR COURT OF KERN COUNTY Respondent CARL & SANDRA VAN TASSEL,etal., Real Parties in Interest After Decision By The Court of Appeal, Fifth Appellate District, Case No. F069370 Kern County Superior Court Case No. S8-1500-CV-279141 Honorable David R. Lampe, Presiding Judge, Dept. 11 SUPPLEMENTAL MATERIALS TO AMICUS CURIAE BRIEF BY APPLICANTS CALIFORNIA BUILDING INDUSTRY ASSOCIATION, BUILDING INDUSTRY LEGAL DEFENSE FOUNDATION AND CALIFORNIA INFILL FEDERATION IN SUPPORT OF PETITIONERS Attorneys for Proposed Amici Curiae California Building Industry Association, Building Industry Legal Defense Foundation, and California Infill Federation KATHLEEN F. CARPENTER, Bar No. 124932 AMY R. GOWAN,Bar No. 283311 Donahue Fitzgerald LLP 1646 N. California Blvd., Suite 250, Walnut Creek, CA 94596 Telephone: (925) 746-7770 Fax: (925) 746-7776 kcarpenter@donahue.com | agowan@donahue.com SUPPLEMENTAL MATERIALS TO AMICUS CURIAE BRIEF IN SUPPORT OF PETITIONERS The Amicus Curiae Brief submitted by California Building Industry Association (“CBIA”), Building Industry Legal Defense Foundation (“BILD”), and California Infill Federation (“CIF”) (collectively, “Amici Curiae”) presents unique but publicly available historical, industry-related educational materials and other studies in supportof their position that Petitioners and the Fifth District Court of Appeal correctly stated that the intent of the Legislature was for SB800 to abrogate common law tort causes of action and act as the exclusive remedy for homeowners who seek to bring any defect-related action against the builder involving their home. Kach of these documents are properly referenced in the Amicus Curiae Brief and available to access online. However, for ease of reference for the Court, Amici Curiae has complied each of the referenced articles and reports in this Supplemental Materials to Amicus Curiae Brief. Attached hereto are true and correct copies of the the following documents: No. Document 1 Kelly Zito, Jnsurance Nightmare: Flood ofLawsuits Alleging Defective Construction Leaves Builders Scrambling to Find Coverage for New Projects (July 11, 2002) S.F. CHRON (Last Visited July 6, 2016). 2 Ricardo Sandoval, When the RoofFalls In, Construction Defect Litigation is Becoming a California Cottage Industry (September 1992) California Lawyer (Last Visited, July 6, 2016.) 3 McCarthy & Johnson, /nsurers’Rate Hikes Hammer Builders (May 4, 2003) Sacramento Business Journal (Last Visited July 6, 2016.) 4 Russell Hoyle, Study Unmasks Litigation Myths (November 13, 2002) Berkeleyan (Last Visited July 6, 2016.) 5 Kroll, et al., impact ofConstruction-Defect Litigation on Condominium Development (2002) CPRCBrief, Vol 14, No. 7 (Last Visited July 6, 2016.) 6 Darin T. Allen, Esq., Construction Defects Litigation and the “Right to Cure Revolution” (March 2006) Construction Briefings (Last Visited July 6, 2016.) Glucksman,et al., Right to Repair Reform: Revisions and Proposals to State's “Right to Repair Statutes” (April 1, 2015) Construction Defect Journal (Last Visited July 6, 2016.) California Department of ConsumerAffairs, Construction Detect Notice To Owners OfNew Residential, Single-Family Dwellings (Last Visited July 6, 2016.) Paladin Risk Management, A Subcontractor’s Guidebook for SB800 The “Fix It’ Right to Repair Law (2009) (Last Visited July 6, 2016.) 10 Construction Industry Research Board, California Housing Units 1954 — 2015 (Last Visited July 6, 2016.) 11 The San Diego Union-Tribune Editorial Board, How California Should Fight Poverty:Add Housing Stock (March 6, 2016) The San Diego Union-Tribune (Last Visited July 6, 2016.) 12 Next 10, Current State ofthe California Housing Market (March 8, 2016) (Last Visited July 6, 2016.) 13 Thornberg,et al., Current State ofthe Calitornia Housing Market, A Comparative Analysis (March 2016) Next 10 (Last Visited July 6, 2016.) 14 Thornberg, et al., Employment By Income, A Comparative Analysis (March 2016) Next 10 (Last Visited July 6, 2016.) 15 Thornberg,et al., California Migration (March 2016) Next 10 (Last Visited July 6, 2016.) 16 Taylor, Mac, California’s High Housing Costs Causes and Consequences (March17, 2015) Legislative Analyst’s Office Report (Last Visited July 6, 2016.) 17 Siniavskaia Ph.D, State andMetro Area House Prices: the “Priced Out” Effect (August 1, 2014) National Association of Homebuilders Special Studies, HousingEconomics.com (Last Visited July 6, 2016.) 18 Baldassari, Erin, Housing Costs Push CommutersOutward, Expanding Definition ofBayArea, StudyFinds (June 30, 2016) East Bay Times (Last Visited July 6, 2016.) Dated: ] | alte Respectfully Submitted, Donahue Fitzgerald LLP Attorneys for A California Building Industry Association, Building Industry Legal Defense Foundation and California Infill Federation Document I Insurance nightmare / Flood of lawsuits alleging defective construction leaves builders scr... Page 1 of 6 SFGATE http:/Avww.sfgate.com/business/articie/Insurance-nightmare-Flood-of-lawsuits-alleging-2797712.php Insurance nightmare/ Flood of lawsuits alleging defective construction leaves builders scrambling to find coverage for new projects Kelly Zito, Chronicle Staff Writer Published 4:00 am,Thursday, July 11, 2002 IMAGE 1 OF 2 Aworker from Draeger Construction re-tiles a roof after the company conducted a watertest on Tuesday, July 2, 2002, at a homein the Marina Vista Development on San Leandro, Ca., where various residents are ... more If you believe some homeownersin the Marina Vista development in San Leandro, there's almost nothing right with their homes. They say their foundations are defective, the drywall wasinstalled improperly and windows leak like sieves, opening the door to rampant-- and possibly toxic -- mold.As a result, http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279..._ 7/6/2016 Insurance nightmare / Flood of lawsuits alleging defective construction leaves builders ser... Page 2 of 6 about 85 of the subdivision's approximately 250 homeownershavefiled a $15 million lawsuit against the builder. If you believe the state's building industry, such complaintsare theresult of hysterical media coverage of mold andofhyperactive attorneys looking to cash in onthe state's 10- year statute of limitationsfor filing such claims. Whateverthe cause, a waveof so-called construction defectlitigation, paired with the financial fallout of the Sept. 11 tragedy, has put a squeeze on contractors’liability insurance. According to the InsuranceServices Office Inc., which provides research for the insurance industry, insurers in 1998 collected $19.3 million in premiumsfrom contractors’liability policies in California and paid out about $36 million (that figure includes construction defect, as well as other types of losses, including bodily injury). In 2000,insurers collected $15.2 million and paid out $44.8 million. In other words,for every $1 insurers collected in 1998, they paid out nearly $1. 87; in 2000, insurers paid out about $2.95 for every dollar in premiums. Faced with steep losses, many underwriters havepulled out of the condominium construction market, given that condoprojects are the most susceptible to defect suits. Others havetripled premiumsand dramatically curbed the scope of coverage onall kinds of residential projects. "If it's not already past,it's nearinga crisis stage for condo builders,” said Hugh Coyle, a broker at Willis Insurance Services in San Francisco. CRIMP ON AFFORDABLE HOUSING Builders say the insurance crunch is endangering new constructionof affordable housingin California. They estimate the state already has a housingdeficit in the hundreds of thousands.At the recent Pacific Coast Builders Conference in San Francisco, a symposium on the state of the building industry shifted to a discussion of construction defectlitigation and the dire consequencesfor the state's consumers. http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279..._ 7/6/2016 Insurance nightmare / Flood of lawsuits alleging defective construction leaves builders scr... Page 3 of 6 "No one wants to touch (condos) any longer,” said Phil Serna, spokesman for the Home Builders Association of Northern California. "Smart growth focuses on morehigh-density residential development.It's what the environmental community wants and whatthesocial equity folks want. Butit's the trial attorneys who have put up the roadblocks toit." The homeownersandtheir lawyers say such fears are overblown. They contend builders are trying to shirk the financial responsibility for shoddy work. In fact, some homeowners who have filed recent construction defect lawsuits said they first contacted the builders and asked them to fix the problem,only to be ignored. "The builders are trying focus attention away from the cause to the remedy,"said Tyler Berding, a San Francisco attorney who spokeat a recent construction defectlitigation forum held by the Association of Bay Area Governments. "We don't blame the chemotherapyfor the cancer. Canceris cancer. Litigation shouldn't be blamedfor construction defects; it's a remedy, not a cause." Insurers are abandoning the market, Berding added, because "they've looked at what's being built in the last 20 years andthey've decidedthat they're being asked to underwrite a bad risk. From a business standpoint, they've said, "No way.’ " Theinsurance impasse isn't new. The condo building boom of the 1980sstarted thefirst waveof construction defect lawsuits in the 1990s. Berding said condos and town homes often present more problems in part because they require moreelaborate infrastructure to link the dwellings. FAT PICKINGS Butbuilders say lawyers target condos becausetheyoffer a larger poolof potentialplaintiffs -- and money-- than single-family houses. http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279..._ 7/6/2016 Insurance nightmare / Flood of lawsuits alleging defective construction leaves builders scr... Page 4 of 6 Nevertheless, as condo construction in the state has tumbled-- from 18,691 in 1994 to 2,945 in 1999, according to the Meyers Group,a real estate consulting firm -- lawyers are suing morebuilders of single-family homes, according to building industry experts. Nowtheissue has taken on newsignificance, as the cost of housing in the state has surged to record highs, evenin the face of a sagging economy.Theoretically, if builders’ insurance premiumsshootthroughthe roof, they're likely to push homeprices even higher. Coyle, the insurance broker, said that minimum insurance on a $1.5 million, three-unit condo developmentin San Francisco's Mission District would run about $250,000,twice whatit would have been several years ago. "The bottom lineis, it's painful because ultimately it affects the developers' bottom line... butit also will affectthe homeowner,"Coyle said. LEGISLATIONIN THE PIPELINE State senators are in talks with builders andplaintiffs’ attorneys on a construction defect litigation reform measure that mayinclude a so-called "right to repair" item, whereby builders would get the chanceto repairthe flaw before attorneysgetinvolved. But evenif such a measureis passed -- and similar proposals have been defeatedin the past-- it may not go into effect for a year or more. This time, however,builders are confidenttheywill prevail. "Housing is such anissuein the state right now,that the Legislature knows the system is broken, and they know wehaveto fix it," said Jim Ghielmetti, chief executive of Signature Properties, a Pleasanton builder. Until then, both the largest and smallest builders find themselvesin a tight bind. Gilroy's Atlantic Concrete, which specializes in pouring foundations for residential buildings, received a notice in April that its insurance was being canceled. The 150-employeefirm wasableto secure an interim policy, but that coverageis limited only to on-site mishaps. http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279..._ 7/6/2016 Insurance nightmare / Flood of lawsuits alleging defective construction leaves buildersscr... Page 5 of 6 In other words, Atlantic is not coveredfor thefirst 10 years ofthelife of the house, as was the case underits old plan. If the ownerof a homebuilt on oneof Atlantic's foundations in the past three monthsfiles a lawsuit against the company, the company mustpayforlegal fees out of its own pocket. SKY-HIGH PREMIUMS Atlantic officials hoped to land a newpolicyasearly as this week. But even thatis oflittle consolation. According to company comptroller Teresa Ortiz, the company's premiumswill probably jump to $700,000 to $800,000 year with a $100,000 deductible, compared with $200,000 annually in premiumswith a $15,000 deductible. "T've talked to so many brokersit's not funny," Ortiz said. "Theyall come back with the same story. They say, "The insuranceisn't there for you.’ "The builders are saying, ‘If you can't getit, I'll find someoneelse who does have insurance,’ " said Ortiz, who addedthat business could dropbyhalf if Atlantic doesn't secure a policy with broader coverage. Local plaintiffs attorneys say the prospect ofjeopardizing local businessesis a sobering thought. But they andtheirclients insist that builders and their subcontractors mustbe held to a higher standard. Izzy Ahmedandeight family members movedinto a brand-new,five-bedroom housein Marina Vista almost five years ago. Almost immediately, they said, they noticed a black efflorescence around manyofthe windows.Izzy's wife, Nabila, said she scrubbed the windowsandsills; but the material reappeared. In addition, some family memberssay they have noticed in increase in asthmaattacks since moving into the home. Ahmedsaid they contacted the developer, San Leandro's Westco Community Builders, about the problem, but to no avail. "If they had good management, they would havefixed it," Ahmed said. "The project managerkepttelling me he would bethereto fix it, and he didn't." http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279... 7/6/2016 Insurance nightmare / Floodoflawsuits alleging defective construction leaves buildersscr... Page 6 of 6 Westco referred commentto attorney Andy Weiner. Weiner would nottalk on the specifics of the lawsuit butsaid of his client, "These are quality people, good builders. They're surprised bythis.” Ahmed, ownerofthe Food King grocery store in Oakland,has decided not to take any chances and recently purchased an eight-bedroom homein the Oaklandhills. In a telling sign of the Bay Area's almost ludicrous demandfor housing, Ahmedwasable to sell the Marina Vista house -- alleged defect disclosures andall -- for $640,000, about $300,000 morethanhepaidforit. As aconstruction crew hired by her lawyer blasted water against her windowsin her Marina Vista hometotest for leakage, Nabila Ahmedsaid, "Wedidn't see any mold with this new house -- and we checked.” © 2016 Hearst Communications,Inc. ADVERTISEMENT http://www.sfgate.com/business/article/Insurance-nightmare-Flood-of-lawsuits-alleging-279..._ 7/6/2016 Document 2 WHAT YOU SEE FROM 3,000 FEET on the final approach to San Diego’s downtown Lindberg Field airport is arid, rocky terrain, canyons, steep hillsides and dryriver beds terracing toward the Pacific Qcean. And houses. Almost everywhere on this uncertain and unstable terram, there are houses. Most werebuilt in the 1980s, dur- ing the breakneck, often careless and haphazard home-building spree that barely kept pace with the region’s explosive population growth. Lately, thoagh, che growth industry here has changed fromconseruction tolitiga- tion-—constrnetion-defect litigation over the myriad problemsthat plague owners of homes in most af those hastily constructed developments. For several years California courts Photograph by Cristiana Ticcosnt have held that home purchasers have remedies against construction defects, in both strict lability and unplied warranty. See Pollard v Saxe &Yolle Deu Co, (1974) 12 C3d 374, A 1976 statute (CCP §374) overturned ad- verse case law to give condominium homeowners associations standing to sue for construction defects. For lawyers chis was pay dirt. Being able to ery a case under the theory of strict liabiliry makes construction-de- fect cases casicr to prave (although the home builder must be a “mass producer,” an ambiguous require- ment). Standing for homeowners as- sociations—which could incfuce hundreds of units--imakes the cases far more lucrative. Not surprisingly, a construction- defect plaintiffs bar has emerged from the subdivisions, Major players in- clude Gary Aguirre of Aguirre & Eck- mannin La Jolfa; Brian Gerstel of San GALIFORNEAR LAWYER Gary Aguirre, a pioneer int construction-defect litigation: His latest win is a $36.5 million settlement for San Diego homeowners. CONSTRUCTION DEFECT LITIGATIGN i§ BECOMING A €ALIPORAIA COTTAGE INDUSTRY Diego’s Duke, Gesstel, Shearer 8 Bre- fewiies Mickey MoGuire nf San Diego's Thussies, Bartolacta, McGuire 8 Padillas and, more seventy, Moward. ‘dor! ofSilidorf, Barderan, Durgsiaa a Cisenberg ard Doug Grinnell of Epsten & Geannell, bothia Sau Diego. ieaesLarairae RaPconenn nt:aa For more than a decade, these pfaine tits artomeys ave recanted a win rec- tie so exrraubeuning that today even the most highly regarded defense taw- sere camsider a success when they're ble twmiiniasize claims against iene, Talleofakingether avoiding 00: curry jaslgments or setdemcnts i vie ally ponesistent, measure my success de keeping my cient in business aaby rutting han jr a position¢e pass on. baie shine of the claims to subconerae tos." says Bruce We. Lorber of Lorber, Volk & Greentield: Lorber, eho bas rgpresewsed some af Cabifornia’s legest develnpcrs,estitngtes that some 90 per- fens of constrictedaisare settled ont ofcont, Coustractiou-defit lingation has provenso suecesstn!, par- in San Diego Counrs,that lave versace rambliag to gee uothe action aunt ace spacing, ligation. nother pasts Ye sae, Whecan dtane thea? Wie seersto veane easy for dase phindtts toeyers. Conside eccnrawardsane!setdemenss: 2°523 mitlion seeelement fora geoopof Rizal Seardovul is a business enter ar beSiu Francisco Examines Ap TGR Ls Jolleieee horocoeners frum levine Co, executive Donald Bret’s private censerueton fray 86.75 lonjury verdice ia favor of uw n tbe Del Coronada Sntee: Towniloracs project against San Diego financier i Laety Vawrences « setlanent worth $36.3 mullion finding assurved liabilities) trom 40 dete dines fne selling a poflated andidongwich homies i Paradise Hills sonihease of Diego. } CONS FRUCTION-DESECT Uiigations im its current jie camation hegen 15. years ayoshortly after Florence Young, a Navy bride, moved itya new home ia the Mesa Village develop- rathe nana edgeoF Soe Diego. he se found her éream bome nore OF 2 nighunare: The gas and ware lines sealed, the sootdidnt fig,she foe dion haset adhe sowitaring, pool was siking. aleoanphained20 he {nviding compare, hut i rushed complaivisasnic, saying at sage ion ‘a yoarhaci passed sine consaracsic Iwas to fonper lable for detente har, ‘Young teamed, were plagtig bundeees of bees inthedevelopment Young persisted. Over th Developers plalatiifs years she fogged hnedieds of hours Siadying pre-construction repos, Joc phering Dhieprints and erxineseiag as sisimeats, sitting throughtadiouscepo- svcions with hee atcoreey, Gary J Aguiere fof Aguicre & Tclnann in ta fol, Apuirne: had yorten rave reviews For helping secure a $3 million setlervent from Preific Soatlwest Aurines Borthe telerives of vievnns of a 1978 midhaie Gash over San Digue. Young and Aguites sontso aunravelee fiailities of developerssubcontracts, designers sand she right fistedinsurance companies that cowersd their work ‘Aqwirve had to establish thushoddy ‘construction practieshd icdeed led & the leaking rools undsagging rooms, then convince a jtaye art fary th Thome bnigeas were entedathe same rights of redvess as consumers who buy any ee defectiveprtso year, Experts hited <0 verity problems swith homesithe subdizisionkeptf ang row defoors,thus adding ro these) plitint, tx addition,che tawsuic vas feat before San ogsew nabs ten: of eampfcting cam strgetionededect Cases vsithin two Years, Agnine says he was unsure at the timelowto approach a jury with sch 2 compicaued snate ter. “Thad people,inched ing some bigesime a= sees in sis town, ell me ihe hionteownces woul not stick with chisease eo the eve,” he says. “Peo ple were also saying the jury would aot under , siand what we were try w 0 prove, Thad my slaves abaec thar fo0. T was intimidated.” He chose 10 being separate aetions in several cats rorher rhea die sual method of dunip Hho alleged problans ‘ontd a ptyat one time. iu $982 Young and Aguirre’ perseveraare fy rewarded with 2 2 silken settleatene agaist Mesa Vilage. This, according to Apt, stot Jor 2 tiaacheTangent senkomdneatid Ajuinie had diseoxeced his eaftin Ie sane, espectaled, eh exerine “fone eadicalta fog Irae Beectae« comernetion it Tol, fry une decade since dhe Mesa og th yids Poetry Criteens Village victory, he has managed to clench his jaws aroundseveral develop- ers and shake out millions in damages tor his clients. The ageressive—somesay temperamental—courtrooni style that shaped Aguirre’s post-University of Cal- ifornia at Berkeley legal life as a farm workers’ advocate and chen a public defender has served him. well against developers and their attomeys. After his big wins inthe PSA and Mesa Village cases, Aguirre established his reputation with a $6 million jury verdict in 1982 against building materials makerJohns Manville Corp., which had refused to replace the crumbling faux- stucco exteriors of homes throughout Southern California. In tharclass action, Aguirre gained special notoriety for pre- dicting Manville’s financial collapse and convincing the judge to order the com- panyto post a bondto ensure an award tor his cherts. Coincidentally, Aguirre met Young again in 1987. Despite her resolution after Mesa Village never again to be duped by developers, she found herself in anocher tangled construction-defeer lawsuit in Hillsborough, southeast of San Diego, The homeowners were suing the builder, Treetops Unlimited, as well as San Diego County andthe state air pollution control district, which had threatened them with $10,000-a-month fines for allowing methane gas to leak from a landfill they didn’t know they owned, Earlier chis year the parties reached a settlement for shoddy construction and for causing lenders to abandonthe sub- division, making it impossible for the owners co sell their property. San Diego County authorities will assume respon- sibiliry for the landfill, whichstill leaks methane and has showntraces af can- cercausing benzene—a large enough threat to ferce the posting of “Danger” and “No Smoking” signs several yards from unsalable $200,000 homes. Tree- tops paid $4.3 million for constructien defects and $14.2 million for damages relating to the landfill; San Diego Countyis assuming $18 million in tta- bilities. The grand rotal: $36.5 million, THE WIN COLUMN in the construc- tion-defect game is so tilted toward plaintiffs chat developers have come to believe something is wrong withthe sys- tem. They complain most loudly about a perceived pro-plaintiff biag in the trial courts’ reliance on strict fast-reack guidelines and alternative dispute reso- fution. In San Diego County, where the vast majority of California’s construc- tion-defect cases originate, fast track means keeping to strict discovery peri- ods, holding regular sertlement talks with special masters and moving from filing to séttlementorjury verdict within two years. Under the San Dicgo system, rarely does a lawsuit go to trial andeven nore rarely does a defendant emerge un- seathed. “Ican recall only twocases that went to trial—and there was a defense verdict all around,” says defense spectal- ist James E. Chodzko of San Diego's MeInnis, Fitzgerald, Rees, Sharkey & Mcelnrvre. “We are not petting our day in court,” adds one development companyofficial. ports. “When [ first got involved with these cases back in 1984 and °85, trial firme was from five ta seven years. For us, these cases wece as welcome as the plague,” says Adams. “With fast track, a lor of the garbage went away when we said, ‘Bool? ” Adams says. “The ones that would nat go away were the big ones. I'dcall a readiness conference in one of these cases and 65 lawyers would showup. We had to do something.” Keven with fast-track disposition, cis- covery masters and strict schedules, cases can and do bog down. Some maine tainthat trials just don’: make sense for these cases, “The costs for both sides are “The judges [and special arbirrators and discovery masters] don’t want to sev these cases go to court. Li- ability scems irrelevant. The system is heavy- handed and set to make developers pay roughly half the claim.” San Diego Supertor Court Judge G. Dennis Adams, who has heard a majority of the region's construction-defect cases over the last seven years, scoffs ar the idea that the system is unfair, “OF courseit seems [the system is skewed against therm],” Adams says. “That's be- cause they are strictly hia- ble if chere is something wrong with a home. The law itself is nacurally skewed against them.” Judges push for media- tion because they don't want the cases in their courtroams, “The cases are typically—especially enormous, and jurics often dow’t understand the scope of claimsor the res- timonyof expert technical witnesses,” says Merville R. Thompson, a special masterwho mediates con- struction-defect disputes. *So it behooves us to get most ofthe issues resolved before a trial starts.” Frequent sizable awards do not mean defense law- yers are doing poor work, insists John B. Campbell of Campbell & Associates in San Diego. “The results of some of the cases—the big wins—geta lot of fan- fare. But people don’t see the many times that law- suits are settled before trial because we proved the plaintiffs did not have enoughevidence or legiti- mate claims to goall the way. A lot of claims starr out big bet are whittled dawn to almost nothing in the end.” the large, multiparty mate" ters—extremelydifficult,” says Michael Duckor, a mediator in the San Diego firm of Duckor & Spracdling who regu- larly serves as a special master for con- struction-defect cases. “It hecomes a gang activity, and it puts a great deal of stress and straon judges. It is even tough to physically pack all the parties into one courtroom. They don’t like rhe hig cases with dozens of cross-com- plaints and defendants, although Pye never scen a judge back away fromthe challenge.” San Diego’s crowded civil calencar haslittle roomforthelitigators’ delaying tactics, endless depositions and re-ex- amination of evidence and experts’ re- CALIFORNIA LAWYER Even under the current system,plaintiffs do not always win. But when they don’t,it’s frequently because they get greedy. “When you ger into these cases, your biggest mistake can be trying to overreach,” says Adains, “When you overreach, the jury will in- cinerate you.” Evenhighly regarded Aguirre & Eck- mannis not immune from an occasional misjudgment. In one recent case the firm is said to have rejected an $8 million settlement offer, holding ta its court- roomdemand for $12 million. The jury awardedthe plaintiffs $5 million. “One of the dangers for plamtiffs is throwing in claims for everything but a bad kitchen sink,” says a San Diego defense lawyer. “More and more, furies are awareof that and it can backtire.” SOME DEVELOPERS are quietly hoping proposed changes in state lawwill curb what they believe are excessive clainis against their work. So far no major lob- bying effort has been launched by build- ing-industry advocates in Sacramento. Dan Collins, whorepresents the Califor- nia Building Industry Association, says tinkering with established consumer lawsthat protectthe right of homeown- ers to sue-—especially involving matters of strict liability—will be futile because nopolitician wants to appear anti-con- sumer Collins does foresee continued efforts to rein in what che industry con- siders oppressivelitigation. ‘Twobills addressing construction-de- fect cases are awaiting Governor Pete Wilson’s signature. Sponsored by De- laine Eastin (D-Fremonr) and backed primarily by building trade associations, AB 3412 would require homeowners associations to obtain certificates of merit from building trade experts such as architects, engineers and dry-wall contractors before filing a lawsuit. AB 3708, sponsored by Carol Bentley (D-El Cajon) and pushed by a coalition of homeowners association lawyers, would restrict the ability of defendants tofile cross-complaints against plaintifts to recover damagescaused by managing agents or homeownersassociations. A recent appeals court decision (Daan Corp, uv Place Homeowners Ass’n, (1989) 207 CA3d 1449) allows defen- dans to sue homeownersfor bad man- agementthat created problemsor exac- erbated construction defects that might not have become problems. In addition, some defense lawyers are thwarting lawsuits by inclucling restric- tive covenants in agreements signed by builders and homeowners that require owners to give buildersfirse shot at fix- ing the problems. Additional language would hald homeowners to keeping their developments well-maintained, “We are advising our clients to include specific maintenance schedules, formu- lated by design and trade experts,” says Jeffrey M. Shohet, a defense lawyer with Gray, Cary, Ames &Frye in San Diego. On another front, Southern Califor- nia builders are lobbying the Depart- mentof Real Estate to replace litigation withbinding arbitration. “I could easily see disputes worth less than $25,000 barred from the court system,”saysJon- athan Woolf-Willis, a plaintiffs attorney in the Orange County firm of Fiore, Nordburg, W;alker & Woolf-Willis who formerly represented construction-in- dustry clients. “I cannot see, however, anvonebeing able to abridge the rightof homeowners to sue over big-dollar dis- putes.” Lawyers an both sides predict such attempts to curb construction-defectlit- igation will fail. They say lawmakers won't risk appearing to take sides against consumers, especially since ap- peilate courts have regularlyupheld the right of homeowners to sue builders. The lawyers agree the substantive changes in construction-defect cases won't come from Sacramento bat from Hartford, Connecticur-—that is, from the insurance industry. Shocked by reg- ular million-dojlar awards against their customers, insurers are now fighting claimseverystep of the way. They are also being stingy with cov- erage and subjecting developers to a battery of newquality tests. Developers complain that insurance companies— the ones signing the checks to plain tiffs—are jacking up the minimum qual- ity requirements that must be met before a development is insured. In manycases, builders say, insurers are simply gerting out of the business of covering home- CONSEFUCTION projects, even those built by the biggest developers. “Generally, no major companies are s a n a Fo ot e ALONG WITH GARY AGUIRRE, Brian Gersrel, a partner at Duke, Gerstel, Shearer & Bregante, isa leadingplaintiffs lawyer. With 21 partners and 75 lawyers state- wide,the firm is the state’s largest construction-defect specialist, Gerstel claims that overthe yeats he and his firm have scored more than $200 million in settlements ane judgments for homeowner clients from San Diego to San Francisco. Gerstel, 47, started in the con- struction-defect game in 1977 with a successful lawsuit against developers of a San Diego condo project. Homeowners saw their 7S-unit hillside buildingsink five inchesbecause the large columns holding it up were not sunk into bedrock, as they had been led to believe. Gerstel won a $1.5 mil- hon summary jadgment for his clients after six mouths ofdiscov- ery and trial. In 1986 he won evenbigger, with a $36.5 million judgment in a case involving owners of the Christiana Com- munity Development in Terra Santa north of San Diego. Another major player is Mickey McGuire, a partner with Thorsnes, Bartolotra, McGuire & Padilla in San Diego. Tall, tanned and seeminglylaid-back, McGuireprofesses a preference for surfing over taking deposi- tions. Often dressed in Hawai- ian-style print shits and casual pants, he Listens intently and has every reason to flash his Cheshire ag a a4 cat’s smile. Not onlywill his firm get a share of a $23 million jury verdict for La Jolla homeowners against executive Donald Bren’s construction company, but his partners and associates have racked up settlements and awards worth more than $12 million in recent years. “Mickey is colorful,” says a San Diego defense lawyer who has opposed McGuire in several court cases. “He has a careless air about him. Bur whenit comes to playing hardball in negotiations, or whenit comes to crunchtime in court, no one is better pre- pared. I’ve gota loc of respect for him, even though |find myself on the other side of the cable quite often.” Like other successful construc- tion-defect lawyers, McGuire andhis ficm are knownfor their thorough research. “We [try cof overwhelm and exhaust the de- fense,” McGuire says. Atleast a dozen associates and clerks do nothing but research, interview homeowners and consult with construction, engineering and design experts. “You have to do it this way,” says Howard Silldorf of San Diego's Silfdorf, Burdman, Duignan &Eisenberg. “Tf think that is what separates our firms from others nor so well-estab- lished. ‘They either don’t have the will or the ability to fund the critical research.” —RICARDO SANDOVAL SEP PFEMBER L992 velopers who build without adequate The Roof Falis In instirance coverage. So the plaintiffs lawyers are getting more aggressive, Somebuilders claim they are going beyondethical boundsin sceking clients by canvassing newdevel- opments with surveys asking questions about commondetects, or by advertis- sull writing residential-developmhent ing in everything from homeowners as- policies,” says Phil Capling, manager of sociation magazines to free weekly Aetna Insurance Co.’s standard com- shoppers. Competition for subdivision mercial lines operation in the San Fran- clientsis so tough, thebuilders claim,it’s cisco Bay Area. “We still have litigation common for lawyers to line up for the in effect that goes back eight years.We chance to make apitch to a homeowners ave talking about strict habilicy here. association meeting. We'velost tons of money, Thelitigation Meanwhile, most of the San Diego is expensive upfront, and the premiums constraction-defect firms are dealing we would charge could never cover the with thinning prospects by sending out potential losses, It is like insuring a hig- feelers—even opening up offices—in rig truck driver, The question is not if Orange County, eastern Los Angeles there will be a claim, but when will the and San IBernardino counties andthe claim come and how big will it be?” easternreaches of the San Francisco Bay Mary Wiscly, chief of National Union Area. The major firms, such as Aguirre Fire and Casualty Insurance Co.’s con- & Eckmann, Duke Gerstvi, Thorsnes struction-risk division, agrees. “There Bartolotra and Silldorf Burdman, have are big-time questions about soil subsi- satellite offices in other counties or are dence in California, and norjust because involved in cases in places such as Los of earthquakes,” says Wisely. “We just Angeles and SanJose. don’t write policies for] residential de- “Its happening everywhere,” says velopers anymore. Can you blame us?” Jeffrey Shoher, whose firm defends de- The companies that do underwrite velopers throughout the state. “Plain- residential developments charge sky- ffs lawyers canget holdof anyproject, high premiuni rates. anywhere, go overit with a fine-rooth combandfind something wrong. The THE BIGGEST BENETFLT of the flood of questionis the legitimacy<‘of the ‘Tefects construction-defeet cases seems to be they find—whetherir’s something that herrer-quality homes. “Developers are will never cause a problem or something, getting the message,” says Joha F. chat needs to be fixed right away,” “Mickey” MeGuire of Thorsnes, Barto- As one plaintiffs lawyer who has al- lotta, McGuire & Padilla, a San Diego ready opened offices in Riverside and plaintiffs litigation firm. Orange counties puts it, “Away from Unleashing the flood, of course, have San Diego, the markeris notentially lim-g g f been lawyers such as McGuire and itles * Aguirre (see “At the Plain- _-——— ona samen wena tiffs Bar” page 48), and more and more are follow- Wye ing them into the field. Buc Ae in San Diego County, pros- o (, YS pects for the highly publi- . U PRIDE cized big awards may be 5 ry ey \ building practices and COURTOUSRest | ' n closer monitoring of seb- | SLotH (— . ene contractors by both devel- “yg opers andinsurers scem to 7o have diminished litigation prospects. “AH the easy cases are done with,’ Aguirre’s partner, James K, lickimann, has said. Eck- mann adds that whar’s Jett will be increasingly com- plex cases invalving bank- rupt construction firms SHADE andsubcontractors andde- | ee : +" : : E waning. The improved re ANGER. CALIF GRNEA LAWYER Document 3 Insurers' rate hikes hammerbuilders Extra cost per new house: $10K-plus May4, 2003, 9:00pm PDT Updated May 5, 2003, 1:f4pm PDT INDUSTRIES & TAGS BANKING & FINANCIAL SERVICES, Local homebuilders and the framers, plumbers and other subcontractors who do the construction are being blasted by rate increases for constructionliability insurance of up to 500 percentthis year. The surge in insurance has helpedincreased the cost of a 2,500-square-foot house by $12,500 and threatens to throw somecontractors out of business. It has also spurred an ardent search for alternatives to conventionalpolicies, including self-insurance and "captive" insurance companies owned by their members. Rates are soaring because of aggressive lawsuits over mold and constructiondefects, plus a scarcity of insurers, higher expectations among homebuyers when they pay $300,000 for a house, and a generally poor insurance market. Smaller butstill costly hikes in workers' compensation insurance aren't helping. "We're absolutely being hammered byinsurancerates," said house framerJim Colafrancesco. "It's running people out of business. Some people can't even get insurance." "This is just an unbelievable nightmare," echoed Steve Benjamin, owner of Production Framing Systems and one ofthe organizers of a new association that subcontractors have formed to fight back. From $200K to $1.2M in two years: Rates for construction liability have been increasing for at least a year, but contractors say the trend has worsened in 2003. They're paying more andoften getting less coverage. As few asfourliability insurers still cover home construction, subcontractors say, and sometimes a company won't disclose the much higher rates it wants for a renewal until the old policy expires. Homebuilders require subcontractors to have continuous insurance coverage, so the delay pressures the subcontractor to accept the new rate as offered. If the subcontractor balks, he's up the creek. "I'm in breach of contract on all of my jobs," said one subcontractor whose insurance has expired and says he can't find reasonablerates. Benjaminwill pay $1.2 million for constructionliability insurance this year. Last year he paid $900,000, and in 2001 he paid about $200,000. Someofthe sixfold gain is due to his increased workload,he said, but mostofthe extra $1 million is simply a higherrate. Meanwhile, he said his coverage has eroded. He is no longer covered for mold-related damage to his frame work, and his deductible went from zero three years ago to $100,000 today. To make the rate, Benjamin hasraised his charge to the general contractors, the homebuilders, by $700 per homelast year, $350 this year. He is one of 35 to 40 subcontractors that work on each new home,although mostof the others contribute less to the cost of the house. Lawyers for plaintiffs say the real problem is defective construction, not aggressive attorneys. "If the builders did their jobs right in the first place, that would certainly cut down ontheir litigation," said Mark Milstein, managing general partner in the law firm of Verboon, Milstein & Peter LLP in Santa Monica. "Webelieve in theclients’ rights." An extra $6,000 for framing: Colafrancesco Framing Inc. paid $120,000 forits latest constructionliability policy until last year. The renewed policy, which expires June 28, came with a premium of $550,000 -- a 358 percent increase. "My wagontrain was oneofthefirst to get arrowsinit," Jim Colafrancescosaid. And as with Benjamin, his coverage is shrinking. His $120,000 policy was based ona payroll of $4 million for the year. The current policy is based on a payroll of $3 million. He's told to expect a 25 percentincrease in June, “and they're telling me that's if I'm lucky." Another framing subcontractor, Jon Olivieri of Olympic Construction Co., said his premium last year was $85,000. This year it would be $540,000 if he takesit, despite a flawless 19-year insurance record. "They haveno justification,” he said. "Every subcontractor I know hasfallen into this.It just puts you right out of business." The rate increases add $2,500 to his charge for framing an average home,hesaid, and $6,000 for an upscale home. One prominent homebuilder, Dunmore Homes, wouldn't accept his increased charges, so Olivieri lost the business. "T did $12 million in business with them last year,"he said, "and that business is gone thanks to the insurance issue." Olivieri said he has framed more than 10,000 homesin the Sacramento area and only one homeownerhasever sued him. Plumbing contractor Louis Ferrari of Ferrari Plumbing Inc. is also among the wounded. "It's extortion,” he said. His insurancethis year rose to $195,000 -- up 550 percent from $30,000last year. So far this year, he said, only one of the seven homebuilders he's working for-- Elliott Homes-- has accepted his increase in charges to coverinsurance. An extra $12,500 per house: The subcontractors pass their higher costs on to the homebuilder, whopassesit on to the homebuyer. The impact on generalliability premium hikes for subcontractors during the past year or so has probably added $5 per square foot to the cost of a home,said Ed Elkins, director of purchasing for Meritage Homes. For a homeof 2,500 square feet, that means an additional $12,500. RogerStanton, purchasing director of Beazer Homes ofNorthern California, calculated a similar sum. Homebuilders are paying more for insurance too. Beazer paid $550,000 for generalliability insurance three years ago, or $625 perhouse, said Brendan O'Neill, chief financial officer for Beazerandpresident of the Building Industry Association of Superior California. This year, the amountis up to $3 million, or $2,100 a house. That's a 236 percent increase. Andbecause deductibles are now as high as $50,000 per house, the companyis basically self- insured for anything short ofa catastrophe, O'Neill said. The subcontractors are caught in a special trap. Although many probably could self-insure, the homebuilders they work for require them to get insurance. That's because the homebuilder's own insurers demandthat they do so, said the subs. Homebuilders also don't want to risk contracting with subcontractors who are uninsured, Elkins said. Subcontractors organize: Some subcontractors are forming an associationin Northern Califormia to tackle insurance andother problems,said Jeff Wilson, owner of A-1 Door and Building Solutions. The group-- Professional Association of Specialty Contractors-- is affiliated with a group of that name in San Diego. The local group metfor the first time on April 9. Wilson, the group's president, said it has about 100 members, hashired an executive director and has collected $100,000 in dues. The group intends to lobby the Legislature for insurance reforms and changes in construction litigation law. "If we don't solve these things in California," he said, "housing is going to be so expensive that people won't beable to affordit." The group's territory runs down the state to Merced. Thefirst step will be to set up committees to tackle each issue facing the subcontractors, then to tackle the Legislature, said Brad Diede, the group's executive director. The groupis also offering its own insurance, Artisan's Insurance, through a captive insurance company owned by the group's members. Insurers are getting scarce: Insurance industry observers say one big problem facingbuildersis that the numberofinsurers licensed to offer coverage in California has dropped, and only those licensed insurers have their rate hikes controlled by the state. "Non-admitted" insurers cansell policies for whateverpeople will pay, if the insured cannot find appropriate coverage among the admitted companies. Twenty to 30 licensed California insurers offered defect-liability coverage about five years ago, said Mark Sektnan, assistant vice president of the western region for the American Insurance Association in Sacramento. Sektnan washard pressed to think of one today. "There are a small handful of insurers that will provide programs," said Greg Van Ness, managing director of Acordia of California Insurance Services Inc, in Rancho Cordova. Most contractors in California have to go to the non-admitted market. Non-admitted insurers range from well-knownentities such as Lloyd's of Londonto small, poorly capitalized offshore insurers. Before one insurer decided to stop writing constructionliability, Sektnan said, it was paying out $4 for every $1 of premium it was taking in. How insurers see it: Insurance has been a tough industry in recent years, with rates for various kinds of coverage generally headed higher. The market wasalready contracting when reinsurance-- coverage that insurers buy to cover themselves -- became tougherto find after the Sept. 11, 2001 attacks exposedthe potential for billions ofdollars in losses caused by domestic terrorism. But the construction industry has its own particular factors. A key factor, insurance industry experts say, is an aggressiveplaintiffs bar eagerto file construction defect suits. The market is "very unfavorable" to insurers becauseofthe "explosionof construction defect litigation," Van Nesssaid. "That's the essenceofit. It’s the cost of the claims." The condo insurance market disappeared in the 1990s because of constructiondefectlitigation. Condoslend themselves to class actions. When few new condoswerebuilt, plaintiffs attorneys movedto actions against builders of single-family houses, Sektnansaid. The losses from potential claimsare particularly tricky for constructionliability insurers to predict because suits for defects can be brought as long as 10 years after construction. Other factors listed by Sektnan: ? The threat of toxic mold. Earlier policies were neverpriced to factor in the uncertaintiesofit. ? A buyer's higher expectations. As homebuyers pay $300,000 and up for new homesin the region, they expect a better house. For mostpeople,it's the largest investment they'll make, and it's one on which hundredsof people have worked. Take a Sun City resident who has bought his beloved last home and looks forward to a care-free retirement. Such a person, with high expectations, might be morelikely to contendthat a crack in a drivewayis a defect rather than a blemish. ? The quality of workers and pace of construction. The regional housing boom has thinned the quality of the work force, and people wanttheir homesbuilt in a hurry. Builders can construct a perfect home, said Sektnan and Nicole Mahrt, local American Insurance Association spokeswoman,but no one could afford it. Asfor workers’ compensation, coverage has grown costlier irrespective ofindustry. After California deregulated workers’ comp insurance in 1993, many insurersstarted to price their coverage below their cost to gain market share from rivals. As long as the stock market boomed, investment incomeoffset the losses. But then costs soared, stocks soured,and rates surged. Someofthe state's largest workers’ comp carriers went underorleft the state. In recent years, the few remaining workers’ compinsurers have beenpricing their product more appropriately. But indemnity and medical costs remain high, and a new benefit increase for injured workers has forced rates upward. Somesolutions: One idea for easing the construction problem is setting up a framework in which developers and subcontractors agree to have one law firm represent them collectively in a defect lawsuit, instead of each having its ownlegal representation. They'd agree on which experts to use, and divide the liability. Forplaintiffs, this would speed settlements, Sektnan said. For the defense, it would reduce or eliminate countersuits between general contractors and subcontractors, and reduce overall defensecosts. Assemblyman Darrell Steinberg, a Sacramento Democrat, has authored Assembly Bill 903, currently a spotbill, that would clean up some insurance problems remaining after last year's state Senate Bill 800. That law gives homebuildersthe right to fix defects in homesfinished after Jan. 1, 2003, before the builder can be sued for defects. No language has been written yet, but the idea is that AB 903 would create a collective framework for the construction industry to use voluntarily, Sektnan said. The idea comes from a 4-year-old pilot program in San Diego that wasinitiated by large national insurers and developed by a think tank to reducelitigationcosts. Such a system is a start, butit's not the whole solution, Sektnan said. Insurers need to be able to predicttheir risk better in order to offer coverage. Beutler formsa ‘hybrid captive': Some companiesin the construction industry are pursuing alternatives to conventional insurance, both for liability and workers’ compensation, with hopes of at least stabilizing their costs. Membersof the Building Industry Association of Superior California are considering forming a group self-insuranceplan or a captive for workers' compensation. A group of subcontractors, with help from a Sacramento administrator, have sent their proposalfor a self-insured workers’ compgroupto the state for approval. Beutler Corp. of Sacramento,the area's largest mechanical contractor with 1,300 employees and gross billings of $114 million, formed its own Bermuda-basedcaptive last Septemberbecause of skyrocketing insurance costs, said Jeff Starsky, vice president and general counsel. The captive is for generalliability, but it also has a component for workers' comp. Beutlerwill fold in auto and property next year. Beutler’s is a hybrid captive. Even before Beutler formedit, the traditional lability coverage the company was able to obtain required that Beutler self-insure the first layer of risk. Beutler's captive is designed to cover that self-insured first layer for liability and workers’ comp. It's a tax-deferred mechanism that allows the companyto set aside funds for future claims, Starsky said. Beutler uses traditional insurancepolicies to covertherest. Document 4 11.13.2002 - Study unmaskslitigation myths Page | of 1 Berkeleyan HOME | SEARCH | ARCHIVE Study unmaskslitigation myths By R. Russell Hoyle, California Policy Research Center 13 November 2002 | A report released recently by the California Policy Research Center examines the impacts of construction-defectlitigation, including its effect on condominium developmentand affordable housing in the state. Aspects of California’s legal environment may havefacilitated more defectlitigation than has occurred in other states, say the two principal authors, Cynthia Kroll, regional economist at Berkeley’s Fisher Center for Real Estate and Urban Economics, and Larry Rosenthal, executive director of the Berkeley Program on Housing and Urban Policy. The report indicates that litigation — and resulting problemsof insuring residential construction when construction carriers leave the California market — is one of several different factors contributing to the decline of new multifamily construction in the late 1980s through much of the 1990s. “California was hit hard by both the legal climate and economic conditions during this period,” says Kroll. “As the economy improved, builders found waysto address some of the problems broughtonbylitigation, and they began building condominiums again.” The study’s authors challenge some of the mythsofthelitigation debate in California. “Many builders will tell you that a key problem in California is that state law permits litigation on construction defects to occur for up to 10 years after the completion of a project,” says Rosenthal. “Yet we found that many other states allow such suits as long or longer after construction but have not had similar levels of litigation and insurance problems.” According to Rosenthal and Kroll, resolving the affordable-housing problem in California will require more than reformsjust in the area of construction-defectlitigation. From a public- policy standpoint, they say, such reforms mustbe part of a broader strategy that enhances subsidies, loosens overly restrictive land controls, and overcomes unreasonable community opposition to new low- and moderate-income housing stock. The report is based on a research study conducted by a team affiliated with the Fisher Center and the Goldman Schoolof Public Policy. Links: The complete report A four page summary of the report Home | Search | Archive | About | Contact | More News Copyright 2002, The Regents of the University of California, Produced and maintained by the Office of Public Affairs at UC Berkeley. Comments? E-mail berkeleyan@pa.urel. berkeley. edu. http://www.berkeley.edu/news/berkeleyan/2002/11/13_-html 7/6/2016 Document 5 RESEARCH SERVING CALIFORNIA CPRC Brief Vol. 14, No. 7 October 2002 The Impactof Construction-DefectLitigation on Condominium Development Cynthia Kroll, Larry A. Rosenthal, Robert Edelstein, John Quigley, This Brief summarizes study findings about the impactof construction-defectlitigation on condo- minium development in California. The purpose of the study was to inform the policy debate— principally between builders and insurers on one side, and attorneys for homeowner plaintiffs on the other—over whether defect litigation is re- ducing the amount ofaffordable, for-sale attached housing built in California.If so, litigation reform might improve opportunities to build such lower- cost housing. To contribute to an understanding of current con- cerns aboutdefectlitigation and construction levels, the study documented trends in building activity; examinedlitigation and the California legal envi- ronment in context; and investigated legislative, builder, and insurance company responses to the problem. Specifically, our findings indicate the following: p> Construction of multifamily housing and con- dominiums slowed in the 1990s p> Builders and insurers have grown increasingly concerned overlitigation pm Aspects of California's legal environment may facilitate more defect litigation than occurs in otherstates p> Legislative reform and recent court decisions may dampenlitigation activity p Builders and insurers are finding new ways of doing business According to builders and insurers, “frivolous” David Howe, and Nan Zhou construction-defect lawsuits have stopped the pro- duction of attached projects and have led to skyrocketing construction-insurance premiums. Builders’ general experience is that insurance and litigation costs are significantly higher in California than otherstates. Homeowners associations and trial lawyers, on the other hand, argue that unfettered construction- defect litigation is necessary to protect the rights of homeowners. Some see the shortage of affordable housing as being caused by many complicated fac- tors in the real estate market—not lawsuits. Con- struction-defect litigation, they argue, is caused by poor-quality construction and builders’refusal to fix their costly mistakes. They argue that insuranceis a small percentage of the sales prices of single-family homes or condominiums. Earlier studies have not resolved the welter ofissues raised by these different points of view, and neither does the presentresearch.The authors soughtto add an analytical perspective to the conflicting claims re- garding existing conditions andlitigation policies. This perspective is based on an examination of changing construction levels of condominiums and multifamily housing; interviews concerning the availability of insurance for residential builders; a survey of legal conditions in comparison with those in other states’ housing markets; and a review of innovations by builders and insurers that have expanded building opportunities in California. Research Approach Ideally, an analysis of the defect-litigation CALIFORNIA POLICY RESEARCH CENTER UNIVERSTtTY OF CALILFORNIA issue would compare California with otherstates and regionsover a 20- to 30-yearperiod, to account for economic business cycles. This ideal method would track (a) new home construction by con- dominium status and numberofunits per building; (b) construction-defect litigation by number and type of lawsuits and sizes of settlements and en- forced judgments; (c) shares oflitigation recoveries dedicated toward homeowner compensation,defect repair, and legal expenses; (d) insurance costs and availability; and (e) background economic and dem- ographic data by geographic area. Unfortunately, the cost and inaccessibility of much ofthis data make such a study prohibitively expen- sive. Basic economic and demographic factors are mosteasily tracked, yet even these data are affected by changing geographic definitions over time. De- tailed data on building permits (but not housing starts) are also available at the state and metropolitan levels, but published series do not identify whether units are built as condominiums. Housing surveys provide much morerestricted data on condominium stock and construction, and re- port data by aggregated timeperiods (e.g., five-year time increments) rather than annually and for few geographic areas. (The present research was con- ducted prior to the release of data from the 2000 census, which may becomean alternative source for analyzing changes in condominium construction in the 1990s.) Noavailable data sources report the amountofcon- struction-defect litigation or insurance availability, the size ofsettlements, or changes in insurance costs and accessibility. Court-docket systems are designed for judicial managementrather than systematic data analysis. Insurance-market information is the basis for actuarial analyses that form the private, propri- etary knowledge base for firms in the insurance business. Forthese reasons, the best sources ofinformation on litigation activity and insurance costs are interviews with builders, insurers, and attorneys. While limited interviews do not generate reliable statistical mea- sures of important policy factors such as insurance costs orlitigation frequency or cost, key-informant interviews can illuminate concernsandstrategies of builders, insurers, and related services such as prop~ erty management andtradeassociations in address- ing defect-litigation risk. In the present study, such interviews also identified critical years in California, starting in the early to mid-1990s, whenlitigation concerns and demands for reform among builders appeared to gain mo- mentum and whentheavailability of liability insur- ance became much morerestricted. Residential Construction Trends Analysis of construction data indicates that total residential building dropped sharply in California and nationally duringthefirst half of the 1990s.The construction industry’s recovery in California was weakerthan that ofthe nation’s builders overall. Im- portantly, this differential included both single-fam- ily and multifamily buildings and was not limited to condominium units. Throughout the country for much of the 1990s, multifamily permits made up a lower share of total residential permits than in previous decades. Cali- fornia’s multifamily share of total permits in the mid-1980s was at a higher level than the multi- family share nationally; by the mid-1990s, Cali- fornia’s multifamily permit share had dropped more sharply than nationwide. Economic and geographic factors explainedpart, but notall, of this differential. Since the mid-1990s, California’s multifamily con- struction activity has partially recovered. While its level is now similar to that of the United States as a whole, California’s recovery appears weaker com- pared to pre-1990 levels. A variety of sources indicate a similar drop in the construction of condominiums in the 1990s. The extent to which this has occurred varied widely among places in California and also among other US. metropolitan statistical areas (MSAs). In California, the share of new homesbuilt as con- dominium units declined in the 1990s in the major- ity of MSAs for which data are available, and all of these MSAs experienced a sharp drop in the total numbers of new condominiums built. Some other MSAshad similar experiences. Ourstatistical anal- ysis could not demonstrate what share ofthe decline in California was due to background economic conditions rather than litigation or other uniden- tified factors. Changes in the price and characteristics of condo- miniums in California also indicate that shifts oc- curred in the state’s condominium market in the 1990-2000 period. Condominium prices have risen relative to single-family home prices within the state, and the relative price differential between California and other U.S. condominiums was less affected by the recession ofthe early 1990s than the relative price differential for single-family homes. California’s Legal Environment Interviews with builders and insurers confirm that, throughout most of the 1990s, construction-defect litigation became moreprevalent in California than it did elsewhere, and affected condominium projects more than single-family homes or apartments. The comparative incidence or cost oflitigation within California, in the aggregate, remains to be measured. However, a review of Internet information sources on construction defects revealed a more intense marketforlitigation services in California than else- where, even accounting for population size and re- cent growth. Builders and insurers regularly argue that Califor- nia’s legal environmentis particularly conducive to defectlitigation. However, a detailed comparison of the legal environments in California and 20 other places (19 states and the District of Columbia) re- veals great similarity on the procedural side. Califor- nia’s statutes of limitations and repose—four years and 10 years, respectively—governingthe period of years when post-construction lawsuits may befiled, are at the medianfor the 21 places. States commonly allow legal action for latent defects to be taken up to 10 years following a building’s completion. In the area ofsubstantive liability standards, Califor- nia appears more unusual. Of the 21 places studied, it is one of only five that apply the plaintiff-friendly doctrine of strict products liability to claims of de- fective residential construction. Three of these five places had other factors that could mitigate the effects ofstrict liability. For ex- ample, NewJersey has an aggressive home warranty program, whereas Pennsylvania has applied the eco- nomic-loss doctrine, narrowing the scope of recov- erable damages and reducing overall litigation risk to builders. Although Washington, D.C.has neither the economic-loss doctrine nor a warranty pro- gram,it has lost rather than gained population in re- cent years—and may have little new construction raising the potential for litigation. The neighboring states that include the greater District of Columbia MSAhave not applied strict liability to construc- tion-defect cases. In contrast, California and Nevada were left during the 1990s without any significant legislation moderating substantive liability standards. Legislative and Judicial Reform The state legislature has attempted to encourage meansotherthan litigation to resolve construction- defect disputes. In 1995, for example, a new law modified court procedure in suchcases by requiring more meaningful exchanges of information be- tween plaintiffs and defendants as well as dispute resolution to encourage pretrial settlement. Inter- views withlitigants revealed that this procedure— known as the “Calderon process,” for the bill’s author—1is easily circumvented, and thus less suc- cessful than originally intended. However, recent amendments taking effect in 2002 may improve the Calderon process by lengthening the dispute-resolution period and expanding the participation of subcontractors and insurers. Ad- ditionally, the California Supreme Court in De- cember 2000 rejected a lawsuit, applying the economic-loss doctrine in a case where no personal injury or damage to property had occurred. New Business Methods Thebuilding industry has adapted to dauntinglegal challenges and insurancelimitations, but these adap- tations carry their owncosts. Key business adjust- ments by builders and insurers, designed to address heightenedlitigation risk, include: (a) peer review of project design; (b) third-party construction inspec- tions, often documented via videotape; (c} post-sale building maintenance programs; (d) segmented and wrapped insurance policies; and (e) pooled insur- ance coverage provided through trade organiza- tions, particularly among subcontractors. These steps aim to enhance insurance availability and improve building quality and maintenance. While such efforts add to total project cost, the in- dustry’s adaptations to litigation realities suggest it believes these changes will reduce legal expenses in the long run. Changes in building practices and insurance prod- ucts allowed California builders to respond to market demand, boosted by a rapidly expanding economy and growing population,at the end of the 1990s. In addition, builders and insurers new to Cal- ifornia entered some of the state’s more lucrative condominium markets, but have focused on luxury condominiums,not affordable units. Policy Implications and Recommendations Muchofthe policy development concerning these issues has been hampered by poor information and few meansfor trackingtheeffects of programs. This Brief also leaves some key questions unanswered, The research has. demonstrated that multifamily building levels remain low in California after a slug- gish recovery, that litigation levels are high, and that builders have had difficulty obtaining insurance for residential projects that involve homeowners associ- ations, especially when attached units are involved. The research has not demonstrated the presence, nor proved the absence, ofa direct link betweenliti- gation and the shortage of affordable housing, nor has it identified specific policies and programs that could alleviate the situation. The lack of good measures makes it premature to make specific policy recommendations. However, some general points are evident, and new policy ap- proaches would benefit from better data on defect litigation and housing-market conditions, as well as more information on otherstates’ experience with some of the more promising means for addressing the problem. Thus we recommend: p Continuing policy efforts to move construc- tion-defect disputes out of the courtroom to the bargaining table. p Policymakers seeking further reform need to consider all parties with systematic stakes in maintaining construction-defect litigation, such as developers and homeowners associations, in- surers, and trial lawyers. pm Better data and analysis would make it much easier to determine theeffectiveness ofexisting and future reforms. Analysis of the 2000 census will help measure how condominium construc- tion and costs differ in California markets from other parts of the United States. Further econo- metric analysis of annual building-permit data at “the metropolitan andstate level could also ex- plain how specific legal conditions affect multi- family construction. » Monitoring of court cases over the next few years would help to determine whether the anticipatory strategies of builders and insurers— such as peer review, construction documenta- tion, and third-party inspection—are effective and should be incorporated into programs to 1504 Nonprofit Org, UNIVERSITY OF CALIFORNIA USPostage California Policy Research Center University of 1950 Addison Street, Suite 202 California Berkeley, California 94720-7410 reduce litigation cost.We also recommend eval- uation ofrecent dispute-process reforms in Cali- fornia and evaluation of warranty programs elsewhere. p Survey construction-risk insurers nationwide to identify the extent of California’s troubled mar- ket conditions. Resolving the affordable-housing problem in Cali- fornia will require more than reforms in the area of construction-defect litigation. From a policy stand- point, such reforms must be part of a broader strategy that enhances subsidies, loosens overly re- strictive land controls, and overcomes unreasonable community opposition to new low- and moderate- incomehousingstock. Robert Edelstein is professor at UC Berkeleys Haas School of Business and co-chair of the Fisher Center for Real Estate and Urban Economics. John Quigley is pro- fessor at the Haas School ofBusiness and the Department of Economics. He also holds an appointment at the Galdman School of Public Policy and directs the Berkeley Program on Housing and Urban Policy. Cynthia Kroll is regional economist at the Fisher Center, and Larry A. Rosenthal is executive director of the Berkeley Program on Housing and Urban Policy and a lecturer at the Goldman School ofPublic Policy. David Howe and Nan Zhou were graduate students in economics and information and sys- tems management, respectively, during the course of the study. For CPRC Briefs and a complete publica- tionslist, see wwww.ucop.edu/cpreorcall (510) 643-9328. This Briefmay be copied without permission. oy CDpe~ DeDP yeas 1971-2002 Document 6 THOMSON je WEST Construction Brietings March 2006 practicaltight-knit briefings including action guidelines on construction contract topics In brief... CONSTRUCTION DEFECTSLITIGA- TION AND THE “RIGHT TO CURE” REVOLUTION Overview of Construction Defects Lawsuits The Rise Of “Right To Cure” “Right to Cure” Statutes — Requirements and Application ¢ Type of Building ¢ Type of Construction Project * Type of Construction Professional Procedural Requirements of “Right to Cure” Statutes ¢ Defect Discovery and Statutory Timelines * Written Notice and Contractor's Response * Consequencesof Not Following the Statutory Requirements Case Studies ¢ California and SB 800 * The Texas Residential Construction Commission Act Possibilities for Alternative Dispute Resolution ¢ Mandatory Mediation Programs — California and Hawaii Criticisms of “Right to Cure” Laws ¢ Burden on Homeowners ¢ Lack of Compliance ¢ Biased “Tort Reform” Conclusion The author... Darin T. Allen, Esq., is the Director of Real Estate and Employment ADRServices for the National Arbitration Forum in Minneapolis, Minnesota. 40405078 CONSTRUCTION DEFECTS LITIGATION AND THE “RIGHT TO CURE” REVOLUTION By: DarinT. Allen, Esq. West's Key NumberDigest, Contracts <= 320 For manybusinesses, the prospectof costly and time-consuming litigation is a significant threat, and one from whichthe construc- tion industry is not insulated. The complexities of a construction project create an infinite sourceoflitigable disputes. Construction flaws and errors by general contractors and subcontractors are often difficult for the homeowner to detect. Nonetheless, such defects create animosity between homeownerandbuilder, leading many homeownersto pursuelitigation without attempting to ne- gotiate for repairs or other remedies. While the costs of excessive litigation harm contractors through attorneys’ fees and insurance premiums,these costs are also passed on to consumers in the way of higher construction prices and housing shortages. In response to this expanding problem, approximately half of the states have enacted “right to cure,” or “notice and opportunity to repair” legislation. “right to cure” statutes do not deprive homeowners of any remedy they could normally obtain through a courtof law. Instead, the laws aim to prevent unnecessary litigation by first requiring consumers to comply with a statutory procedure. The homeowner mustprovide the contractor with written notice of the alleged defect, usually 60 or 90 dayspriortofiling suit. In moststates, this notice gives the contractor 30 days to request an inspection of the premises, offer to repair the defect, negotiate a monetary settlement, or reject the claim altogether and proceedtolitigation. If the parties previously agreed to resolve their disputes through arbitration or another dispute resolution technique, then the terms of such an agreement will control the dispute resolution process. “Right to cure” statutes aim to protect construction professionals and improve the housing market for consumers by encouraging NO. 2006 - 03 ~ MARCH 2006 © 2006 THOMSON/WEST Construction Briefings / March 2006 less expensive resolution of construction defect disputes. The statutory waiting period also pro- vides a “cooling off” stage where homeowners will be forced to consider negotiation rather than headingstraight for the courtroom.’ Also, “right to cure” statutes open the door for alternative dispute resolution methods, such as mediation, which are morelikely to be effective during this period before the litigation process has begun. Yet, the “right to cure” movement is not withoutits critics. In particular, homeowner and condominium associations have expressed con- cern that these new lawscreate unnecessary and expensive hurdles for consumerswithlegitimate claims. While “right to cure”legislation has been billed as the construction industry’s version of “tort reform,” consumer advocates question why contractorsare not similarly restricted from suing homeownersfor withheld payments.’ This article analyzes the various provisions of a typical “right to cure” statute, and considers the potentialeffects of the legislative approaches articulated in select states. Attention will be paid to the policy arguments supporting and oppos- ing this legislation, as well as future approaches that might reconcile someof the concerns in the Construction Briefings This publication was created to provide you with accurate and authoritative information concerning the subject matter covered; however, this publication was not necessarily prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice and this publicationis nota substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorneyor other professional. CONSTRUCTIONBRIEFINGS(ISSN 0162-3176) is issued monthly, 13 timesa year with twoissues in January; published and copyrighted 2005 by Thomson/ West ¢ 601 Opperman Drive, P.O. Box 64526 ¢ St. Paul, MN 55164-0526 m http: //www.west. thomson.com a The subscription is $867.00. For subscription information: call (800) 221-9428,or write West, Credit Ordering Processing * 620 Opperman Drive, P.O. Box 64833 © St. Paul, MN 55164-9753 = Periodical Postage Paid at St. Paul, MNa Postmaster: Send address changesto Construction Briefings ¢ 610 OppermanDrive « P.O, Box 64526 ° St. Paul, MN 55164-0526. GENERALPHOTOCOPYNOTICE:Reproduction, storage ina retrieval system, or transmissionof this publication or any portionofit in any form or by any means,electronic, mechanical, photocopying, xerography, facsmile, recording, or otherwise, without written permission is prohibited. For authorization to photocopy, please contact the Copyright Clearance Center at 222 Rosewood Drive, Danvers, MA 01923, USA (978) 750-8400;fax (978) 646-8600 or West's Copyright Servicesat 610 Opperman Drive, Eagan, MN 55123,fax (651) 687-7551. Please outline the specific material involved, the number of copies you wishto distribute and the purpose or formatof the use. “right to cure” debate. Finally, this article looks to the future of “right to cure” legislation, and examines what new methods maybe used to resolve construction defect disputes. Overview of Construction Defects Lawsuits Asthe construction industry expandsrapidly in the western United States and in many other developing areas of the country, the volume of construction defects litigation has grown exponentially. The definition of a “construc- tion defect” varies from state-to-state, and is largely controlled by state laws and judicial interpretation. Generally speaking, a defect occurs when a construction professionalfails to complete some aspect of a building project in the appropriate manner. Some examples of “construction defects” are: conditions causing a building or system to not function properly (design deficiencies); the use ofinferior materi- als or components (material deficiencies); poor quality or workmanship resulting in undesirable conditions (construction deficiencies); and a failure to account for soil conditions, result- ing in damage to the building’s foundation (subsurface/geotechnical problems).? While construction defects have been around as long as constructionitself, three factors explain the recent explosion in defectslitigation.First, the sheer volume of new projects has increased the potential forliability, especially as construction firms are challenged bystricter time deadlines. For example, in Clark County, Nevada, which includes Las Vegas and its surroundingareas, there were approximately 170 construction defects lawsuits filed between 2000 and 2001.* While competition benefits the construction industry by offering choices for consumers and keeping estimates and costs low, the homeowner’s expectationscan bedifficult to meet in such fast-paced, cost-conscious environment. Construction projects invariably runinto delays, and the pressure to comply with the estimated price might lead to the use of substandard ma- terials or workmanship in completing projects. Strapped bycosts, many developers refuse to hire a full-time quality control supervisor who would be able to detect most construction defects before a project is completed.’ Second, the numberof lawyers educated in construction law hasalso increased as construc- tion litigation becomes more prevalent. In manystates, a specific commonlaw action for construction defects has only been available for a half-century.’ Defect disputes are extremely fact-intensive and require experience with construction or consultation with industry professionals to assessthevalidity of a case. At- torneys previously viewed construction defects as another subsetof torts, but modern law firms often employ a numberof attorneys specialized in this area of practice. Third, the statutory schemesof the 1990’s that regulated construction projects and remedies were riddled with ambiguities and loopholes that supported plaintiffs in filing construction defect claims. For example, Nevada passed a statute in 1995 imposing pre-suit requirements and limiting the scope of obtainable damages. However,the statute also contained a “complex matter” exception for planned unit developments (PUDs) and condominiums. Given that PUDs and condominium projects were outside of the statute’s notice requirements, builders were forced into large class action settlements. Mean- while, Nevada courts articulated an “economic loss doctrine” that seemedto contradict the 1995 statute. The Nevada Supreme Courtdeclared that all components of a home were necessary and integrated. Therefore, a construction defects suit would only be available under theories of contract or warranty.’ The Nevada example typified the uncertain nature of construction defects law—an environment giving homeown- ers greater bargaining powerandincreasing the overall threat of construction defects litigation. Construction Briefings / March 2006 The Rise Of “Right To Cure” While much of the litigation surrounding construction defects likely reflects legitimate concerns with deficiencies in construction proj- ects, it soon becameclear that excessivelitigation was becoming a problem. With the erosion of the caveat emptor (“let the buyer beware”) rule, homeowners overcamethe prohibitive costs of a lawsuitby bringingsuit as part ofacondominium, planned unit development, or commoninterest community group.’ These large-scale lawsuits forced contractors into costly settlements, which madeconstruction insurance expensive and difficult to obtain. As a result, these costs wereoften passed on to consumers, and housing shortages, particularly in the fast-growing Sun Belt, became a problem. Insurers, joined by contractors and other concerned groups, called for a legislative fix to the broken system of defects litigation. The resulting “right to cure” legislation represents an attempt to reconcile homeowners’ common law andstatutory rights with the needto protect contractors from frivolous or unnccessary law- suits. As of January 1, 2006, 24 states have enacted someform ofa “right to cure” statute, and several states, including Iowa’ and Pennsylvania”, are considering similar laws. “Right to Cure” Statutes — Requirements and Application Oneof the key variables in construction defects legislation is how the statutes differ across states. While “right to cure” legislation imposes procedural requirementsthat could be applied to disputes in any numberof constructionsettings, the influence of special interest groups and the particular needs of the construction industry in a given location result in different versions of the statute in different states. These legislative influences also explain whyseveral states have addressed construction defects issues more quickly than others. There are three categorical Construction Briefings / March 2006 factors that determine the scope of a particular “right to cure”statute: the type of building,the nature of the construction project, and the status of the construction professional. ¢ Type of Building Generally speaking,“right to cure” laws apply to the construction of a “residence” or “dwell- ing,” but those terms can be defined such that certain building projects are exempted from the law’s requirements. For example, the Tennessee law" covers damagesto all types of “commercial property,” but not “residential property” that the statute defines narrowly as a “dwelling unit intended as a residence of a person or family.” Thus, single-family homeowners in Tennessee are not subject to any notice requirementsbefore filing a lawsuit. In other states, however, “residence” and “dwelling”refer not only to single-family homes, but also to duplexes,triplexes, quadraplexes, and other multi-unit residential structures “where title to each individualunit is transferred to the ownerunder a condominium regime.”!? Mobile homesare occasionally omitted from coverage,” particularly if a state has a separate set of laws dealing with manufactured housing defects." ¢ Type of Construction Project Most construction defects statutes spell out the types of projects to which they apply. For example, the West Virginia law defines a “resi- dential improvement”as “(A) The constructionof a residential dwelling or appurtenantfacility or utility; (B) an additionto, or alteration, modifica- tion or rehabilitation of an existing dwelling or appurtenantfacility or utility; or (C) repairs made to an existing dwelling or appurtenantfacility or utility.” Texas goes into even greater detail, providing that the law applies only to construc- tion of new homes, “material” improvements, or improvements to a home’sinterior exceeding $20,000 in value.® ¢ Type of Construction Professional Finally, “right to cure” statutes usually define the term “construction professional” in a broad manner to encompass a wide range of defects disputes. Dependingonthestate, “right to cure” laws might apply to any numberofparties involved with a construction project, including “an architect, subdivision owner or developer, builder, contractor, subcontractor, engineer or inspector” whois “performing or furnishing the design, supervision, inspection, construc- tion or observation of any improvement”to real property.’* Texas has a unique statutory scheme, which requires “builders” to register with a special commission tasked with establishing and governing construction defects disputes.” The divergent approach of Texasin establishing the “Texas Residential Construction Commission’® will be fully addressedlater in thisarticle. Procedural Requirements of “Right to Cure” Statutes * Defect Discovery and Statutory Timelines Thefirst event that invokes the “rightto cure” procedure is the homeowner’s discovery of a defect, which often occurs after the project has been completed and the consumer occupies the premises. While some consumers might volun- tarily go to their contractor and use a “carrot and stick” approach to negotiate repairs, many choose to pursuecostly litigation and request expenses and punitive damages. “Right to cure” laws aim to reduce or preventlitigation by forcing compliance with a statutory waiting period designed to encourage negotiation and to facilitate solutions. Usually, the statute will allow 60 to 90 days to pass before the homeowner mayfile a lawsuit. However, if the contractorfails to comply with the “rightto cure” provisions, then the homeowneris allowed to sue at an earlier time. Some states, such as Kentucky, do not provide a specific time period for negotiation.” Kentucky’s law regulates the exchange of written notices and responses, but does not stipulate a minimum numberof days between the initial notice and the ability to file suit. Rather, lawsuits can be initiated upon the failure of the negotiation process.” One concern of homeowners might be that these pre-litigation procedures will interfere with their ability to commencesuit before the statute oflimitations lapses. Ohio is oneof several states that has addressed this problem through a specific provision tolling the statute of limitations “from the time the ownersendsa noticeof defect to a contractor...until the owner has complied with this chapter.””! ¢ Written Notice and Contractor’s Response The language of a “Notice and Opportunity to Repair Construction Dwelling Defects” docu- ment is generally provided bythestatestatute, and service of this notice signals the beginning of the “right to cure” timeline. Regardlessof its form, the written notice conveys three important pieces of information from consumerto contrac- tor: “(1) a statement that the claimantasserts a construction defect; (2) a description of the claim or claimsin reasonable detailsufficient to determine the general nature of the construction defect; and (3) a description of any results of the defect, if known.”” Following notice, the contractor usually has a period of 30 days” to respond in one of four ways. First, the contractor may request a formal inspection to assessthe validity of the claim and to determine a proper course of action. The in- spection mustoccurwithin a specified timeframe, and the inspection proposal must indicate that the contractorwill use the inspection’s results to determine a further course of action.*4 Second, the contractor can offer to make the necessary repairs, and even extend the allotted time for such repairs by agreement, if the statute permits such modification.” Third, a monetary settlement Construction Briefings / March 2006 can be offered in lieu of repairing the alleged defects. Fourth, the contractor can reject the claim altogether, which allows the homeowner to proceed witharbitration or a lawsuit. * Consequences of Not Following the Statutory Requirements If the homeownerfails to comply with any of the statutory “right to cure” requirements, any legal action for construction defects filed thereafter will be dismissed without prejudice. In other words, the homeownerwillstill be able to file suit, but will have to repeat the entire 60- day or 90-day process before being allowed to proceed. However,if the contractorfails to reply to the homeowner’s written notice or rejects the claim altogether, the homeowner may go forward immediately with litigation.” Case Studies In countering the problem of excessive con- struction defects litigation, several states have stepped forward in generating creative legislative solutions. Twostates in particular, California and Texas, have developed aggressive and innovative approaches toward “right to cure” laws. * California and SB 800 California’s “right to cure” law” is perhaps the most unique and controversial effort in the country to stem the tide of construction defects litigation. Commonly known as “SB 800”—the title of the bill introduced in 2002—much of the statute’s pre-litigation procedure is similar to other state efforts. Prior to commencing legal action, the homeowner must provide the contractor with a written notice of claim. The contractor then has a brief 14-day period in which to acknowledge receipt of this notice.” At this time, the contractor may request an inspection, which must be completed within 14 days, to assessthe validity of the claimed defect.*° Within 30 days of the initial inspection, the contractor Construction Briefings / March 2006 can offer to repair the defect, and actual repairs must then begin within 14 days, with “every effort” to complete them within 120 days.*! SB 800 provides:“If the builderfails to make an offer to repair or otherwise strictly comply with this chapter within the times specified, the claimant is released from the requirementsofthis chapter and may proceed with thefiling of an action.” What makes SB 800 unique among “right to cure” statutes, however, is its enumeration of “actionable defects” in Chapter 2.% One commentator referred to Chapter 2 as the law’s “most ambitious aspect’for its attempt to address “every function or component of a structure.”*° Only the defects considered in Chapter 2 are actionable, as the statute’s minimum performance standardshavethe dual effect of guidingefficient repairs while imposing strict liability for non-compliance.” The law also establishes a statute of limitations attached to a series of building warranties. Contractors must provide homebuyers with a one-year written limited warranty for the “fit and finish” of various installed items.” A two-yearstatute of limitations applies to untreated woodposts, de- fective landscaping, and installed dryer ducts.* Plumbing and sewerdefects, electrical defects, and problemswith exterior pathways and other outdoor improvements have a four-yearstatute of limitations.” Finally, paint or stain decay is covered for a period of five years.” It is simply too early to assess the full impact of SB 800 on California’s construction defect disputes. While the law shows promise for reducing problems,it remains to be seen whether the law’s complex formula will prove workable in securing repairs, or simply impose more costs on homeowners and builders during the pre-litigation stage. * The Texas Residential Construction Commission Act In Texas, the approach to construction defect disputes is unique because the “right to cure” legislation creates a state commission responsible for licensing builders and supervising arbitra- tion of defects claims. The “Texas Residential Construction Commission” (TRCC) consists of nine members appointed by the Governor, and it applies to a “dispute between a builder and a homeownerif the dispute arises out of an alleged construction defect, other than a claim solely for personalinjury, survival, or wrongful death, or damagesto goods.’Priortofiling suit, the homeowner may request state-sponsored inspection and dispute resolution by written request outlining each alleged construction defect with “reasonable detail.”” Within 30 days of this request, the homeowner must also notify the contractor of the alleged defects.* The inspector will then examine the premises and make a recommendation based upon the applicable warranty and building performance standards established by the TRCC.“ While the inspector’s findings are not binding on either party, the findings may be used as a “rebuttable presumption”in latertrial. It should be noted that the creation of the TRCC waslargely brought about bythe influence of special interest groups, and its composition and complex schemeof warranties and standards mightbe difficult for the average homeownerto understand.“ The inspectorbases hisor herfind- ings on TRCC standards,soit is possible that a homeowner’s expectations based on knowledge of applicable building standards might differ substantially from whatis ultimately revealed in an inspector’s findings. Though different in structure than California’s SB 800, the Texas statute could be perceived to create additional procedural hurdles for homeownersby requiring the paymentof increased costs during the state- sponsored dispute resolution process. Overall, however, the hope is that the state-sponsored dispute resolution process and the TRCC are successful in reducing or preventing construction defect disputes. Possibilities for Alternative Dispute Resolution In addition to encouraging repairs and monetary settlements, “right to cure” legisla- tion might also provide new opportunities for alternative dispute resolution (ADR) in construction defect disputes. Increasingly, contractorsare including pre-dispute arbitration provisionsin construction agreements, and the American Institute of Architects (AIA) recently updatedits standard Design-Build contracts to allow parties to designate an ADRforum oftheir choice. “Right to cure” laws also allow for the parties to agree to any numberof post-dispute resolution methodsduring the statutory period, including mediation. Somestates even require mediation as part of the negotiation and repair process, as discussed below. ¢ Mandatory Mediation Programs — California and Hawaii Mandatory mediation provisions represent efforts by the states to encourage parties to work out differences face-to-face,rather than suing for a construction defect as svon as oneis detected. As noted above, California’s SB 800 contains an aggressive mediation requirement upon the contractor’s offer to settle a defects dispute.” The mediation session must occur within 15 daysof the request, andis limited to four hours in duration.* Critics have identified a number of flaws in SB 800’s use of mediation. Homebuilders retain the right to repair defects, regardless of mediation, leaving little incentive for them to actively participate.” Even if the homebuilder fully cooperates with repairs and mediation, the statute provides no guaranteed insulation from suit. Also, the four-hour limit on media- tion sessions is unlikely to produce any real results in a fact-intensive dispute. Mediation may also be counterproductive in somecases, since the homeowner’s objective is to have the house repaired, and anyresolution efforts Construction Briefings / March 2006 aside from attempting repair will be viewed as unacceptable.” The State of Hawaii, perhaps emulating the California plan, also has a mediation require- ment.*' Hawaii's law provides: “If the parties are unable to resolvethe claim...all parties shall attempt to resolve the dispute through media- tion, even if mediation is not otherwise ordered or mandated by contract or by law.”*? However, Hawaii does not place any time constraints or other procedural requirements on mediation. This “hands-off” approach acknowledgesthat dispute resolution might only be moreeffective whenthepartiesare free to control the scope and duration of mediation proceedings. Criticisms of “Right to Cure” Laws While many observers agree thatthe “right to cure” movement “represents a well-intentioned effort at tort reform,”there is a still a great deal of skepticism surroundingthe laws’effectiveness and overall fairness.Critics of “right to cure”legis- lation believe that the lawsplace a high burden on homeowners, that contractors have not willingly complied with the laws, andthat thelegislation is biased in favor of the construction industry. ¢ Burden on Homeowners Many homeowners consider “right to cure” laws to be an unnecessary obstacle tolitigation and a tool to potentially frustrate otherwise legitimate defect claims at the hands of the insurance industry and other special interests. These criticisms largely stem from one central argument: if the main objective of a homeowner whodiscovers a construction defectis to have the defect repaired, a “cooling off” period should not even be necessaryin thefirst place. The 90-day waiting period elongates defect disputes without any real guarantee that the parties can avoidlitigation. Moreover, the “pro- cedural hoops” that most “right to cure” statutes put in place are often equally as complicated as Construction Briefings / March 2006 the pleadings phaseoflitigation.™In these early stages, homeowners often need the assistance of a lawyer merely to interpret their responsibilities, since failure to comply with any of the law’s provisions re-starts the process. A counter-argument to this concern is that homeowners only need to comply with the statutory requirements if they intend to sue in the first place. Cooperative homeowners are still free to pursue mediation or other forms of negotiation, while homeowners determined to seek legal recourse will invariably seek the aid of an attorney and follow thepre-litigation procedures. Given that “rightto cure” legislation aims to control rising insurance premiums and provide more affordable housing, proponents of “right to cure” legislation argue thatall homeownersbenefit from such laws. * Lack of Compliance Although “right to cure” laws doclearly aim to provide contractors with an opportunity to fix. construction defects, there is much concern that builders are failing to comply with statutory requirements, and even using the laws to gain advantages in litigation. For example, nothing prevents a contractor from feigning intent to re- pair identified defects while using the duration of the “cooling off” period to prepare legal defenses for trial.Other dishonest practices include using the statute to run up legal costs on a vulnerable homeowner, or using mandatory mediation pro- ceedings as an early discovery device to explore the weaknesses of a homeowner’sclaim. * Biased “Tort Reform” If “right to cure” statutes are properly viewed as the construction industry’s answer to “tort reform,” somecritics question why the reform is focused only ina direction that is advantageous to a contractor. In other words, why should a contractor be allowed to sue a homeownerfor non-paymentorother reasons without honoring the statute’s pre-litigation procedures, while the homeownermustwait up to 90 days for even the mostblatant construction defects?°¢ The answers to these questions relate to the specific harms that brought about a movement toward “right to cure” legislation in the first place. In burgeoning markets such as California and Nevada,the threatof large-scalelitigation by condominiumsand planned unit developments had threatened the ability of builders to obtain affordable insurance, or any insuranceatall. Builders were either forced to pass on these costs to consumers, or elect not to build any new projects.°” To the extent that “right to cure” lawsaffect homeowners disproportionately, they do so because of a need to persuade homeownersto seek other remedies prior to commencingcostly lawsuits. In contrast, the vast majority of suits filed by contractors against homeowners are simple contract claims for unpaid sums. “Right to cure”legislation purposefully targets the types of lawsuits that cause the greatest burden on the judicial system and the resources of the parties involved. Nonetheless, by exempting individual litigants with single-family homes from the pre- litigation requirements or by exploring other consumer-friendly amendments, “right to cure” laws could do a better job of focusing on more balanced reform efforts. Conclusion “Right to cure” legislation emerged in an attempt to help homeownersand construction professionals resolve disputes in an orderly and amicable fashion. By crafting procedures to clarify the obligationsof the parties involved in construction defect disputes, several states have kept insurance costs down for contrac- tors, while still helping homeowners to have access to an adequate supply of affordable building projects and housing. While “right to cure” laws have not been withoutcriticism in their design or implementation, the discus- sions surroundingthe legal issues, procedural requirements, and alternative meansof resolv- ing disputes have generally been positive for homeownersandcontractors. References 1. 10. 11. 12. 13. 14, 15. 16. 17. 18. 20. 21. 22. 23. 24, 25. RogerJellenik, The New Construction Disputes Law: Cooling Off or Chilling Out?, 15-Mar S.C. Law. 15, 16 (March, 2004). id. Marianne Sparks, Construction Defect Resource Guide, 1" Edition (2005). RobertJ. Aalberts, “To Sue or Not to Sue”: The Past, Present and Future of Construction Defect Litigation in Nevada, 5 NVLJ 684 (Spring 2005). Andree J.B. Swanson, Las Vegas: Boom Town for Construction Defect Litigation, 5-DEC Nev. Law. 15, 19 (December, 1997). Lynn Borkenhagen, Montrose Chemical Corp. v. Admiral Insurance Co.andits Effects on Construction DefectLitigation, 32 CAWLR 359, 360 (Spring 1996). Aalberts, supra n. 4. Borkenhagen, supra n. 6. at 360. S.F. 381, First Sess., 2005. H.B. 1467 and S.B. 656, 2005-06 Regular Sess., 2005. Tenn. Code Ann. § 66-36-101. Ky. Rev. Stat. Ann. § 411.252(4). Kan. Stat. Ann. § 60-4701. Kan, Stat. Ann. § 58-4202. Tex. Prop. Code Ann. § 401.003. Idaho Cade § 6-2501. Tex. Prop. Code Ann § 416.001. Tex. Prop. Cade. Ann § 406.001. Ky. Rev. Stat. Ann. § 441.258. Ky. Rev. Stat. Ann. § 411.258(7). Ohio Rev. Code Ann. § 1312.08(A). See generally S.C, Code Ann. § 40-59-840(A). See generally Ga. Code Ann.§ 8-2-38. See Mo. Rev. Stat. § 436.356. Ariz. Rev. Stat. § 12-1363(K), 26. 27. 28. 29. 30. 31, 32. 33. 34. 35. 36. 37, 38, 39. 40. 41. 42. 43, 44, 45. 46. 47, 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. Construction Briefings / March 2006 See Wash. Rev. Code § 64.50.020, Cal. Civ. Code §§ 895 et seq. Cal. Civ. Code § 910. Cal. Civ. Code § 913. Cal. Civ. Code § 916. Cal. Civ. Code § 921. Cal. Civ. Code § 920. Cai. Civ. Code § 896. RogerB. Coven,California Attempts to Resolve Residential Construc- tion Defect Claims Without Litigation, 23-SPG Construction Law. 35 (Spring, 2003). Cal. Civ. Code § 897. Cal. Civ. Code § 942. Cal Civ. Code § 900. Cal Civ. Code § 896(g)(8). Cal Civ. Code § 896(e). Cal Civ. Code § 896(g)(10) Tex. Prop. Code Ann. § 426.001. Tex. Prop. Code Ann. § 428.001. td. Tex. Prop. Code Ann. § 426.004. Tex. Prop. Code Ann. § 426.008. Angela R. Lilly, Texas Residential Construction Commission: DoTexas Homeowners Need It?, 57 SMU L., Rev. 1587, 1609 (Fall 2004). Cal, Civ. Code § 919. Id. Melissa C. Tronquet, There’s No Place Like Home... Until You Discover Defects, 44 Santa Clara |. Rev. 1249, 1280 (2004). Id. at 1279. Haw. Rev. Stat. § 672E-7. Id, Jellenik, supra n. 1 at 19. Aalberts, supra n. 4 at 700. id, Jellenik, supra n. 1 at 18. Tronquet, supra n. 49 at 1250. Visit West on the Internet! http://www.west.thomson.com Construction Briefings / March 2006 State-by-State Construction Defect Statutes and Legislation Type Citation Effective Date Statute AK ST §§ 19.45,881 et seq, 2003 “including single-family homes, duplexes, nrulti-family housing units, and the mechanical and other systems, components, and improvements that are part ofthat unit, ! Arizona Statute A.R.S, § 12-1363 8/2002 Covers a “person engaged in the business ofdesigning, constructing or selling dwellings” (single- or multi-family housing, including condominiuns). California Statute CA Civil Code § 895 2002 Residential construction: developers, contractors, subcontractars, suppliers, architcers, engineers, and insurance carriers Colorado Statute CRSA. §§ 15-20-80] et seq. 872001 “Construction professionals,” including anarchitect. contractor, subcontractor, developer, builder, builder vendor, engineer, or inspector performing/fumnishing (he design, supervision, inspection, or observation of any construction or intprevementto real property. Not limited to residential construction. - Florida Statute F.S.A. 8§ 558.001 et seq. FOE condominiums: appliesto “residential construction”(single- family homes, condominiums, manuactured homes, modular homes, and multi-lamily dwellings designed for residential use) Design, construction, or remodeling of dwellings. including | Georgia Statute Ga, Code, Ann, §§ 8-2-35 et seq. 3/2004 Applies to “dwellings.” including condominiums and other systems, improvements, or recreational features of dwellings Hawaii Statute ILR.S. §§ 672-1 ct seq. 2004 “Owelling" meansa single-family house, duplex. or multi-family unit designed forresidential use, including commonareas and improvements thatare owned or maintained by an individual, asseciation, or olherentity. “Premises” means a dwelling, inchiding commonareas and improvements that are owned or maintained by any person, firm, partnership, corporation, association, or other organization. "Premises" includes the systems, other component improvements, otherstructures, or recreational facilities appurtenant to, but not necessarily apart of, the dwelling or facility. Idaho Statute Idaho Cade §§ 6-2501 et seq. 772003 “Construction professional" means any person with a right tolien pursuant to Sects “ody, such, as an architect, subdivision ownerof developer, builder, contractor. subcontractor. engineeror inspector, performing or furnishing the design, supervision, inspection, construction or observation af the construction of any improvementto residential real property, whether operating as a sole proprietor, partnership. corporation, limited liability companyor other business entity. "Kesidence” means a single-family house, duplex, triplex. quadraplex, condominivs or a unit ina multionil residential slrvcture in whichtitle to cach individual unitis Lransferred to the ownerunder a cooperative system. Indiana Statute 8§ 32-27-3-1 ct seq. 5/2003 "Residence" means a: (A) single family house; {B) duplex: B {C) triplex: (D) quadraplex; or (E) unit ina multiple unit dential structure in whichtitle to the individual unit is (ransferred lo the owner under 4 condominiumor cooperative system, For purposes of clause (2), the term includes commonareas and facilites (as defined in 9.952) ). lewa Bill SF381 (2003) N/A ?“Residence” means a single-family house. duplex, or multifanily unit designed for residential use aad shall melude otherstructares appurtenant to the house, duples, or multifamily unit, KKansas Statute K.S.A. §8§ 60-4701 ct seq. 7/2003 “Dwelling” means a single-family house, duplex or multifamily anit designedforresidential use in whichtitle to each individual unit is transferred lo the owner under a condominiumor cooperative system and shail inchide commonareas and improvements that are owned or maintained by an association or by members of an association. A dwelling includes the systems and other companents and improvements that are part ofa single or multifamily unit at the Gine of construction. For the parposes ofthis act, “dwelling” does not mean manufactured home as defined in K.S.A, 38-4202, and amendments thereto. Kentucky Statute K.R.S. §§ 411.250 et seq. 7/2003 Applies to “residences,” including a single-tamily house, duplex, (riplex. or quadraplex, or a unit ina multiunii residential structure in which title to cach individual unitis transferred to the owner ss 10 vader a condomuniumsystem. Minnesota Statute MLS.A. Ch. 327A.01 et seq. M.S.A.Ch. 541.051 5/2003 “Dwelling” means a new building, aol previoasly occupied. constructed for the purpose ofhabitation, but does not include appurtenant recreational facilities, delached garages, driveways, walkways, patios, boundary walls, retaining wails net necessary for the structural stability ofthe dwelling, landscaping, fences, nonpermanent consteuction materials, ofEsile improvements, or other similar tems. “Home improvement" means the repairing, remodeling,altering converting or modernizing of, or adding to a residential building. Forthe purpose of this definition, residential building does not include appurtenant recreational facilities, detached parages, driveways, walkways, patios, boundary walls, retaining walls rot necessaryforthe structural stability ofthe building, landscaping, fences, nonpermanent construction materials, off-sile auprovements, and all other similar items. Missoutt Statue §§ 436.350 et seq. 2005 Applies to residences, including a single-family house, duplex, triplex. quadraplex, or a nit ina muliiuni residential strucinre in whichtitle to each individual unit is transferred to the owner undec a condaminiun ar cooperative sysiem. Montaata Stanite M.C.A. § 70-19-427 1052003 Applies to residential construction disputes. Nevada Statute N.RS. §§ 40.680 et seq, 82003 “Construction defect" means a defect in the design, construction, manufacture, repair or landscaping of a newresidence, of an altcraiton. ofof addition to an existing residence, or of an appurtenance and includes, without limitation, the design. construction, manufacture. repair orlandscaping of a new residence, ofan alteration ofor addition to an existing residence, or of an appurtenance, New Hampshire Statute NHL Rey. Stat. §§ 359-G:1 et seq. 1/2006 “Residence” means a single-family house, duplex, or multifamily unit designedfor residential ase in which tide to cach individual unit is transferred to the awner under a condominiumor cooperative systemand shall include commonareas and improvements that are owned or maintained byan association or hy members ofan association. A residence includes the systems, other components, improvements, other structures, or recreational facilities that are appurtenant to the house, duplex, or multifamily unit at the time of its initial sale, but not necessarily a part ofthe house, duplex, or maltifamily unit. New Jersey Lee J.S.A § 46:3B-3 Applies to “new bome™ construction, Ohio Stahile R.C. §§ 1312.01 etseq. "Residential building" means a structure that is a one-family, two-farnily, arthree-family dwelling house or a dwetling nil within that structtue, any accessory structures incidental to that dwelling house. and a unit in a condominium developmentin which the ownerholds tide to that upit, "Residential building" includes anystructure that is used as a model to promote the sale ofa similar dwelling house. Pennsylvania Bul HL. 1467 and S.B. 656, 2005-06 Regular Session (2005) Applies to residential construction defect disputes between builders and homeowners. Seuth Carolina Stutute SC ST §§ 40-89-810 et seq. “Dwelling” means asingle-family house or duplex or a multifamily unit not to exceed sixteen units and not to excced three siories in height, and that is intended for residential use, A dwelling includes the systems and otber components and improvements that are part ofa single or mulGifarnily unit at the time of constuction. ‘Tennessee Statue T.C.A. $8 66-36-101 et seq. i5/2004= Unique scope of coverage; inchides actions for damages toafl types of property, except single dwelling units tatendedas the residence ofa personor family, covers remodeling and new constrnetion ofail such structures Texas Statute Property Code §§ 426.00 ]et 9/2003 “Buidders” including any business entity or individual who constructs, supervises, or manages the construction of a new home: improvesthe interior of an existing home at acost exceeding 520,000; or constructs, supervises or manages the construction of a material improvement to a home (ether than a roalrepair). Washington Statutc R.C.W.A. § 64.50.0035 2002 Applies to homeowners and condominiumassociations. West Virginia Statute W. Va. Code, §§ 21-L1A-1 et seq. 2003 Applies to dwellings andresidential improvements:"Residential improvements" means: (A) the construction ofaresidential dwelling or appurtenant facility or utility: (B) anaddition ta, otalleration, modification or rehabilitation fanexisting dwelling or appurtenantfacility or utilily: or (C) repairsmade to an existing dwelling or appurtenant, facility or uality. Tnaddition to actual construction or yenevation, improvemen|sadded to residential real property include the designs,specifications, surveys, plans, goods, services and supervision ofa4 contractor's subcontractor, officer, employee. agent ar otherperson furnishing goodsor services to a claimant. Document 7 Right to Repair Reform: Revisions and Proposals to State’s “Right to Repair Statutes” April 1, 2015 Richard H. Glucksman, Jon A. Turigliatto, and David A. Napper — Chapman Glucksman Dean Roeb & Barger Bulletin Virtually all of the states in the country have "Right to Repair" statutes. Wefollow the various states legislatures to determine what trends or developments are occurring. For years, Chapman, Glucksman, Dean, Roeb, and Barger has prepared a compendium that provides the salient points of these Right to Repair statutes. In this extended BULLETIN we provide a discussion of important and very recent developments that are occurring in Nevada, Arizona, Florida, and Colorado. In Nevada, Governor Brian Sandoval very recently signed The HomeownerProtections Act of 2015, representing a massive transformation to Nevada's Right to Repair Actin the builder's favor, including but not limited to removal of the attorney fees provision as part of claimant's damages. In Arizona, Governor Doug Ducey signed HouseBill 2578 in March 2015, amending Arizona Revised Statutes § 12-1361 et. Seq. by eliminating a homeowner's statutory opportunity to recover attorney and expert fees and providing a builder the right to repair the alleged defects. In Florida, Bill 87 proposesto shorten the statute of limitations, requires more detail in the Homeowner's notice of defects, and allows a builder to use a prior settlementin lieu of repair as an affirmative defense against subsequentclaims. In Colorado, lawmakers are proposingto place additional conditions in front of an HOA board beforefiling suit and require alternative dispute resolution for HOA Condominium Defect Claims evenif the requirement no longer exists at the time the claim is brought. NEVADA: GOVERNORSIGNIFICANTLY MODIFIES NEVADA'S RIGHT TO REPAIR ACT WITH THE SIGNING OF ASSEMBLYBILL 125 Nevada's Right to Repair Act has been extensively modified by the signing of Assembly Bill 125 also known as the HomeownerProtections Act of 2015. The Act considerably revises Chapter 40 of the Nevada Revised Statute ("NRS") governing construction defect actions. According to Governor Brian Sandoval, the signing of the first major bill of the legislative session in Nevada “discouragesfrivolouslitigation and strengthens Nevada's rebounding housing market."1 Amongother provisions, the Homeowner's Protection Act removes a claimant's ability to recover reasonable attorney fees as part of the claimant's damages, shortens the statutes of repose, defines the duty to defend, and prohibits a claimant from filing a notice of construction defects unless the claimant has submitted a claim under the homeowner's warranty and the insurer has denied the claim. Only claims that have been denied under the homeowner's warranty may be claimed. Additionally, the term "construction defect" is now defined as a defect "(1) which presents an unreasonableriskof injury to a person or property; or (2) which is not completed in a good and workmanlike manner and proximately causes physical damageto the resident or appurtenance." Critically, the Act now requires that the notice of construction defects (1) state in "specific detail" rather than reasonable detail, each defect, damage,andinjury to each residence or appurtenancethat is subject to the notice; (2) state the exact location of each defect, damage, andinjury, rather than describe in reasonable detail the location of the defect; and (3) include a statement signed by the ownerof the residence or appurtenancein the notice that the ownerverifies that each defect, damage andinjury exists in the residence or appurtenance. Although not every revision is set forth above, the passing of The Homeowner's Protection Act appears to be a colossal victory for builders as the majority of the revisions to NRS Chapter 40 are favorable to the builder while additional or heightened requirements have been placed upon homeowners whowishto bring a claim. The following two Right to Repair updates concern proposedbills that also seekto radically change the pre-claim construction defect landscape. ARIZONA: BUILDERS NOW HAVETHERIGHT TO REPAIR INSTEAD OF AN OPPORTUNITY TO REPAIR WHILE HOMEOWNERS NO LONGER HAVE A STATUTORY RIGHT TO ATTORNEYFEES AND EXPERT FEES In March 2015, Arizona Governor Doug Ducey signed into law HouseBill 2578, revising key portions of the Right to Repair pursuant to the Purchaser Dwelling Act (Arizona Revised Statute ("A.R.S.") Section 12-1361 et. seq. Important categories of the Act affected by the new law include the builder's right to repair or replace, the processof repair or replacement, dwelling actions, and homeowners’ association dwelling actions. Mostnotably,priorto filing a construction defect suit, or a "dwelling action" as defined in A.R.S. Section 12-1361 et. seq., a homeowner mustprovide written notice detailing the basis of a dwelling action and mustallow the builder to repair or replace the alleged construction defects. Anothersignificant revision includes the elimination of the prevailing homeowner's statutory right to reasonable attorney fees, witness fees and taxable costs in a dwelling action. Bill 2578 also revised the definitions of “Construction Codes," "Construction Defect," "Construction Professional,” and "Material Deficiency." Homeowner Associations now must disclose additional information regarding the claim toits members and must show compliance with procedures set forth in the community documents. Clearly, Arizona's legislature is seeking to reduce the amountof frivolous construction defects suits with the elimination of a prevailing homeowner's right to reasonable attorney fees and expert fees. Moreover, the Legislature now provides builders in Arizona with the right to make repairs to alleged construction defects if they so choose. FLORIDA: FLORIDA GENERAL CONTRACTORS SEEK AGGRESSIVE AMENDMENTTO PRE-CLAIM CONSTRUCTION DEFECT PROCESSWITH BILL 87 Florida's Right to Repair Act, Chapter 558 of the Florida Statutes, may be extensively revised in the near future. With the help of the South Florida Chapter of the Associated General Contractors of America, House of Representatives Bill 87 will be presented as an amendmentto the Pre-Claim Construction Defect requirements set forth in Chapter 558. The proposedbill is aggressive and seeks to addressissuesin the current statute. These deficiencies have seemingly prevented construction defect claims from being resolved without the filing of a civil suit. Notably, the statute oflimitations period for a property ownertofile suit for construction defects would be shortened based upon the revision of the term "completion of a building or improvement"to include issuance of a temporary certificate of occupancy. Additionally, property owners would be subject to additional requirementsfor issuing a notice of claim, including specific identification of locations of each alleged construction defect as well as the specific provisions of the building code, projectplans, project drawings, project specifications, or other documentation, information or authority that serve as the basis of the claim for each alleged construction defect. Perhaps most importantly, the bill providesthat if a construction defectis settled by repairs offered by the contractor during the Chapter 558 claims process butthe repairs fail to fully correct the defects and the owneror association thenfiles suit because the issue was not resolved, the defendant mayclaim that the issue was previously resolved andthe plaintiff owner may face sanctions. Evenif the bill as proposed doesnot passin its current form, on the heels of Nevada's Right to Repair Act overhaul, it may serve to encourage otherstates, including California, to take another look at their Right to Repair Act procedures. COLORADO: UPDATE FROM CGDRB SEPTEMBER2014 BULLETIN: COLORADO PROPOSED LEGISLATION RE: HOA CONDOMINIUM DEFECT CLAIMS In September 2014, we provided an important discussion ofpotential significant tort reform legislation presented in Colorado regarding construction claims by homeowner associations for condominiums. This Bulletin serves as an update to that discussion as intense debate overlegislative reform to provide condominium builders in Colorado more legal protections has heated up again. On October 13, 2014, the city of Lakewood becamethefirst Colorado municipality to pass a “right to repair” measure with respect to common interest communities. The Lakewood measure gives builders a right to repair construction defects before homeowner associations take legal action and requires a homeowner majority approval before legal action is taken. On February 10, 2015, two bipartisan Senators introduced Senate Bill 177, a bill proposing changesto the prerequisites for a homeowner associationtofile a construction defect action under the Colorado Common Interest Ownership Act. SB 177, if passed in its current form, would require: 1. That when the governing documents of a commoninterest community require mediation or arbitration of a construction defect claim and the requirementis later amended or removed, mediation or arbitrationis still required for a construction defect claim; 2. That the mediation or arbitration take place in the judicial district in which the commoninterest community is located; 3. That the arbitrator (1) be a neutralthird party; (2) make certain disclosures before being selected; and (3) be selected as specified in the community's governing documents or, if not specified, in accordance with the Uniform Arbitration Act; 4. That before a construction defect claim is filed on behalf of the homeowner association: (1) the parties must submit the matter to mediation; and (2) the board must give advancenotice to all unit owners, together with a disclosure of the projected costs, duration, and financial impact of the construction defect claim, and mustobtain the written consent of a majority of the unit owners. 5. That the disclosures required prior to the purchase and sale of property in a commoninterest community a notice that the community's governing documents may require binding arbitration of certain disputes. As explained in our previous Bulletin, currently, in Colorado, homeownerassociation boards are only required to obtain two condominium owners’ consenttofile a construction defect suit. Similar to SB 220, which proposed a numberof the same requirements, SB 177 would likely have the potential effect of reducing the numberof lawsuits filed against builders and decreasethetreat offrivolous claims; and allow the parties an opportunity to resolve their issues short oflitigation. On March 18, 2015, the Colorado Senate Committee on Business, Labor, and Technology voted 6-2 to forward SB-177to the full Senate with four minor amendments. The amendments provide: 1. The homeownerassociation’s attorney can prepare the disclosures that must be presented to unit ownerspriorto filing a construction defect claim; 2. Voting may be donebyproxy; 3. The parties must agree on an arbitrator. If they cannot agree, they maypetition the court to appoint one. Preference will be given to the arbitrator designated in the community’s governing documents; and 4. Adifferentlist of disclosure topics is required. Also introduced this year is SB 091, abill to shorten the Colorado's construction defect statute of repose to a homeownerfrom bringing an action after three years. On March 16, 2015, the Colorado Senate Committee on State, Veterans & Military Affairs voted to pass SB 091to the full Senate with two substantive amendments. Thefirst amendment excludes any multifamily developments from being effected by the shortened statute of repose. The second amendment proposesthe statute of repose only be shortened to five years, plus an additional yearif the defect manifests in year five. Currently, in Colorado, if a homeowner does not discover a construction defect within six years of a house’s completion, the homeownermayforfeit all legal rights to seek repair. Again, SB 091 would protect builders from frivolous or untimely claims by homeowners. Wewill continue to monitor developmentof these bills and others that may be proposed in the future. If we can provide anyfurther information concerning these developments or you are interested in receiving our compendium ofthe various right repair statutes please let us know. 1 As reported by KTVN-TV in Reno, Nevada: http://www.ktvn.com/story/28163519/senate-passes-constructiondefect-bill..... Reprinted courtesy of Chapman Glucksman Dean Roeb & Barger attorneys Richard H. Giucksman, Jon A. Turigliatto and David A. Napper Mr. Glucksman may be contacted at rglucksman@cgdrblaw.com Mr. Turigliatto may be contactedatjturigliatto@cqdrblaw.com Mr. Napper may be contacted at dnapper@cgdrblaw.com Document 8 Construction Defect Notice To Owners OfNew Residential, Single-Family Dwellings -C... Page 1 of 1 OCA Entities } Disclaimer | AboutUs | Contact Us California Repariniernt of pee Search PQ : woOV Consumer Affa i rs This Site California’ Construction Defect Notice To Owners Of New Residential, Single-Family Dwellings Should you discovera defect in the construction of your home, prior to pursuing legal action or responding to a construction defect solicitation, you mustfirst contact your home builder. Under SB 800 (Burton, 2002), homebuilders are given the opportunity to repair your homepriarto a legal action beingfiled. Construction defects could be problems such as waterintrusion into the home orcracksin the foundation These Pre-Litigation Procedures for Construction Defects only apply to new residential homes purchased after January 1, 2003. These laws provide the homebuilder with a right to attempt a repair of the defect prior tolitigation, inspections and exchanges of documentation under certain circumstances, and mediation at various points, all according to various time frames. These laws also provide thatif the homebuilderfails to follow any of the procedures, the homeowneris entitled to proceed with the filing of an action. The laws regarding Pre-Litigation Procedures for Construction Defects can be found in California Civil Code Sections 910-938. Back to Top | Conditions of Use | Privacy Policy | Accessibility | Contact Us | Help Copyright © 2046 State of California This web site contains PDF documents that require the most current version of Adobe Readerto view, To download click on the icon below, oer Adube Reader" i http://www.dca.ca.gov/publications/construction_defects.shtml 7/6/2016 Document 9 SB 800—A Subcontractor’s Guide ORTA aladin Risk Management, Lid.is a risk management consultancy company and the information provides id:not be interpreted as insurance, coverage, or legal advice. The information provided should be interpreted in line inceand legal methodologiesas they relate to your business practices and/or procedural guidelines. In&s @P aladia Risk Mo Page I of 17 agemsnt.com Rvl-69 SB 800—A Subcontractor’s Guide Table of Contents 2 S ction1 : An Opportunity for Increased Partnership 3 Section2 Subcontractors’ Liability Under SB 800 4 iSB 800 Requirements of Trade Contractors 5 : Making the Most of SB 800 6 : : Areas of Negotiation Between Builders 8 - and Trade Contractors : ‘Areas of Negotiation—Participation in the 14 Chapter 4 Procedures Se stion - Maintenance Obligations 15 reof Limitations for Functionality Standards 16 17 gladin Risk Management, Led.is a risk management consultancy companyand the information provides Aske LAD [Ne erpreted as insurance, coverage, orlegal advice. The information provided should be interpreted in line nd legal methodologies as they relate to your business practices and/or procedural guidelines. inks @P aladinRisk Mamagement.com Page 2 of17 Rvl-09 SB 800—A Subcontractor’s Guide Introduction xovernor Gray Davis signed SB 800into law on September20, 2002. The roductof intense negotiation by the California ConsumerAttorneys and the alifornia Building Industry Association, the bill replaces,in its entirety, existing ! regarding construction defects for new homesthatare first sold after January 03. e law‘applies to all new residential construction, including detached and ached homes.It does not apply to remodeling contracts or condominium nversions. ‘bill contains two primary sections. Thefirst consists of 45 definitions of ionable conditions or defects. These standards are designedto allow a rto recoverfor construction problems that actually affect the usability or lity of the home.If a problem is not addressedin the 45 standards,orin wly required one-yearfit-and-finish warranty for traditional “punchlist” items, is no Habit. @functionality standard section also codifies several affirmative defenses, ncludingrelief for defendants if the homeownerdid not properly maintain his or er home. Also, each functionality standard has a different time limit for meowner claims. rhe.second main section of SB 800 contains a very specific and time-sensitive essfor dealing with complaints priorto litigation. This section mandatesthat challegedviolation of the functionality standards be presentedin writing to the and that the builder has the right to inspect the problem andoffer to it. Ifa builder offers to repair the problem, the homeownermust allow the ilderto do so priorto instituting anylitigation stemming from a violation of any e 45standards. e details of SB 800 are too numeroustolist in this guide. For specific mation, we encourageyouto read “SB 800, The Homebuilder‘FIX IT’ struction Dispute Resolution Law,” available through the California Building ndustry Association (CBIA). ges Paladin Risk Management, Ltd.is a risk management consultancy company and the information provides Sy))PALADING reted as insurance, coverage, or legal advice. The information provided should be interpretedin line HAIGMANAGEMENT ce dnd legal methodologiesasthey relate to your business practices and/orproceduralguidelines. in>> https:fwww.facebook.com/UTOpiniani) hese high costs are not daunting to the affluent. Net migration data show that fram 2007lo 2614, 80,000 families with a household income cf $150,000 or more moved to the GoldenState. But during that span, 563,000 families with incomeofless than $50,000 left the state, as did 139,000 families with income from $60,000 to $99,899. ‘These trends are likely to continue; according to Beacen, unlessstate leaders change state laws — starting with the California Frvirormental Quality Act (CEQA) — to makeit easier to bulld new housing and less easy for opponents to tie up developers with semands and prolonged court battles. Without such changes, Beacon wamed that the state could face worker shortages, depressed lemand far goacs and services, and increased welfare costs. comvnews'201 6/mar/(0G/housing-costs-too-high-california’all/?print TSI201C vipvfwwe,sandiegouniontsibun ow California should fight poverty: Add housing stock | SanDiegoUnionTribune.com Page 2 of z These reports should serve as a wake-upcall to California’s political establishment. After seeing similar circumstancesin his city, New York MayorBill de Blasio — one of the nation’s leading progressivepoliticians — launched a push to add 80,000 new housing units. Vox executive editor Matthew Yglesias — oneof the nation’s leading progressive journalists — has expressed astonishment for years that there’s not a broader appreciation of how muchrestrictive housing regulations hurt the poor and middle class. In his 2012 e-book (http:/Avww.goodreads.com/book/show/13513173-the-rent-is-too-damn-high), “The Rent Is Too Damn High,” Yglesias wrote that high rentis “bad for the environment; it promotes long commutes,traffic jams, misery and smog. What's more,high rentis not a fact of nature. It’s the result of bad public policy, and it deserves to be taken seriously as oneofthecritical problems weface.” Especially in California. New Census Bureau measuresthat include costofliving show the state to be America’s poverty capital, with nearly onein four residents barely able or unable to make ends meet. But to date, attempts to address poverty have focused on raising the minimum wage and adding moneyto affordable housing programs that amountto lotteries in which select few families gain accessto subsidized homes. Theseare policies that allow the state’s most powerful forces to show sympathyforthe impoverished without addressing the biggest cause of masspoverty. The millions of Californians whofeelstricken by their monthly housingbills deserve far better. Next editorial: Thanks, San Diego police, for mandatory dog training (http://)www.sandiegouniontribune.com/news/201 6/mar/05/police-mandatory-dog-training/) © Copyright 2016 The San Diego Union-Tribune.All rights reserved. ttp://www.sandiegouniontribune.com/news/20 1 6/mar/06/housing-costs-too-high-california/all/?print 7/6/201€ Document 12 7/6/2016 Current State of the California Housing Market | Next 10 { Subscribe to our NEWSLETTER| emailhere GO Publications « Economy & Governance (/programs/economy-governance) Current State of the California Housing Market March 3, 2016 Despite having the third highest rate of low-wage job creation in the nation, California could face a shortage of low-wage workers as housing costs push residents out in search of affordability. According to a trio of new studies, low- and middle-wage workers are leaving California even as large numbers of higher-wage earners continue to arrive. And all together, more people are moving out than moving in. California's current housing-market suffers from a shortage of supply andthelingering effects of the housing crash and the Great Recession. California currently ranks near the bottom in terms of its supply of housingrelative to population growth. Add that to the increasing demandto live near the coast, to be close to tech hubs, andto be near downtowns, andit's not too surprising that home prices throughout the state continueto rise. Additionally, the cost of developmentand stringent regulations imposed on developers has contributed to the lack of homebuildingin Califomia. To alleviate the housing affordability crisis that plagues low-income and middle-income households in the state, more housing construction needs to take place. One such way would be by streamlining the permitting process and finding a way to reduce concerns about environmentalprotection policies, in addition to encouraging more residential development along California coastalcities and, if possible, an increasein the residential density of such developments. The report's main findings include: e Homeownership rates, which havehistorically been low comparedtoratesin other states, have been declining throughout California, as many residents - especially those with recent foreclosures on record - remain unqualified for mortgage loans. In 2014, California ranked 49th in terms of homeownership, as only 53.8% of homes were owner-occupied. » Housing costs are high relative to incomes and have been increasing in recent years for both homeowners and renters. California's average homeownerspent 25.4% of their household income on housing costs in 2014, more than homeownersin anyother state. « Housing remains overcrowded asthe proportion of renter-occupied housing units with more than one person per bedroom grew from 12.7% in 2007 to 13.2%in 2014. http://next10.org/ca-housing 1/4 7/6/2016 Current State of the California Housing Market | Next 10 » Homeprices are more expensive thanin all other states, particularly in major metropolitan areas. Diminishing levels of affordability have already driven many low-income and middle-income householdsto migrate to more affordable states. * Housing remains in short supply, placing upward pressure on homeprices and reducinglevels of affordability. From 2005 to 2015, permits for only 21.5 housing units were filed for every new 100 residents in California, less than any other state except Alaska. More information on California housing compared to other states available at Compare50.org (http://www.compare50.org/pages/home?utm_source=next10&utm_medium=referral&utm_campaign=housing). 49 people likethis. Ecos BU Downloads Full Report (/sites/next10.huang.radicaldesigns.org/files/current- state-ca-housing- market.pdf) Press Release (/sites/next10.huang.radicaldesigns.org/files/beacon- press-release.pdf) coMPARE HQ) Comparing Feonomic Performance Across theUnitedStates (http://www. compare50.org/pages/home? utm_source=next10&utm_medium=referral&utm_campaign=housing) Related Press Coverage California doesn't have enough housing, and lawmakers aren't doing much nttp://next10.org/ca-housing 2/4 7/6/2016 Current State of the California Housing Market | Next 10 about it (/node/695) LA Times, April 14, 2016 Report: High Housing Costs Responsiblefor California's Economic Woes, Not _ Taxes (/node/683) Planetizen, March 7, 2016 Howtofightpoverty in California: Add housing stock (/node/682) The San Diego Union-Tribune, March 6, 2016 Here's How Serious California's Housing Shortage Has Gotten (/node/676) Curbed Los Angeles, March 4, 2016 Why poorer, uneducatedpeople are leaving California (,/node/678) KPCC, March 4, 2016 High Housing Costs Are Driving Californians Out in Droves (/node/680) Curbed Los Angeles, March 4, 2016 Are high-wagejobs squeezing lower earners out ofBay Area? (/node/681) San Francisco Business Times, March 4, 2016 High Housing Prices Spur Migration OutofCalifornia (,/node/679) Los Angeles Business Journal, March 3, 2016 New report says California needs more housing (/node/669) Sacramento Business Journal, March 3, 2016 How housingprices are driving low, middle-incomefamilies out ofCalifornia (/node/670) Daily Bulletin, March 3, 2016 (http://www.cawaterchallenge.org/pages/overview) ‘CALIFORNIA. WATER CHALLENGE Did you know? The City ofLos Angelesjust released the Los Angeles Budget Challenge (http://la.budgetchallenge.org/pages/overview)! http://next10.org/ca-housing 3/4 7/6/2016 Current State of the California Housing Market | Next 10 What Was The Most Important Thing You Learned? It is really hard to balance the budget as a government. - Butte, CA NEXT 10 300 Brannan Street, Suite 402 San Francisco, CA 94107 Telephone: 415 957 0202 Fax: 415 957 0685 Email: INFO@NEXT10.ORG (MAILTO: INFO@NEXT10,ORG) DONATE (MAILTO:SARAH@NEXT10.0ORG) Follow NEXT 10 TWITTER (HTTP://TWITTER.COM/NEXT10) | FACEBOOK (HTTP ://WWW.FACEBOOK.COM/#!/NEXT 10? REF=SEARCH&SID=100000859247177.3367325027..1) YOUTUBE (HTTP://WWW.YOUTUBE.COM/USER/NEXT100RG) | GOOGLE+ (HTTPS://PLUS.GOOGLE.COM/B/111755553546070234150/+NEXT10ORGCA) © NEXT 10 (HTTP://NEXT10.0RG/COPYRIGHT-POLICY) | PRIVACY POLICY (/PRIVACY-POLICY) | TERMS (HTTP://NEXT10.ORG/TERMS) http://next10.org/ca-housing 4/4 Document 13 Next 10 Overview California's current housing marketsuffers from a shortage of supply and the lingering effects of the housing crash and the Great Recession. * Homeownership rates, which havehistorically been low comparedtorates in other states, have been declining throughout California, as many residents- especially those with recent foreclosures on record - remain unqualified for mortgageloans. In 2014, California ranked 49* in terms of homeownership, as only 53.8% of homes were owner-occupied}. ¢ Housingcosts are high relative to incomes and havebeen increasingin recent years for both homeownersandrenters. California’s average homeownersspent25.4% of their household incomeon housingcosts in 2014, more than homeownersin anyotherstate. ¢ Housing remains overcrowdedas the proportion of renter-occupied housing units with more than one person per bedroom grew from 12.7% in 2007 to 13.2% in 2014. ¢ Homeprices are more expensive thanin all otherstates, particularly in major metropolitan areas. Diminishing levels of affordability have already driven many low-income and middle-income households to migrate to more affordablestates. ¢ Housing remainsin short supply, placing upward pressure on homeprices ~ and reducinglevels of affordability. From 2005 to 2015, permits for only 21.5 housing units werefiled for every new 100 residents in California, less than any other state except Alaska. Indeed, California currently ranks near the bottom in termsof its supply of housing relative to population growth. Addthatto the increasing demandto live near the coast, to be close to tech hubs, and to be near downtowns,andit’s not too surprising that homeprices throughoutthe state continueto rise. In the years to come, the dearth of new homescould exacerbate the problem, making housing evenless affordable for many of California’s residents. The cost of development and stringent regulations imposed on developers has contributed to the lack of homebuilding in California. Tough environmental and zoning laws sometimes create an obstacle for homebuildersthat are seeking approvalfor developmentactivities, especially along California's coastalcities. Althoughtheselawsreflect good intentions and were enacted to preservethestate’s 1 Unless otherwise noted, all statistics in this report are attributed to the U.S. Census. CurrentState of the California Housing Market: A Comparative Analysis March 2016 Next 10 naturalland, they are well past due to be reevaluated, as they are often poorly implemented and abused.” This reportwill provide further evidence that California’s residential real estate market needs more housing by showing how thestate stacks up against otherstates. Taken together, these key housing trends explain the economic fundamentalsof the housing market and why housing is becoming too expensive for manyCalifornia residents, laying the groundworkfor the decisions and policy changesthat need to be made to improvethelives of those living in the GoldenState. Housing Tenure Select States, 2005 to 2014 ~ ~e -a ~~ way70 peomnnaneenne nneeetvo ec:a iniewT - oeee oe 65 oo Ragaetre 60 S h a r e of O w n e r - O c c u p i e d Un it s (% ) 55 eeeee By 50 t I ! t | ' | ! ! | 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 California voces Florida ore ewer? New York “=== Texas === Arizona some Nevada Source: United States Census Bureau 2 A few examples include the Sacramento Senior Homesin the City of Berkeley (2001), the East County Transitional Living Centerin the City of El Cajon (2003), the Wagon WheelVillage in the City of Oxnard (2009), and the Parkmerced DevelopmentProject in the City of San Francisco (2014). CurrentState of the California Housing Market: A Comparative Analysis March 2016 Next 10 Structure of Housing Occupancy Manyhouseholdsin the state rent rather than own. This is commonin states like New York and Massachusetts, where major metropolitan areas attract young professionals whopreferto live near their jobs rather than own homesin more affordable suburbs.Areaslike San Francisco, the South Bay, Los Angeles, and San Diego have been attracting more young professionals from outof state in recent years. Migration patterns from 2007 to 2014 indicate that over 52,700 personsover 25 yearsof age with bachelor’s degrees moved to California from otherstates on net. In contrast, 469,800 persons without bachelor’s degrees moved out of California on net. In 2014, California ranked 49th amongall states in homeownership. Proposition 13 has had a negative effect on the homeownership rate because it encourages properties to remain under the same ownership for longer periods of time, makingit difficult for new homeownersto enter the market. Move-up buyers can rent out their prior homes and maintain the lowercosts associated with the lower assessed values, in comparisonto the costs and assessed values for would-be owners weretheytosell their homes. Not only is the homeownershiprate in California low,it has also been falling overthe last ten years for Housing Affordability in Select Metropolitan Areas MSA Housing Affordability Index | Median 2014 Rank Home Price(3} Youngstown, O11 369.0 1 78,600 Toleda, OH $68.1 2 87,200 Rockford, [L 454.5 3 66,300 Decatur, IL 343.5 4 $9,700 Elmira, NY 320.0 5 100,200 cleveland, OH 285.5 138 122,600 Cincinnati, O1 257.4 43 140,560 Amarillo, TX 250.2 58 144,560 Athanta, GA 2eL7 7 159,500 Tanipa, PL 205.6 85 151,500 Dallas, TX LO7.F 92 188,400 Chicago, OH 190.3 104 205,900 Albuquerque, Nii 182.3 118 177,600 San Antonia, TX 180.4 120 182,169 lfouston, TX 180.4 121 198,400 Austin, TX 189.9 134 240,700 Tueson, AZ 169.6 155 173,800 E] Paso, 1X 168.9 136 140,800 Orlando, FL 168.8 137 i8a,oo0 Phoenix, AZ 166.7 140 198,500 Las Vegas, NV 158.8 144 198,000 Washington, DC 147.1 154 383,800 Sacramento, CA 136.9 137 268,700 Denver, CO 135.9 158 416,200 Portland, OR 154.7 160 286,000 Seattle, WA 125.4 163 355,800 Bastor, hiA 125.3 164 489,400 InJand Empire,CA 117.9 165 273,900 Miami, FL Lid 1867 264,000 New Yark, NY 108.2 168 1,994,000 San Diego, CA 7.8 171 497900 Los Angeles, CA 73.0 17Z 449,500 San Francisca, CA 70.5 173 737,600 Jtonoludu, HI 67.7 174 68280D Orange County, CA 65.0 175 887,500 South Bay, CA 64.9 176 $60,000 Source! National Association of Realtors Based on 176 Metropolitan Statistical Areas March 2016Current State of the California Housing Market: A Comparative Analysis Next 10 various reasonsrelated to the economic cycle. California residents suffered greatly during the housingcrash,and theeffects of the crash continueto linger. Subprime mortgages were very prevalentin inland regions throughoutthe state, which caused massive numbersof foreclosures in these areas. An overcorrection of home prices between 2009 and 2013 created bargainsfor investors, providing them an advantagefurtherfueled by the lack of competition from the manytraditional buyers who held foreclosures on record. Manyinvestors converted these homesto rentals and will benefit from low tax rates due to Proposition 13 until they decide to sell. With few distressed properties now available on the market, residents in middle- income households, many ofwhom were subprime borrowers during the downturn, are finding it increasingly difficult to become homeowners.In additionto the introduction of muchtighter lending standards, metropolitan areas in both the Bay Area and Southern California continue to rank at the bottom in termsofaffordability when comparedto metropolitan areas throughoutthe nation. Even inland metropolitan areas such as Sacramento and the Inland Empireare estimatedto be less affordable than metropolitan areas in other states, such as Las Vegas, Phoenix, Chicago, Washington,D.C., San Antonio, and Houston. CoreLogic estimates that 11.4% and 8.7% of homeowners with mortgagesin the Inland Empire and Sacramentoregion, respectively, werestill underwater, with negative equity,as of the third quarter of 2015. Housingcosts in the Golden State continue to remain elevated for both homeownersandrenters when comparedto housingcosts in other states. Approximately 40.6% of householdsliving in owner- occupied housing units with a mortgage spend 30% or moreoftheir income on housing. Apartmentrenters in California are also struggling, as 56.8% of households living in rental units spend 30% or moreof their income on housing- secondonly to Florida (57.9%). _ Average Percentage ofHousehold Income Spent on Housing Owner-Occupied | Renter-Occupied : State Income Spent (9%) Rank Income Spent(9) Rank 2000 2014 2000. 2014.| 2000 2014 2000 2014 ‘ Texas 18.0 19.3 16 24 25.0303 iss Arizona 21.0 20.4 40 33 | 27.2 30.9 42 19 Nevada 22.6 21.6 48 39 26.8 30.0 383 Florida 21.4 22.4 43 43 | 23.8 35.5 50 46 j New York 21.7 23.0 45 46 28.0 36.4 4749 California 23.8 25.4 50 50) 284 36.0 48°48 Source: U.S, Census Bureau Current State of the California Housing Market: A Comparative Analysis March 2016 Next 10 Indeed,California continues to have expensive apartmentrental rates as well. In 2014, the average apartmentrental rate was 35.7% abovethe national average. In comparison,the State of New York,despite the significantly high rental rates in Manhattan, has an average apartmentrentalrate that is only 22.9% above the national average. The high cost of housing has contributed to two notable trends amongCalifornia households. First, household sizes, which were steeply declining prior to the recession, started to grow larger overthe last five years as young adultsareliving with their parents for longer periodsof time. This trend madenational headlines during the recession becauseit affected every state. However, the issue continues to affect California households even as the economyis expanding, particularly with respect to renter-occupied housing units. California had the highest share of renter- occupied housing units with more than oneresident per bedroom in 2014 (13.2%). . Proportion ofHomes with More than 1 Resident per Bedroom Owner-Occupied | Renter-Occupied State 2000 2007 2014 2014 2000 2007 2014 2014 (%) 6} (96) Rank (96) (4) (96) Rank Florida 37° 13 1600 (37) «129 5.20 5.540 NewYork 2.6 17 20 43 | 136 76 85 48 Nevada 47 18 22 44 145 56 64 43 Arizona SA 8.0 A 45 | SALT 7646 Texas 63 32 32 47 |) 150 73 73 45 California 86 41 39 48 | 239 127 13.2 50 Source: U.S. Cersus Bureau The second notable trend stemming from the high cost of housingis a trend in domestic out-migration: more residents are leaving California than are movingin from otherstates. An analysis of California's aggregate domestic net migration between 2007 and 2014 showsa netoutflow of approximately 625,000 residents (excluding migrants whoare enrolledin college and universities, as they may be only temporary residents). This is comparedto net positive domestic migration for Texas (975,700), Arizona (261,400), Florida (558,500), and Nevada (102,000) over the sametime span. New Yorkalso experienced a net domestic out-migration, with a net outflow of 967,400 residents. CurrentState of the California Housing Market: A Comparative Analysis March 2016 Next 10 Net Domestic Migration, 2007-2014 (in thousands) Component California. Arizona fYlorida -Nevada New York Texas Total -625.0 261.4 558.5 102.0 967.4 975.7 iy Household Income Group Under $50,000 ~§63.0 157.5 294.3 73.2 ~976.5 432.0 $50,000 ta $99,999 “138.9 70,0 175.5 18.2 -292.0 312.6 $100,000 to $149,999 -3.3 15.6 SAS 26.9 =105.2 149.3 $150,000 and Over 80.1 18.3 34.3 -7,3 -9.7 81.8 By Age Group Under 36 ~292.6 38.5 45.2 37.0 -484,7 641.3 36 to 65 -309,8 138.7 324.8 47.3 -361.6 276.7 Over 65 ~22.6 $4.1 188.5 17.8 “W211 57.7 By Education (25 Years and Over) Less than Bachclor’s Degree ~469.8 169.3 324.5 54.6 -180.4 407.3 Bachelor's Degree or Higher 52.7 722 163.5 11.0 -204.6 196.9 Source: U.S, Census Bureau Migration patterns confirm that middle-income households are being driven out of the local housing market. Persons in households with incomes of between $50,000 and $100,000 constituted 22.2% of domestic migrants leaving California between 2007 and 2014. Meanwhile, in other states, such as Arizona, Florida, and Nevada, households in this income grouprepresented a high shareofthe positive net domestic migration over the sameperiod. And while more middle-income householdsare leaving the state, the opposite can be said about high-income households. Net domestic migration of persons in households with incomes of more than$150,000 was 80,100 persons between 2007 and 2014. Furtherdeclines in homeownership andlevels of homeaffordability could carry serious consequencesandaffect the future economic growthoftheState of California. Homeowners are morelikely to invest in their homes and communities than renters, an important reason to encourage homeownership. Furthermore, households that spend high proportions of their incomes on housingwill spendless on goodsandservices. High costs for housing increasethe likelihood that lower- income householdswill be reliant on government welfare, which in turn puts undue fiscal pressure on state and local governments. Yet these concernsonly exist because homesarein short supply. Owner-Occupied Housing Statistics, 2014 Component California Texas Arizona. Florida Nevada NewYork Total Persons Living in Owner-Occupied Housing 6,855,688 §,674,241 1,484,957 4,693,821 547,905 3,857,906 Share of Owner-Occupied Houscholds (9%): With Income of less than $50,000 28.1 35.4 40.0 43.2 36.4 29.2 With Income of $150,000 or More 22.6 15.3 11.8 18.7 10.8 20.1 With Householder in Retirement Age WA 245.9 35.3 39.0 31.4 29.7 Whose Householder has a Bachetor’s Degree 42.5 34.3 36.0 35.1 31.8 42.0 ’ Source: U.S, Census Bureau Current State ofthe California Housing Market: A Comparative Analysis March 2016 Next 10 Housing Supply Constraints Permitting by State, 2005-2015 California ranks near the bottom in terms of eank state Permits per the numberof residential permits issued on a 100 New Residents . : 1 Michigan 166. per capita basis. From 2005 to 2015, only 21.5 » Rhode tsland aoa new units have been permitted for every 100 3 Maine 42 newresidents, compared to 33.4 new units 3 Vermont 897 . : . . 3 Loautstaria 36.8 nationwide. Housing statewide has favored 6 Ohio 56.3 multifamily structures more than single-family : Wile “tammpshive ae . . inois 7, structures, a trend that sets California apart 4 Mississippi ar from manyotherstates. From 2005 to 2015, 10 North Dakota 46.8 . ' . 11 South Dakota 46.5 only 59.1%of housing units permitted werefor LZ Wisconsin 45.3 single-family homes, a category in which uw ee . 42.8 . . + . 14 ew York 42.3 California ranks 46th. While the city centers of 15 NewJersey 403 the largestcities in the state arefairly built out, _ 16 Nebraska 40.2 inl ' . . . LY) South Carclina 39.8 and thus mainly receive permits for multiunit is Delaware 37.4 properties, construction of new single-family 19 Alabama 37.4 . : “f 20 North Carolina 36.7 homesin suburbanareashaslackedsignificant a1 indiana ma growth. : 22 idaho 36.4 23) Pennsylvania 36.0 za Florida 553 The deficient amount of homebuilding in 23 Kansas 3.7 Californiais in part the result of a numberof anes we regulatory changes. Amongthese regulatory 28 Minnesota 34.5 factorsis the California Environmental Quality Washington a . < Adal Act (CEQA). Following CEQA,local 41 Georgia 33.0 governments require new developments % Nevada te . . . . . : PLEastal a1. (either residential or nonresidential) to 34 Virginia 312 conduct environmental reviewsfor potential 35 Arkastsas S22 . . 46 West Wirginia 31.1 environmentaleffects, which may lead to a7 Maryland 30.7 either limiting developments or stopping them 3 Utah 4 40.0 . Se Colorado 29.9 altogether. According to the 2012 Annual 40 Texas 384 Planning Survey Results published by al Kentucky 29.2 ° oe a : 42 Mass sett 265. California’s Governor’s Office of Planningand Mote one Research, 21% of respondents indicated that 44 New Mexico 26.5 h : b : : ] : . fill i 45 Connecticut 27.9 the primary barrier to implementing Infi 46 Okdahoma 276 projects was community 47 Wyoming 15.3 tgs : : 0 48 Hawaii 25.1 opposition/CEQA/lawsuits, while another 24% 49 California tus of respondentsattributed a lack of 50 Alaska 16.2 funding/high costs, which can be impacted by Gaited Sats a sotrce: U.S, Census Surcati the fear of a CEQA lawsuit.3 3 State of California, Governor’s Office of Planning and Research, “Annual Planning Survey Results, 2012”. Available at https://www.opr.ca.gov/docs/2012_APSR.pdf CurrentState of the California Housing Market: A Comparative Analysis March 2016 Next 10 The scarcity of developable land has also madeany form of homebuilding along the coast difficult. The Legislative Analyst's Office (LAO) reports that just under two- thirds of the area surrounding urbancenters on California’s coast is undevelopable due to mountains,hills, ocean, and other water.* The 1976 passingof the California Coastal Act, which was enacted to protect and maintain the overall quality of the coastal zone environment,has played a role in limiting how muchcoastal land can be developedfor residential construction.° On multiple occasions, local communities have blocked homebuilding by utilizing land use authority to either slow or stop projects. The resistance to new developments often stems from the desire to maintain current homevaluesor from the perception that the land should not be developed for various reasons. Also concerning to developers, especially those that handle fewer properties, are the costs associated with tearing downexisting buildings and addressing the environmental concerns that may arise during the redevelopmentphase. TheState of California has some of the toughest zoning lawsin the country, requiring developers to adhere to multiple state and local ordinances. The fees associated with developmentalso put morefinancial strain on homebuilders, resulting in these fees being passed along to homebuyers. Thesefees include the building permit, utility connection, environmental impact assessment, and zoning and subdivision fees. These items wereall key issues discussed at a recent House L.A. 2015 Summit hosted by the Building Industry Association’s Los Angeles and Ventura Chapter, whichfeatured a numberof local and national developers along with local political representatives.® Some developers assert that many local governments have favored commercial projects over residential, as these projects provide a larger financial upside than residential projects. Cities and counties are awarethat sales taxes collected by potential commercial andretail establishments far outweigh the property taxes homeowners would pay. Somelocal governmentshave also remained cautious toward homebuilding because the accompanying population growthis sometimes costly, leading to an increased needfor fundingto facilitate infrastructure developmentandforpolicing. 4 MacTaylor, California’s High Housing Costs, Causes and Consequences, Legislative Analyst's Office, March 2015,available at www.lao.ca.gov/reports/2015/finance/housing-costs/housing-costs. pdf. 5 See the 2003 State of California General Plan Guidelines, p. 174. 6 For more information, see www.bialav.org. CurrentState of the California Housing Market: A Comparative Analysis March 2016 Next 10 Conclusion California’s current housingclimate is not able to supportits growing population. The lowlevels of residential construction could result in further increases in home prices, such that fewer and fewerCalifornia residents will be able to afford homes.It is true that homeprices have increased throughoutthe country, but California remains the most expensive state for purchasing a home.Rental rates have also continued to climb, and residents who usually flock to the rental market to avoid unaffordable homepricesfindlittle relief. The state’s lower-incomeresidents suffer the most; they are burdenedwith having to spend a higher proportionoftheir incomes on housing andare forced to cut back on other discretionary, but oftentimes necessary, purchases. However, diminishing levels of affordability are also reducing the ability for middle-income residents to own a home,whichis discouraging for residents of both low-income and middle-incomecategories. Indeed,the currentstate of housing has led manyto leave California in the hope of finding more affordable living circumstances elsewhere. To alleviate the housing affordability crisis that plagues low-income and middle- incomehouseholdsin the state, more housing construction needsto take place. Homebuilders should be encouragedto build in California. One such way would be by streamlining the permitting processes andfinding a way to reduce concerns about environmental protection policies. The LAO reportreferencesa few solutions that mayhelp alleviate the housing affordability crisis that California currently faces, including encouraging moreresidential developmentalong California coastal cities and, if possible, an increasein the residential density for such developments. Current State of the California Housing Market: A Comparative Analysis March 2016 10 Document 14 Next 10 Overview In June 2014, California’s labor marketfinally recoveredall of the jobs it had lost during the Great Recession. It was a landmark achievement and a testamentto the resilience of the state’s economy.California, afterall, was one of the nation’s hardest hit locations in the wake of the housing collapse, and had more ground to make up than most. Many newjobsin California are in low-wage industries. Indeed, the post-recession period favored low-wage job growth over middle-wage and high-wage job growth throughoutthe state by a wide margin. However,California continues to contain a significant amountof jobs in middle-wage and high-wageindustriesas well. In fact, California has been leading the nation in both middle-wage and high-wage job creation during the post-recession recovery. The mainfindings in this analysis include: ¢ Low-wagejobs in California are concentrated in a small numberof high-level industries, such as Leisure and Hospitality, Retail, Health Care, and Agriculture. High-wage employment,on the otherhand, is represented by a largervariety of smaller industries. ¢ Overtheyears, the share of employment in low-wageindustries has risen in California and the nation overall. ¢ Low-wage job growthin California during the post-recession period ranked third highest in the nation. However,California was notthe only large state to rank high in low-wage job growth: Florida and Texaswerealso in the top five. ¢ California is home to someofthe leading high-wageindustriesin the nation, including the Professional and Technical Services industry. California ranked 11th highest amongstall states in terms of post-recession job growthinthis sector. Additionally, compensation in high-wage industries in California is growingfaster than the nation overall. ¢ California ranked 11" in terms of job growth in middle-wage industries from the fourth quarter of 2009 to the fourth quarter of 2014. Overall, California, like other populousstates, is a large producer of low-wagejobs. However,California is also a major job creator in a variety of middle-wage and high- wageindustries. Employment by Income: A Comparative Analysis 2 March 2016 Next 10 California Employment Growth by Wage Ss Q1-04 to 04-14 v 120- ve t yo 9 wn ae va € - pent,— newt & shim es, Sage “ a we ” . @ 100- ad . poo UD “ @ 3 90 ~ 1 1 ! 1 1 i £ Q1-04 Q1-06 Q1-08 Q1-10 Qi-12 Qti-14 High Wage coe oss Middle Wage srmminnrmes LOW Wage Source: Quarterly Census of Employment and Wages High-, Middle-, and Low-WageIndustries in California This analysis is based on the U.S. Bureau of LaborStatistics’ Quarterly Census of Employment and Wages (QCEW).Industries within the QCEW are organized according to the North American Industry Classification System (NAICS). The QCEW program publishes a quarterly count of employmentand wages,as reported by employers, covering 98% of U.S. jobs by industry, and provides the most comprehensivepicture of industry job growthavailable. In this analysis, low-wage industries are those in the bottom 30% ofjobs ranked by wageat the national level during 2014. Similarly, high-wage industries represent the top 30% of jobs ranked by wage. Those jobs between the 30th to 70th percentiles are considered middle-wagejobs. High-wage employmentin California spans a wide rangeof diverse industries. Indeed, the top ten grossing high-wage industries at the three-digit North American Industry Classification System (NAICS) level span acrosseight distinct super sectors: Professional, Scientific, and Technical Services; Health Care Services; Wholesale Trade; Government, Durable Goods Manufacturing; Finance and Insurance; Management of Companies and Enterprises; and Construction. Overall, this study estimatesthat there are roughly 5.4 million high-wage jobs in California— 34%ofall nonfarm jobs. Employmentby Income: A Comparative Analysis 3 March 2016 Next 10 TopTenHighWageIndustries by Employment,Qa-14 industry Employment Average Annual Wage Professional and Technical Services 4,020,380 103,906 Hospitals 548,092 74,318 Merchant wholesalers, durable goods 312,444 76,662 Justice, public order, and safety activities 306,706 83,727 Computer and electronic product manufacturing 279,600 145,107 Credit intermediation and related activities 244,324 83,500 Merchant wholesalers, nondurable goods 243,099 61,492 insurance carriers and related activities 204,500 83,720 Management of companies and enterprises 198,536 118,858 Construction of buildings 146,744 63,200 Source: Quarterly Census of Employment and Wages In California, as of the fourth quarter of 2014, the Professional and Technical Services sector employed roughly one million Californians according to the QCEW, making up 19% ofthe state’s high-wage employment. Drilling downtothe four-digit NAICSlevel within the Professional and Technical Services industry presents a more detailed picture of the types of jobs that makeupthis sector. For instance, the top four-digit industries within the Professional and Technical Services sectorare: computer systems design and related services; managementandtechnical consulting services; and architectural and engineering services. Examplesof jobsin these sectors include software engineers, managers, and architects. Hospitals are the second largestofthe state’s high-wage sectorsat the three-digit NAICSlevel. This sector represents 10% of high-wage employmentin California with 548,100 employees.At the four-digit NAICS level, this sector is comprisedof: general medical and surgical hospitals; psychiatric and substance abusehospitals; and otherhospitals. Beacon Economics estimatesthat there are roughly 6.1 million middle-wagejobs in California—38% ofall nonfarm jobs. The bulk of middle-wagejobs arein Educational services, which includes teachers, professors, and instructors,as well as education support staff. The QCEW data indicates that this industry includes more than 1.4 million employees, making up 24%ofthe state’s middle-wage employment. Other major middle-wageindustries include Administrative and supportservices, ambulatory health care services, and specialty trade contractors. Employment by Income: A Comparative Analysis 4 March 2016 Next 10 TopTen Middie WageIndustriesby Employment, Q4-14 Average industry Employment Annual Wage Educational services 1,452,719 51,545 Administrative and support services 794,123 38,584 Ambulatory health care services 578,297 65,364 Specialty trade contractors 410,141 54,600 Executive, legislative and general government 226,581 64,012 Real estate 189,142 59,644 Membership associations and organizations 165,203 40,768 Motorvehicle and parts dealers 161,344 50,596 Food manufacturing 144,091 45,032 Repair and maintenance 140,869 39,572 Source: Quarterly Census of Employment and Wages Conversely, low-wage employmentis less diverse, spanning fewertop-level sectors, as can be seen bythelist of top ten low-wageindustriesin the table below.Overall, this study estimatesthat there are roughly 4.6 million low-wagejobsin California— 29% ofall nonfarm jobs. Furthermore, the bulk of low-wage jobs can be found in five primary sectors: Leisure and Hospitality; Private Households; Health Care Services; Retail Trade; and Agriculture. It is worth noting that the Health Care Services sector contains three-digit NAICS industries in both the high- and low-wage categories—underscoring the importanceofdrilling down into moredetailed data rather than just looking at average wagesat the supersectorlevel. Top Ten Low Wage industries by Employment, Q4-14 Average Industry Employment Annual Wage Food services and drinking places 1,064,936 18,785 Food and beverage stores 378,943 28,0106 Private households 317,810 28,094 General merchandise stores 283,611 24,102 Nursing and residential care facilities 242,279 31,150 Amusements, gambling, and recreation 234,660 26,832 Social assistance 226,470 17,689 Accommodation 208,863 32,023 Agriculture and forestry support activities 198,638 25,621 Crop production 186,150 31,473 Source: Quarterly Census of Employment and Wages The FoodServices and Drinking Places three-digit industry makesup the bulk of employmentat the low endof the wage spectrum andincludes jobs such as waiters andkitchen staff. The QCEW data indicates that this industry is hometo 1.1 million employees, making up 23%ofthe state’s low-wage employment.This industryis comprised of restaurants and bars, which provide someof the lowest average annual wagesin California at $18,785 per year. Amongthe largest low-wage industries by jobs is the Social Assistance Services industry. With an average annual wage of $17,689,it is the lowest wage industry in thestate. Employmentby Income: A Comparative Analysis 5 March 2016 Next 10 Low-Wage Industry Growth in the United States In the time since the Great Recession, from the fourth quarter of 2009 to the fourth quarter of 2014, low-wage employmentin California has expandedby 16.1%. This represents the third highest growthrate in the nation overthis time period. North Dakota held the numberone rank with a 20.7% increased over the sametime period. California Low Wage Employment Q1-04 to Q4-14 4,600 - 70.120 0.110 8o - -0.&, 4,000 5 3 i E 3,800- oe” uj , ' I I I 70.105 Q1-04 Q3-06 Qi1-09 Q3-11 Q1-14 Employment Employment Per-Capita Source: Quarterly Census of Employment and Wages Although California ranks high amongthefifty states for low-wage employment growthsincetherecession,it is not the only large state experiencing these trends. Florida ranks numbertwoin low-wage job growthsince the fourth quarter of 2009 and Texas, a state often compared to California, comes in at numberfourfor fastest low-wagejob growth. NewYorkwaseighth on thelist. One important consideration for low-wage job growthis the Tourism industry, whichis doing quite well across the nation. Food Service and Accommodation employmentare someofthe largest low-wage industries, and labor demand among these establishments stems primarily from tourism and recreationalactivities. Businesstravelwill also support these industries, but the fact that these jobs are expandingis an indication of a growing economy whereindividuals and businesses are able to increase travel spending. Ultimately,this is a sign of strength for the economy. Employmentby Income: A Comparative Analysis 6 March 2016 Next 10 Top Ten States for Low Wage Grawth State Q4-14 Post-Recession Population Employment Growth (%) Growth (%) North Dakota 116,568 20.7 11.2 Florida 2,450,387 16.2 6.7 California 4,560,546 16.1 5.0 Texas 2,748,083 45.1 8.7 Oregon 507,254. 13.6 4.2 Colorado 633,040 13.2 V7 Delaware 116,577 12.8 4.9 New York 2,293,686 12.6 2.3 Massachusetts 883,135 12.0 3.5 Utah 299,613 11.2 8.1 Source: Quarterly Census of Employment and Wages Low-WageShare ofIndustries in California The share of employmentin low-wage industries has gradually risen over the years in both California and the nation overall. In 1999, the share of employmentin low- wageindustries was 23.9% in California and 23.7% in the nation overall. As of 2014, the shares haverisen to 28.6% and 26.2%,respectively. Share of Total Employment (3) 1999. 2004 2009 2014 United States Low Wage 23.7 24.6 25.6 26.2 Middle Wage 39.9 405 39.6 39.7 High Wage 36.4 349 34.8 34.1 California Low Wage 23.9 25.3 27.0 28.6 Middle Wage 38.8 39.1 37.8 37,7 High Wage 37.3 435.6 35.2 33.8 Source: Quarterly Census of Employment and Wages As mentioned previously, low-wagejobs in California are concentrated in fewer industries than are high-wagejobs. Out of the 100 industries at the three-digit NAICSlevel, 19 are classified as low-wage. Thirty-seven industries areclassified as middle-wage, and 44 are considered high-wage. Employmentby Income: A Comparative Analysis 7 March 2016 Next 10 California Establishment Shares by Wage Type, Q4-14 High Wage * Low Wage Middie Wage Source: Quarterly Census of Employment and Wages While low-wage jobs are found in a narrower spectrum ofindustries in California, the same cannotbe said for the numberof establishmentsin the state. As of the fourth quarter of 2014, the numberof business establishments in low-wage industries made up 46.3%ofall establishments. California ranks highestin the nationin its share of establishments in low-wageindustries. The national averageis 29.8%, with Utah having the lowest share at 20.1%. Leading High-Wage Industries in California California is a leader in high-wagejob creation. Not only does it have someof the fastest growing high-wageindustries, but compensationfor these jobs has grown fasterin California thanin the nation overall. Over the last ten years compensation growthin high-wageindustries averaged 3.7%.In contrast, compensationin high- wageindustries in the nation overall grew by 3.3%. California High Wage Employment Q1-04 to Q4-14 _ ~0.155 5,500 z 2 w) 5,400 - -0.150 & 8 z @ 5,300- 9 = -0.145 5 g oao ® 5,200- o => ® 2 -0.140 2 £ 5,100- . 3 wu = 5,000- / -0.135 Ww at-o4 3-06 at-09 3-14 at-t4 Employment ~* « Employment Per-Capita Source: Quarterly Census of Employment and Wages Employment by Income: A Comparative Analysis 8 March 2016 Next 10 First and foremost amongleading high-wage industries is California’s Professional and Technical Services sector. Since the labor market hit bottom in the fourth quarter of 2009, employmentin this industry has grown by 18.1%—theeleventh fastest growthrate in the nation overthat time period. The state with the fastest growthfor Professional and Technical Services employment was North Dakota, wherejobs in this sector grew by 38.0% over the sametime period. California’s growth ranking for the Professional and Technical Services industryis more impressive when considering the states rankedat the top. With the exception of Texas at numberfour and Michigan at numbersix, the othersare relatively small states. California has by far the largest Professional and Technical Services industry in the nation. Asof the fourth quarter of 2014, this industry had 1.2 million employees, representing 13.9% ofthe national industry.In fact, California has produced more Professional and Technical Services jobs post-recession thanthe top five growth states combined—including Texas. TopEleven StatesforProfessional/Technical Growth Q4-14 Post-Recessian State Employment Growth (%} North Dakota 18,158 38.0 Utah 86,201 32.5 Oregon 88,443 25.0 Texas 701,765 24.9 Delaware 28,821 21.3 Michigan 270,418 21.3 Georgia 261,349 21.2 Colorado 202,481 20.5 South Carolina 87,794 18.6 North Carolina 215,496 18.2 California 1,192,591 18.1 Source: Quarterly Census of Employment and Wages California's third largest high-wage industry, Merchant Wholesalers of Durable Goods,has also been leading the nation in job growth since the fourth quarter of 2009. During the post-recession period employment in Merchant Wholesalers of Durable Goods grew by 10.1%, greater than the 7.5% growthseen nationwide. The industry in California ranked 16in growth outof the 50 states. North Dakota again ranked numberone with a 57.1% growth rate over the same time period. Muchlike the Professional and Technical Services industry, the higher-ranked states had smaller bases to begin with and are seeing faster growth rates from those smaller bases. California already had a sizeable employmentbasein these industries. The Management of Companiesindustry, the ninth largest high-wageindustry in California, has also done well post-recession—expanding by 16.4%since the fourth quarter of 2009. Forthis industry,California ranked 31% in growth amongst the 50 states and trailed the nation overall at 18.2%. Texas took the numberonespotwith a 50% rate of increase over the sametimeperiod. Employmentby Income: A Comparative Analysis 9 March 2016 Next 10 Oneof the main reasonsCalifornia is not higher in the rankings for high-wagejob growthis dueto the Hospitals industry, the second largest high-wage industryin the state, and onethat has laggedtherest of the nation significantly. From the fourth quarterof 2009 to the fourth quarter of 2014, California employmentin the Hospitals industry has contracted by 4.3%.In contrast, Hospital industry employmentin the nation overall grew by 2.3%, This places California 48th in the growthrankings. A handfulof California’s other large, high-wage industries have lagged otherstates during the post-recession period and have dragged downoverall high-wage employmentgrowth.In particular, employmentgrowthin the Credit Intermediation and the Insurance Carrier industries has trailed the national average, contracting by 1% and 5.1%, respectively. This largely reflects the fact that mortgage lending has yet to resumeat a faster pace. Middle-Wage Industries in California Similar to high-wageindustries, California’s middle-wage industries have experienced rising employmentcounts that surpass the nation overall accompanied by faster growing compensations. Overthelastten years, the average wagein middle-wageindustries rose by 2.9% in California versus 2.6% in the nation, leaving the average wagein California 12.4% higher than the national average. Higher wagesin California reflect employers’willingness to pay a premium,either because the local workforce is more productive or becausethere is a shortage of workersin these industries. The Education services industry is one of the middle-wage industries that appears to have a shortage of workers. The average wage in the industry was $51,545 in 2014, 12.4% more thanthe national average wagein the industry. California is rich in high-ranking universities that attract students from all over the world. Apart from hiring well-knownprofessors, these universities pay respectablesalaries to their support workers.In all, the average wageat colleges and universities in California is 18.5% greater than in the nation. Employmentby Income: A Comparative Analysis 10 March 2016 Next 10 California Middle Wage Employment Q1-04 to Q4-14 6,200 - * SA ) I ° B On fr ~.LO \ y -0.160 5,600 - a n w o O o O o t -0.150 E m p l o y e e s (0 00 s. E m p l o y e e s Pe r- Ca pi ta ( S A ) 5,400- ; ; see - , 70.145 Q1-04 Q3-06 Q1-09 Q3-11 Q1-14 Employment ass Employment Per-Capita Source: Quarterly Census of Employment and Wages Summary This report examined low-, middle-, and high-wage industry growthin California andillustrated how that growth comparestotherest of the nation. While California does rank high in low-wagejob creation post-recession,it is also home to numerous high-wage industries that are leading the country in high-wagejobcreation. Additionally, compensation in high-wage and middle-wageindustries in California are growingfaster than in the nation overall. The trend of low-wagejob creation is not unique to California. Both Florida and Texas were amongthetopten states for low-wage job growth duringthe post- recession period.In fact, there were so manylarge populationstates in the rankings that the national average for low-wage job growth fell just behind twelfth-ranked New York, rather than in the middle of the pack. In California, and throughoutthe United States, there have been a large numberof low-wage jobs created during the post-recession period. And while this has not helped to raise household incomesoverthelast few years,it is not necessarily a sign of a weak economy.Severalof the low-wage industries experiencing major employmentincreasesare partof the broader tourism andtravel industry. Recreation and business travel have increased overthe yearsas the overall economyhasrecoveredfrom the recession. Demandforthese typesof servicesis ultimately a sign of strength. Perhaps, more importantly, is that the state and nation overall are also creating high-wagejobs for skilled workers. Ultimately, wages are a functionof skills and the demandforthoseskills. Given California's role as a leaderin both tourism andtechnology,the state should expect to continue creating a mix of high-, middle- and low-wagejobs as businesses invest, construction picks up, consumers increase spending, and tourists continueto travel. California needs to maintain its focus on growing the mostskilled and educated workforcein the nation in order to unlock high-wage opportunities for moreofits Employmentby Income: A Comparative Analysis 11 March 2016 Next 10 residents and enable the high-tech sectors that have become synonymouswith the state to flourish. However, California also needs to provide jobs for those who have yet to seek higher-skilled training opportunities. With jobs growing across the spectrum of wage categories and general economic conditions continuing to improve, there is now breathing room available to begin tackling that challenge strategically. Employmentby Income: A Comparative Analysis 12 March 2016 Document 15 Next 10 Overvicw In recent years, California has experienced negative domestic migration, meaning more people are moving from California to other states than the numberof residents movingto California from other parts of the country. The increasein the numberof residents moving out the Golden State to other parts of the United States is often blamed on California's high personal income taxes. However,data from the U.S. Census Bureau showthis perceived connection between out-migrants and the state’s income tax is overblownatbest, and non-existent at worst. In fact, statistics on the characteristics of California’s inbound and outbound migrants suggest patterns in migration over the past decade are morerelated to housingcosts in the state than to tax structure. That’s notto say California’s tax structure does not require reform—indeed, streamlining the tax code, broadening the tax base, and lowering tax rates would likely bolster the state’s economyfurther. However,that does not implicate the tax regimeasthe sole, or even the primary, source of out-migration from California. Whileit is true domestic migration into California has continued to be negative in recentyears,it is important to look at whois leaving the state and wherethey going. This report analyzes data on: 1. Where California ranks amongotherstates in terms of net domestic migration 2. The income, educational attainmentlevels, and occupations of California's inbound and outbound migrants 3. The reasonsthat migrants are opting to leave the state Additionally, it is important to consider the characteristics of those entering the state from other countries. This analysis is based on the mostcurrent data available from the U.S. Census Bureau’s American Community Survey (ACS). The ACSdetails if an individual moved in the past year, where they movedto, where they movedfrom,their income, their educational attainment, and their occupation. This data will give insight into not only the numberof people whoare migrating in and outofCalifornia, but key demographic features about these migrants. Additionally, this dataset allowsus to exclude the migration ofcollege students who often only move temporarily. The mainfindingsin this analysis include: ¢ California experienced a negative net domestic migration of 625,000 from 2007 to 2014. In other words, 625,000 more people movedoutof California to other states than movedinto California from otherstates. ¢ The vast majority of out-migrants wentto justfive states: Texas, Oregon, Nevada, Arizona, and Washington. California Migration: A Comparative Analysis 2 March 2016 Next 10 * California was a net importer of residents from 15 states and the District of Columbia from 2007 to 2014. ¢ Californians 25 years of age and overthatdo not possess four-yearcollege degrees accountedfor over 469,800 out-migrants. However, California was actually a net importerof nearly 52,700 residents with a bachelor's degree or higher. * California remainsthe top state attracting international migrants, many of which are low-incomeearnersand thosethat have obtained a bachelor’s degree. Despite seeing an overall negative net domestic migration, California is continuing to attract new residents to the state. Despite the rhetoric regarding California’s oppressive tax regime orits overall hostility to business, individuals coming to California are primarily concentrated in high-wage occupations, which enable them to better absorb the state’s high housing costs andcostofliving. In contrast, the majority of California's outbound migrants tend to earn less than $30,000 annually. Migration trends also show that the middle-classis being priced out of the state. Net migrationof those earning between $30,000 and $49,999 accountedfor 43,100 residents leaving California. Meanwhile, low-incomeearners from other countries are replacing low-income earnersleaving California for otherstates. High housing costs have madeCalifornia an increasingly difficult place for lower- incomeresidents with less education to maintain their quality oflife, while many middle-incomeresidents are having trouble moving from renting to homeownership. Meanwhile, those with higher education and high-wage occupations continueto find thestate an attractiveplacetolive. Ultimately, the choice of wheretolive is one of consumption andreflects a variety of preference factors. Based on the data,it appears that despite a high costofliving, individuals whocanaffordto live in California will, becauseofall the state has tooffer. Where are Californians Migrating To? From 2007to2014, California saw 625,000 moreU.S. residents migrate outof the state than in. The vast majority of these migrants wentto only a handfulofstates. The state seeing the largest net migration from California was Texas, which saw over 212,600 net domestic migrants from California between 2007 and 2014. Other states that were primary destinations of California-outbound migrants were concentratedin the western United States, with Oregon, Nevada,Arizona, and Washington roundingoutthe top five. Together,the top five states for California’s net outbound domestic migrants accounted for over 550,800 (or 88%). California was notthe only state to see net outbound domestic migration from 2007 to 2014. Indeed, 23 otherstates saw negative net domestic migration over the same period. Besides California, which had the secondlargest outbound migration,the states seeing the largest amountof net outbound migration were concentrated in California Migration: A Comparative Analysis 3 March 2016 Next 10 the northeast, with New York seeing the largest numberof net outbound domestic migrants (967,400). Illinois, Michigan, and Alaska also saw domestic migration turn negative overthe period, howeverlosses were notas steep in absolute terms as losses in New York. Importantly, California saw positive net domestic migration from 15 states and the District of Columbia, despite an overall negative, from 2007 to 2014. The states accounting for the largest inflowsto California include New York,Illinois, Michigan, NewJersey, and Alaska. Together these states accountedfor a net inflow of over 119,600 migrants to California from 2007 to 2014. California attracted many residents from somestates that do not have an incometax, including Alaska (20,700) and Florida (18,000). As will be discussed below,this counters the perceived link between migration andtax rates, and suggestsotherfactors are driving migration trends. In 2014, California saw out-migrationfall, with just over 52,000 residents leaving California, on net. That puts California third in net negative domestic migration behind New York and Illinois. Florida attracted the most domestic migrants, with net in-migration totaling over 136,300 in 2014. What’s more, half the states in the nation saw negative net domestic migration overthe period,indicating thatthis is not a California-specific trend. CaliforniaNetDomesticMigrationby State, 2007to2014 State Rank Net Domestic Migration (000s) Total -625,0 Texas 1 -212.6 Oregon 2 -96.2 Nevada 3 -95.2 Arizona 4 -90,3 Washington § -56.5 Alaska 46 20,7 New Jersey 47 27.8 Michigan 48 23.7 ilinois 49 41.4 New York 50 46.5 Source: American Community Survey Whe are Calfornia’s Mb While California has seen a significant numberof residents leave the state in recent years,it is important to look at whois opting to leave the state, and conversely what the demographic make-upisof thosestill moving into the state. A common themeis to look at the migration outofCalifornia and blameit on a poorly performing economyor income taxes without looking at whothe people migrating actually are, California Migration: A Comparative Analysis ‘4 March 2016 Next 10 or, ultimately, why theyare leaving the state. This is especially important from a public policy perspectivein that having the right diagnosisis critical to overcoming challenges. Indeed,if tax rates are the drivers of out-migration,the policy recommendationthatlogically follows is to lower the tax rate. However,if, as the data suggests, there are other more important drivers, then the reductionof tax rates will do little to stem the tide of those leaving the state. Lookingat the incomelevels of domestic migrants underminestheassertion that California’s progressive tax system is driving residents from thestate.In fact, from 2007 to 2014 California has actually seen a net positive domestic migration of individuals who earn over $50,000 annually. This meansthereare factors other than income taxes impacting migration decisions, since the majority of out migration can beattributed to residents who earnless than $30,000 and are not subject to California’s higher upper-incometax brackets. This also follows the earlier finding that California gains residents from states with no incometaxes. Indeed,it appears that California's high cost ofliving and housing costs, particularly for middle- and lower-incomeresidents, is playing a larger role in the decision to moveinto or outofthestate. Educational attainmentlevels of California’s migrants provide perhaps someofthe best insight into the underlying nuancesof migration in thestate. Toillustrate, from 2007 to 2014, California residents 25 years of age and over with a bachelor’s degree or higher had the lowest propensity to leavethe state, with this demographic actually seeing a netinflow of nearly 52,700 domestic migrants overthe period. In contrast, California residents who do not possessa bachelor’s degree had the highest propensity to leave the state, with this demographic seeing a net outflow of over 469,800 domestic migrants overthe period. This should not comeas a surprise given that education is a primary driver in incomedisparities and the concentration of out-migrants in the lower-income categories. : California Net Damestic Migration by Personal Income, 2007 to 2014 - Annual Income Net Domestic Migration (000s} Under $30,000 -458.9 530,000 to $49,999 43.1 $50,000 to $99,999 36.2 $100,000 to $149,999 13,4 Over $150,000 0.6 Total -451.8 Note: Includes only persans that earned wagesorsalary. Source: American Community Survey The data on out-migration from California by occupation tells a similar story as whenanalyzed according to educational attainment and incomelevels. The vast California Migration: A Comparative Analysis 5 March 2016 Next 10 majority of outbound migrants were concentratedin lower-skilled, lower-paying fields—namelySales, Office Administration, Transportation, and Food Preparation, which together accountedfora net outflow of over 192,700 domestic migrants over the period. In contrast, California continuesto attract workersin high-skilled, high- wagefields like Computer/Mathematical, Healthcare Practitioners, Science, and Architecture/Engineering occupations, attracting 54,200 net inbound migrants. These occupational patterns support the argumentthat high housing costs rather than incometaxes are impeding positive net domestic migration to the state. Since California is a relatively progressive tax state in terms of incometaxes, increasesin the incometax burdenarelesslikely to affect workers in low- and middle-wage occupations than those in higher-wagejobs.Yet, it was lower-wage and middle- wage workers wholeft the state in greater numberswhile there wasactually an influx of higher-wage workers. Why are Californians Migrating? Ultimately, the choice of whereto live is one of consumption,andreflects a variety of preference factors. High housing costs have madeCalifornia an increasingly difficult place for lower-incomeresidents with less education to maintain their quality oflife, while those with higher education in high-wage occupations continue to find thestate an attractive placeto live. For years,California has suffered from a chronic undersupply of housing despite rising population and increased demand. For example, although hometo more than 12% of the nation’s population,California has consistently accountedfor just 8% of residential permitting for almost twenty years. In fact, between 2007 and 2015, California accountedfor just 9% of the newresidential permits in the nation. The state simply has not built enough new housingto keep pace with its expanding population overthe long term. Indeed, the lack of permitting does not appear to be a demandissue. According to the California Association of Realtors, inventory levels averaged just over four monthsof supply in 2015in California, while the nation overall saw inventorylevels averageoverfive monthsofsupply. This meansat the averagerate of sales in 2015 the stock of available homesin California would dry upin just four months, while the stock of available homesin the nation overall wouldlast five months. California Migration: A Comparative Analysis 6 March 2016 Next 10 California's Share of U.S. Residential Permits 1995 to 2014 12- W1- S h a r e of U. S. Re si de nt ia l Pe rm it s ( % ) I t I 1 1 1995 1998 «2001S 2004S OTs 21s—t—«éiOTD Source: U.S. Census Bureau What’s more, vacancyratesin California are well below the nation overall, where the homeownervacancyrate was 1.9%in 2014, comparedtojust 1.1% in California. The storyis similar for renters, with the rental vacancy rate at 7.6% in the United States overall comparedto just 4.5%in California. This suggests homesin California are more in-demandrelative to the nation overall. Homesin California also tend to be more expensive thanin otherstates. For example, homesin Austin (the most expensive metroarea in Texas) sold fora ‘medianpriceofjust over $261,000 in 2015, compared to nearly $395,000 in California as a whole, according to the National Association of Realtors. Prices are even higher nearthe coast with homesin the BayAreaselling for a medianpriceof over $700,000 in 2015. This puts the dream of home ownership outof reach for manyresidents, especially for those whoare notin high-wage occupations. The rental marketin California is also expensive compared to other metropolitan areas. According to REIS, the costto rent an apartmentin the United States averaged $1,227 in 2015, while the cost to rent in California’s major job centers, like San Francisco ($2,557), San Jose ($2,109), Los Angeles ($1,602), and San Diego ($1,545), waswell abovethis rate. With these figures, an individual optingto live in an area with rents near the national average could save over $10,000 annually compared to the San Francisco and San Jose areas. It is important to note that theseprice differences are notjust a result of California being a moredesirableplaceto live relative to other areas. Our research suggests that a litany of fees, CEQA, NIMBYism,andthefact that Proposition 13 forces municipalities to look to permit and developmentrelated fees for revenue,all contribute to California’s affordability issue. So, to solve the out-migration issue, the focus should be put on these roadblocks, rather than the state’s personal income tax rate. California Migration: A Comparative Analysis 7 March 2016 Next 10 Basedonthe data, it appearsthatdespite a high costofliving, individuals who can affordto live in California will. However,it is important to Jook closely at how affordability has impacted migration, and whyit has been persistentissue in California over the years. international Nigrants Counterto the trends observed in domestic migration, California continues to be the most popular destination for international migrants. Between 2010 and 2015, 835,000 net international migrants moved into California - more than any other state during that period. New York (630,800), Florida (610,500), and Texas (463,400) have also been popularstates for international migrants. Furthermore, unlike patterns in domestic migration, the majority of international migrants movinginto California earned very low incomes. More than 80% of migrants entering California between 2007 and 2014 earned less than $30,000 per year, which is not muchdifferent from international migrants entering in New York (78%), Florida (85%), or Texas (78%). Despite earning low wages, manyinternational migrants enter the nation with an advanced education. Approximately 33% of California’s international migrants 25 years of age and abovehad obtained a bachelor’s degree, similar to the rate in New York and greater than the 27% rate in both Florida and Texas. The majority of international migrants entering California with a bachelor’s degree comefrom Asia. Share of international Migration inte California by Educational Attainment and by Region of Origin, 2007 to 2014 Educational Attainment. Africa Asia Australia Canada Europe Mexico. South America Less Than High School 325 37.1 34.3 29.6 30.8 71.4 577 High School Graduate 15.6 13.5 11.5 14.1 ins 14.3 125 Some College 168 12.2 16.7 15.6 11.7 7.1 12.3 Bachelors Degree 22.3 22.4 24.6 22.2 15.6 35 11.5 Grad./Prof. Degree 412.8 14.8 13.0 214 26.5 3.8 6.0 Source: American Community Survey Conclusion Although California experienced a negative net domestic migration of 625,000 from 2007 to 2014,it appears that despite high housing costs and a highcostofliving, individuals whocanaffordtolive in California will and international migrants destined for the Unites States will continueto start their search for a better quality oflife in California. This is in contrast to the commontalking point that individuals are deciding to move from the state becauseof high personalincometaxes.In fact, California has seen a netinflow of residents whoearn over $50,000 annually, have bachelor’s degrees and/or advanced degrees, and workin high-skilled occupations. California Migration: A Comparative Analysis 8 March 2016 Next 10 California still has plenty of room for improvement. Thestate’s permitting rules and its building regulatory environment could be eased and streamlined to address California’s real enemy:the high cost of housing. High housing costs have made California an increasinglydifficult place for lower-incomeresidents with less education to maintain their quality of life, while those with higher education and who workin high-wageoccupations continueto find the state an attractive place to live. California Migration: A Comparative Analysis 9 March 2016 Next 10 Anoendix States with Negative Net Domestic Migration State Net Domestic : Migration (000s) i Texas -212.6 Oregon -96.2 : vevada -95.2 Arizona -90.3 Washington -56.5 Colerado 45.1 : Oklahoma “44.5 : States with Positive Net Domestic Migration North Carolina 31.3 into California, 2007 to 2014Utah -28.8 : Ces * See angen teria renee te Georgia Be State Net Domestic iano 25.4 Migration (000s)fFennessee 18.4 ' : lowa 12.4 New York 46,5 Kansas “12.1 illinois 444 Montana -11.5 Michigan 39.7 Virginia “116 New Jersey 27.8 South Carolina “411 Alaska 30.7 New Mexico -10.4 Florida 18.0 indiana 7.8 Pennsylvania 18.0 Nebraska 7.4 Connecticut 10.2 Arkansas 7.3 Maryland 73 Wyoming -6.4 Wisconsin 6.4 South Dakota “5.2 Minnesota 5.4 Hawaii 43 Massachusetts 5.0 Missouri -2.8 Ohio 44 New Hampshire 2.8 Alabama 2.2 Kentucky 25 District of Columbia 1.0 Vermant 2.4 West Virginia 0.6 Maine -23 Source: American Community Survey Delaware 13 North Dakota 1.2 Mississippi -0.6 : Rhode isiand -0.4 i Louisiana “0.1 : Source: American Community Survey California Migration: A Comparative Analysis 10 March 2016 Next 10 California Net Domestic Migration by Occupation, | 2007to2014 : Occupation Net Domestic Migration (000s) Computer/Mathematical 18.0 Healthcare Practicioners Wi Arts/Entertainment 15.2 Science 117 Architecture/Engineering 74 Legal 1.6 Farm./Fish./forrestry -1.8 ausiness/Financial 6.7 Military 6.7 Protective Service +116 Community/Secial Service -13.2 Personal Care -13.2 Healthcare Support -16.3 : install./Maint./Repair ~18.2 : Management -20.6 : Education ~22,2 4 Cleaning/Grounds Keeping -27.8 : Construction -39.4 : Production -4Li Food Prep./Serving 443 Office/Administrative -45.4 Transportation -46.? Sales -59.3 Total -360.5 Note: jneludes only persons that were in the laborforce. Source: American Community Survey California Net Domestic Migration by Education, 2007 to 2014 Educational Net Domestic Attainment Migration (000s) Less Than High School -1592.4 High School Graduate “11.6 Some College -165.8 . Bachelors Degree 11.8 Grad./Prof. Degree 40.9 Total -417,4 Note: Includes only persons 25 years of age and over. Source: American Community Survey California Migration: A Comparative Analysis tl California Net Domestic Migration by Personal income,’ ‘2007ta2014 . Annual Net Domestic income Migration (000s) Under $10,000 -329.3 $10,000 to $19,999 “74.0 $20,000 te $29,999 “55.6 $30,000 to $39,999 27.2 $40,000 to $49,999 “19.9 $50,000 to $74,999 20.2 $75,000 to $99,999 16.1 $100,000 to $145,999 13.4 $150,000 ta $199,999 -2.0 $200,000 te $250,000 9.0 Over $250,000 -6.5 Total -451.8 Note:includes only persons that earned wagesor salary. Source: American Community Survey 2007to 2014 California Net Domestic Migration by Age, Age Net Domestic Migration {000s} 18 to 25 26 to 40 41 te 50 51to 65 Total Under 18 Over 65 -205,.4 “45 -141.2 -110.9 -140.5 22.6 S80 scone Souree: American Community Survey March 2016 Document 16 od aL 3: Vienwies “SEASIDE W I R Seebay ea eet wade v e ALES £ poet e t h e n e ugs os SOPESRAD “Rew C e SS a s AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY California’s Home Prices and Rents Higher Than Just About AnywhereElse. Housing in California has long been more expensive than mostofthe rest of the country. Beginning in about 1970, however, the gap between California’s home prices and thosein the rest countrystarted to widen. Between 1970 and 1980, California home prices went from 30 percent above U.S. levels to more than 80 percenthigher. This trend has continued. Today, an average California home costs $440,000, about two-and-a-half times the average national homeprice ($180,000). Also, California’s average monthly rentis about $1,240, 50 percenthigher thanthe rest of the country ($840per month). Building Less Housing Than People Demand Drives High HousingCosts. California is a desirable place to live. Yet not enough housing exists in the state’s major coastal communities to accommodateall of the households that wantto live there. In these areas, community resistance to housing, environmentalpolicies,lack offiscal incentives for local governmentsto approve housing, and limited land constrains new housing construction. A shortage of housing along California’s coast means households wishingto live there competefor limited housing. This competition bids up homeprices andrents. Some people who find California's coast unaffordable turn instead to California’s inland communities, causing prices there to rise as well. In addition to a shortage of housing, high land and construction costs also play somerole in high housing prices. High Housing Costs Problematicfor Households and the State’s Economy. Amid high housingcosts, many households makeserious trade-offs to afford living here. Households with low incomes, in particular, spend much more oftheir income on housing. High homeprices here also push homeownership outof reach for many. Faced with expensive housing options, workers in California’s coastal] communities commute 10 percent further each day than commuters elsewhere, largely because limited housingoptions exist near majorjob centers. Californiansare also four times morelikely to live in crowded housing. And,finally, the state’s high housing costs make California a less attractive place to call home, making it more difficult for companiesto hire and retain qualified employees,likely preventing the state’s economy from meetingits full potential. Recognize Targeted Role ofAffordable Housing Programs.In recent decades, the state has approachedthe problem of housing affordability for low-income Californians and those with unmet housingneeds primarily by subsidizing the construction ofaffordable housing through bond funds, tax credits, and other resources. Because these programshavehistorically accounted for only a small share ofall new housingbuilt each year, they alone could not meet the housingneedswe identify in this report. For this reason, we advise the Legislature to consider howtargeted programsthatassist those with limited access to market rate housing could supplement broader changes thatfacilitate moreprivate housing construction. More Private Housing Construction in Coastal Urban Areas. We advise the Legislature to changepolicies to facilitate significantly more private home and apartment building in California’s coastal urban areas. Thoughthe exact numberof new housing units California needsto build is www.lao.ca.gov Legislative Analyst's Office 3 4 AN LAO REPORT uncertain, the general magnitude is enormous. Ontop of the 100,000 to 140,000 housingunits California is expected to build each year, the state probably would have to build as many as 100,000 additional units annually—almost exclusively in its coastal communities—-to seriously mitigate its problems with housingaffordability. Facilitating additional housing of this magnitudewill be extremely difficult. It could place strains on thestate’s infrastructure and natural resources andalter the prized character of California’s coastal communities. It also would require the state to make changesto a broad rangeofpolicies that affect housing supply directly or indirectly— includingpolicies that have been fundamentaltenets of California government for many years. Legislative Analyst's Office www.lao.ca.gov AN LAO REPORT INTRODUCTION Living in decent, affordable, and reasonably located housingis one of the most important determinants of well-being for every Californian. Morethanjust basic shelter, housing affects our lives in other important ways, determining our access to work, education, recreation, and shopping. Thecost andavailability of housing also matters for the state’s economy, affecting the ability of businesses and other employersto hire and retain qualified workers and influencing their decisions about whetherto locate, expand, or remain in California. Unfortunately, housing in Californiais extremely expensive. Many householdsstruggle to find housing thatis affordable and meetstheir needs. Amidthis challenge, many households make serious trade-offs in order to live here. Because of the important role housing playsin thelives of Californians, the state’s high housing costs are a major ongoing concernforstate and localpolicy makers. The purposeof this report is to provide the Legislature an overviewof the state’s complex and expensive housing markets, encompassing both single-family homes and multi-family apartments. Wepayparticularattention to identifying what has caused housing prices to increase so quickly in recent decades, and provide information to assist the Legislature in makingdecisionsthat will affect the future performanceofthe state’s housing markets. The report covers four main questions: ¢ How expensiveis housing in California? « What has caused housingprices to increase so quickly over the past several decades and what wouldit take to moderate this trend? ¢ Whatare the consequencesof California’s high housingcosts on thestate’s households and the economygenerally? + Whatsteps should the Legislature take in the near term asit considers how to address the state’s high housing costs? High Housing Costs Are Not California’s Only Housing Challenge. Thoughthis report focuses on high housing costs, California also faces other significant housing challenges meriting legislative consideration, including: (1) facilitating housing options for the state’s homeless individuals and families; (2) mitigating adverse health effects related to living in substandard housing or housing near sources ofpollution; and (3) removing noneconomicbarriers to housing, such as race, ethnicity, gender, and disability status. These challenges are beyond the scopeof this report. However, addressing the state’s high housingcosts, as a broad goal, could help mitigate other housing- related problems and thus improve the lives of many Californians. Information Online. Additional information on housing in California will be posted on our California Economy and Taxes blog (www.lao. ca.gov/LAOEconTax)in the days followingthis report’s release. HOW EXPENSIVE IS HOUSING IN CALIFORNIA? Housing Is More Expensive in California Than Just About Anywhere Else. As shownin Figure 1 (see next page), homeprices in California are much higher than theyare in other largestates. (Amongall states, only Hawaii is more expensive, on average, than California.) As of early-2015,the www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT Figure 1 HomePrices Higher in California Than in Other Large States4 Median HomeValue, January 2015 California Massachusetts New Jersey Washington S S I E E O S S O S R d S e t h S e e o g Colorado Maryland New York Virginia Arizona Minnesota U.S. Average TR U n O O O Florida Illinois Wisconsin Pennsylvania North Carolina Louisiana Georgia Texas South Carolina Missouri Tennessee Alabama Michigan Ohio Indiana 100,000 200,000 300,000 400,000 $500,000 4 Figure showslargest 25 states according to population. typical California home cost $437,000, more than HomePrices and Rents Vary Widely Within double the typical U.S. home ($179,000). California California. In a state as large and economically renters also face highercosts. In 2013, median diverse as California, some areas have much higher monthly in California was $1,240, nearly 50 percent homeprices and rents (and other areas much more than the national average. lower) than the statewide average. As shownin 6 Legislative Analyst's Office www.lao.ca.gov AN LAO REPORT Figure 2 (see next page), for example, homeprices in California’s most expensive metropolitan area (or “metro”), San Francisco, are more than double the state average and aboutsix times higher than Bakersfield, the state’s least expensive metro. (Throughout our report we use the U.S. census definitions of metropolitan areas—or metros. Census metros are comprised of counties—or,in somecases, a single county—that share similar socio-economic characteristics and surround a common urbancore.) Rents vary throughout the state as well. The average monthly rentfor a two-bedroom apartmentin San Francisco ($2,000) was two and half times greater than the average in Fresno or Bakersfield (both about $800). Even California’s Least Expensive Housing Markets Are More Expensive Than Average. Single-family home prices and apartmentrents in less costly areas of the state, such as Fresno and Bakersfield, though considered inexpensive by California standards, are about average compared with therest of the country. Each of the state’s other major metros are well-above the rest of nation, even California’s other major inland metros, Riverside-San Bernardino and Sacramento. California’s Home Prices and Rents Have Risen Faster Than U.S. Average Since the 1940s. Figure 3 (see page 9) shows how average U.S. and California homeprices have changed over time. In 1940, the average California home cost about 20 percent more thanthe average U.S. home. By the end of the 1940s, the state’s home prices were 30 percent higher than average. Over the next 20 years—1950 through 1970—California home prices increased aboutas quickly as the national average. Beginning in about 1970, however, home prices throughoutthe state began to accelerate. Prices were 80 percent above U.S.levels by 1980, and by 2010, the typical California home was twice as expensive as the typical U.S. home.Asof 2015, average California home prices were two-and- a-half times higher than average national home prices. Many Households Have Difficulty Affording Housing in California. As we describe in more detaillater in this report, California's high housing costs force many households to make serious trade-offs. In most instances, these trade-offs are particularly challenging for households with low incomes. Notable and widespread trade-offs include (1) spending a greater share of their income on housing, (2) postponing or foregoing homeownership,(3) living in more crowded housing, (4) commuting further to work each day, and (5) in some cases, choosing to work andlive elsewhere. Government Housing Programs Ease Housing Costsfor Some. Federal, state, and local government housing programsgenerally work in one of two ways,by: (1) increasing the supply of moderately priced housing or (2) reducing housing costs for some households. * Programs That Build New Housing. Federal, state, and local governments provide direct financialassistance— typically tax credits, grants, or low-cost loans—to housing developers for the construction of new rental housing. In exchange, developers reserve these units for lower-income households. (Until recently, local redevelopmentagencies also provided this type of financial assistance.) Data suggests these programstogether have subsidized the new construction of about 7,000 rental units annually in the state—or about 5 percent of total public and. private housing construction—since the mid-1980s. In additionto direct subsidies, somelocal governments increase the supply of affordable housing by requiring developers of market-rate housingto set www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT Figure 2 California's Housing Prices Vary, but Most Are Well Above U.S. Levels San Jose == $1,780 Los Angeles, San Diego & Oakland $1,390 = eat Riverside-. San Bernardino =~ $1,080 Us. Average $840 San Jose oo $843K = San Francisco $2,000 Oakland == $567K exes Santa Ana-Anaheim $1,490 San Diego — $471K Rent$1,24 p= Sacramento $950 Sacramento = $333K Pan Bakersfield $820 p—= Fresno-- $810 Bakersfield —— $170K pees San Francisco $952K am Santa Ana-Anaheim $609K Poem Los Angeles $490K >CMAverage Price$437K> Riverside- p= San Bernardino $284K pe Fresno $188K U.S. Average S179K Note: Rents based on 2013 American Community Survey. Pricesreflect Zillow data, January, 2015. Legislative Analyst's Office www.lao.ca.gov AN LAO REPORT aside someof the units they are building low-incometenantsfor a portionof a for low- and moderate-income households, rental unit’s monthly cost. About 400,000 a policy called “inclusionary housing.” California households receive this type of housing assistance. In othercases, local ¢ Programs That Help Households Afford governments limit how much landlords Housing. 1n addition to constructing new can increase rents each yearfor existing housing, governments have alsotaken steps tenants. About 15 California cities have to make existing housing more affordable. these so-called rentcontrols, including In somecases, the federal government ., 8 Los Angeles, San Francisco, San Jose, and makes payments to landlords—known Oakland. as housing vouchers—onbehalfof Figure 3 California Home Prices Have Grown Much Faster Than U.S. Prices Inflation-Adjusted Median HomePrices in 2015 Dollars $500,000 5 450,000 4 a California 400,000+ [_] United States 350,000 7 300,000 + 250,000 4 200,000 + 150,000 4 100,000 7 50,000 4 ii 1940 1950 1960 1970 | 1980 ~~ 1990 2000 2010s 205 www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT WHYIS HOUSING EXPENSIVE IN CALIFORNIA? A collection offactors drive California's high cost of housing. First and foremost, far less housing has been built in California’s coastal areas than people demand.As result, households bid up the cost of housing in coastal regions. In addition, some of the unmet demandtolivein coastalareasspills over into inland California, driving up prices there too. Second, land in California’s coastalareasis expensive. Homebuilders typically respondto high land costs by building more housing units on each plot of land they develop,effectively spreading the high land costs among moreunits. In California's coastal metros, however, this response has been limited, meaninghigherland costs have translated more directly into higher housing costs. Finally, builders’ costs—for labor, required building materials, and government fees—are higherin California than in otherstates. While these higher building costs contribute to higher prices throughout the state, building costs appearto play a smaller role in explaining high housing costs in coastal areas. This section describes how eachofthese factors increase homeprices and rents in California. Building Less Housing Than People Demand Drives High Housing Costs California Is Building Too Little Housing in Coastal Areas. California is a very desirable place to live, with temperate weather, long stretches of coastline, and highly educated and culturally diverse economic centers. Many households wish to live in California. However, someof California’s most soughtafter locations—its majorcoastal metros (Los Angeles, Oakland, San Diego, San Francisco, San Jose, and Santa Ana-Anaheim), where aroundtwo-thirds of Californians live—do not have sufficient housing to accommodateall of the householdsthat wantto live here. The lack of housing on the California coast means households 10 Legislative Analyst's Office www.lao.ca.gov wishing to live there compete for limited housing. This competition bids up housingcosts. Rising homeprices andrents are a signal that more households would liketo live in an area than there is housing to accommodate them. Housing developers typically respond to this excess demand by building additional housing. This does not appearto be true, however,in California’s coastal metros. Building activity during the recent housing boom demonstrates this. During the mid-2000s, housingprices were rising throughout the country and, in most locations, developers responded with additional building. As Figure 4 shows, however, new housing construction, as measured by building permits issued by localofficials, remained flat in California’s coastal metros. We also find that buildingactivity in California’s coastal metros has been significantly lower than in metros outside of California that have similar desirable characteristics—such as temperate weather,coastal proximity, and economic growth—and, therefore, likely have similar demandfor housing. For example, Seattle—a coastal metro with economic characteristics and average temperaturesthat are similarto California’s Bay Area metros—added new housing units at about twice the rate as San Francisco and San Jose overthe last two decades. (Specifically, Seattle’s housing stock—its total numberofhousing units—grew at an average annualrate of 1.4 percent per year while San Francisco and San Jose’s housing stock grew by only 0.7 percentper year.) Between 1980 and 2010, construction of new housing units in California’s coastal metros was low by national and historical standards. During this 30-yearperiod, the numberofhousing units in the typical U.S. metro grew by 54 percent, compared with 32 percent for the state’s coastal metros. Home building was even slower in Los Angeles and San AN LAO REPORT Francisco, where the housing stock grew by only Jump in California Housing Costs Occurred around 20 percent. As Figure 5 shows,this rate as Building Slowed. A look at housing costs in of housing growth alongthestate’s coastalsois California’s coastal metros in recent decades shows low by California historical standards. During an a connection betweenthe slowrate ofbuilding and earlier 30-year period (1940 to 1970), the number higher housingcosts. The slowdownin building of housing units in California’s coastal metros grew in California’s coastal metros corresponded with by 200 percent. a substantial rise in housing costsrelative to the rest of the country. In 1970, homeprices in the Figure 4 Housing Construction on California Coast Was Flat During National Housing Boom Average Numberof Building Permits in Major Metros 25,000 7 California Inland i 20,000 4 L Rest of U.S. f gguagenicd s 15,000 + : California Coast 40,000 e e 5,000 4 2000 2001 2002 2003 2004 ‘ 2005 2006 Figure 5 Housing Construction Has Slowed in California's Coastal Metros Annual Growth in Housing Units in Major Metros 6%4 if i t 2 California Inland 4 4 California Coast to40s.~~=*«<“«sNSS S*:C(“<«éSSS**~*~*«~OS:=~ San Diego f San Francisco F San Mateo F Contra Costa Ventura & Riverside fF Sacramento Region fF San Bernardino Kern Fresno = Average Annual Number of New Housing Units Built by County, 1980-2010 Coastal Counties HW Estimated Housing Units Needed® [| New Housing Units Built SE ES a a E SR e e S N W P R R O S E SE ED E L N R O R a M R S OR R T H O R Inland Counties 10,000 20,000 4 Estimated new housing construction neededto prevent homeprices from growingfaster than the rest of the country. 22 Legislative Analyst's Office www.lao.ca.gov 30,000 40,000 50,000 60,000 BR L IR SE RS Ne ss R E I N E HA R I E AN LAO REPORT metros would have required housingto be built more densely. Figure 10 showsour estimates of how dense housing would be in California's coastal metrosif they had grownoverthelast 30 yearsat the rate necessary to keep theirprices in line with the rest of the country. Housing densities in manycoastal counties would be more than More Housing Would Mean More Californians. If California had added 210,000 new housingunits each yearoverthe past three decades(as opposed to 120,000), California’s population would be much greater thanit is today. We estimate that around 7 million additional people would beliving in California. In someareas, particularly the Bay two-thirds higher under the LAO growth scenario than Figure 9 they are today. Despite these sizeable increases, housing densities in California’s coastal metros under our Home Prices Generally Grew Faster in Central Cities Than Outlying Areas Growth in Inflation-Adjusted Home Prices Between 1980-2010 : 250% growth scenario would Central Cit not be unprecedented. As al aeiy ; 200 {"] Outlying Areas Figure 10 shows, there are other metropolitan counties 150 throughoutthe country that currently are as dense as 100 California’s coastal metros would be under our growth 50 scenario. Alameda Los Angeles Sacramento San Diego Santa Clara County County County County County Figure 10 Building More Housing in Coastal Metros Would Require Denser Development Housing Density in a Typical Neighborhoodin California Counties, 2010 : Actual : Orange 4 units per acre (typical homes) Los Angeles, Alameda, San Mateo, SantaClara 4 to 5 units per acre (typical homes) San Francisco 18 units per acre (two to three story townhomes) condos) the rest of the country. aS ~LAOGrowthScenario a 5 units per acre (typical homes) Cook County (including Chicago), Illinois 7 to 9 units per acre (smalllot homesand duplexes) 35 to 40 units per acre (midrise apartments and a Legistative Analyst's Office (LAO) growth scenario = estimated new housing construction neededto prevent homeprices from growin gfaster than =CountiesSimilarte ‘“LAO GrowthScenario... Denver, Colorado Washington D.C. Baltimore, Maryland Brooklyn, New York Bronx, New York a RO www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO Area, population increases would be dramatic. For example, San Francisco’s population would be more than twice as large (1.7 million people versus around 800,000). In other areas of the state, where significant housing development occurred due to spillover demandin thestate’s coastal metros, population would likely be about whatit is today or potentially smaller. What DoesThis Estimate Tell Us About the Future? As we havediscussed, a collection of barriers have prevented California’s housing developers from respondingto high demand to live on California’s coast by building more housingthere. Ouranalysis in this section suggests that these barriers have created a major disconnect between the demandfor housing andits supply. Looking forward, there are manyreasonsto think this dynamic will continue. Manyof the primaryfactors that make California desirable—moderate weather, natural beauty, and coastal proximity ofits major melros—are ongoing. At the same time, we see no signs that coastal communityresistance to new housing construction is abating. In addition, many REPORT state andlocalpolicies that have slowed or stopped developmentin recent decades remainineffect today. Wetherefore think that, in the absence of major policy changes, California's trend of rapidly rising housingcostsis very likely to continue in the future. Our analysis suggests that building substantially more housing in coastal urban areas—possibly as much as 100,000 additional units each year—could prevent California’s housing costs from continuing to grow faster than the U.S. In our view,this major finding that demandfor housing in California substantially exceeds supply should inform discussions and decision making regarding state and local governmenthousingpolicies. Wedo, however, recognize that any attempt to estimatethe state’s future housing needs faces significant uncertainties. Unforeseeable changes in demographics, economic conditions, or technology could shift dramatically the dynamics of California’s housing markets. Readers, therefore, should focusless on our specific estimates and moreon the simple story theytell: to contain rising - housing costs, California would haveto build significant more housing, especially in coastal urbanareas. WHAT ARE THE CONSEQUENCES OF CALIFORNIA'S EXPENSIVE Housingcosts are the largest componentof most households’ spending. Because housingis such a large financial consideration, households make careful decisions about the location,cost, and amenities of their home. Faced with high home prices andrents, California households must decide: how much incomecan they spend on housing (and therefore what must they consumelessof); where cantheyfind housingof this sort; and how far is this housing from work, school, and local amenities? Each householdfindsits unique answers 24 Legislative Analyst’s Office www.lao.ca.gov HOUSING? to these questions,typically responding to high housing costs with a combination oftrade-offs. In the followingsection, we reviewfive significant trade-offs households make when faced with high housing costs. These include: (1) spending a larger share of income on housing, (2) postponing or foregoing homeownership,(3) living in more crowded housing, (4) commuting further to work each day, or (5) sometimes, choosing to work and live elsewhere. We also discuss how these serious trade-offs affect the state’s economy. AN LAO REPORT Households Spend More of Their Income on Housing Housing Costs Are a Major Consideration forMost Households. Housingcosts are the largest componentof most household’s spending each month. For homeowners, thesecosts include monthly principal and interests payments; property taxes and homeowner's insurance; and household utilities like water, gas, and electricity. For renters, housingcosts are their monthly rent and any utilities the tenant pays. On average, American households spend about one-quarter of their gross monthly incomeon housing. (More information on this data is available in the box on the next page.) Despite Relatively Higher Incomes, Californians Devote Larger Share to Housing. Median household incomein California is about $9,000 more annually than the national median. Median California housing costs, however, are about $5,300 greater as well. For most California households, therefore, higher housing costs consume large portionof their higher income. Specifically, the median California household spends about 27 percent of their monthly income on housing. The median household in the rest of the country, on the other hand, spends about 23 percent. This above-averagetrend exists throughout California. As shown in Figure 11, householdsin each of the state's major metros spend an above-average share oftheir income on housing. In the state’s largest metro, Los Angeles, the average household spends 30 percentof their income on housing, 7 percent more than the national average. ‘The figures discussed above are median housingcosts as a share of income;thatis, the amountof incomespent on housing where one-half of households spend a smaller share and one-half spenda larger share. In this way, they best reflect the typical household’s experience. For other types of households, however,differences between Californians and the rest of the country may be moreor less pronounced. Low-IncomeCalifornians Spend Greater Share ofIncome on Housing. Households with low Figure 11 California's Major Metros Are Ail Less Affordable Than the Average U.S. Metro Los Angeles § San Diego Riverside-San Bernardino § Santa Ana-Anaheim § Fresno fz Oakland £ Sacramento # Bakersfield —m San Francisco # San Jose B reer OtherStates' Major Metros(= Median Share of Household Income Spent on Housing, 2013 a i a a n E e 20 22 24 26 28 30% www.lao.ca.gov Legislative Analyst’s Office 25 AN LAO incomesspend a smaller amount of money each month on housing than do households with higher incomes. Lower-income householdsnevertheless spend a muchlarger shareof their total income on housing, leaving fewer resourcesleftover for other spending and savingspriorities. As shown in Figure 12, California households in the bottom quarter of the income distribution—the poorest 25 percent of households—report spending four times moreof their income(67 percent, on average) than householdsin the top quarterof the income distribution (16 percent, on average). Gap Between California and U.S. Largest for Low-Income Households. The difference between what California households spend and what U.S. households typically spend—a difference that is the byproductofthe state’s high housing costs—is largest for low-income households and How Do We Calculate These Figures? REPORT smallest for upper-income households. As shown in Figure 12, California households with incomes in the bottom quartile report spending 67 percent of their income on housing, about 11 percent more than low-income households elsewhere. This “gap” persists across most income groups but becomes smaller as incomeincreases. For higher-income households, as shownin thefigure, California households and households in other areas spend a similar, much smaller, share of their income on housing. These findings suggestthat California’s high housing costs are particularly challenging for the state’s low-income households. Renters Spend a Much Larger Share ofIncome on Housing. Nationwide, renter households spend significantly larger share of their income on housing. The median renter spends about 30 percentofhis or her income on housing, Analysis Based on Responses to the American Community Survey. Thedatain this section are from individual and household responses to the Census Bureau’s 2013 American Community Survey, which recently replaced the long-form decennial census. ‘The survey asks a sampleofall householdsdetailed questions abouttheir finances, employment, demographics,location, and housing characteristics. WhatIs Household Income? In the American Community Survey, household incomeis the total of incomes earned by each memberofthe household whoisat least 16 years old. Income includes wages andsalaries; business income;interest; public assistance payments; Supplemental Security Income; and social security and other retirement,disability, or survivor income.It does not include capital gains income, moneyfrom thesale of a property, gifts, lump-sum inheritances, or moneythat was borrowed duringtheyear. WhatAre Housing Costs? For owners, monthly housingcosts includeprincipal and interest payments on their mortgage(s); homeowner’sfire, hazard,or flood insurance; property taxes; utilities (electricity, gas, water, and sewer) and fuel costs; as well as monthly condominium feesor mobile home costs whenapplicable. For renters, monthly housing costs include what they pay for rent and any additionalutilities or fuel costs in addition to their rent paymentsthat are not paid by the landlord on behalf of the tenant. Household rent payments are recordedas rent paid, even if rent is paid by someonethat doesnotreside in the household—asituation that could occur, for example, if a university student’s rent was being paid in full or in part by his or her parents. 26 Legislative Analyst's Office www.lao.ca.gov AN LAO REPORT whereas the median homeownerspends 20percent. Primarily, this occurs because renter households have notably lower incomes, on average, than ownerhouseholds. In addition to generally lower incomelevels, renters spend more on housing, on average, because a portion of homeowners have owned their homes for many years and therefore have very low monthly mortgage costs or no mortgage costs whatsoever. Low-Income Households That Spend More on Housing Spend Less on Essentials. In high cost areas, householdstypically spend a larger share of their income on housing. Asa result, households have less money available for other types of spending. For households with above-average incomes, higher housing costs may mean they spendless on other items, but these households typically have sufficient resources to purchase regular household necessities. For low-income households, though, high housingcosts cut into spending considered more necessary. According to Harvard’s Joint Center for Housing Studies, low-income households whospent more thanhalf of their income on housing spent 39 percentless on food than other low-income householdsthat spent less than half their income on housing. High Housing Costs Contribute to Poverty in California. The federal governmenteach year calculates what share of eachstate’s population lives in poverty. Typically, poverty is calculated Figure 12 State's Low-Income Households Spend Much More on Housing 80%4 70 4 60 4 50 4 20 4 10 4 Median Share of Income Spent on Housing by Income Quartile Hi California [_] Rest of U.S. Low-Income Households <€ > High-income Households www.lao.ca.gov Legislative Analyst’s Office 27 AN LAO REPORT by the Official Poverty Measure, which defines a family as poorif their pretax cash incomeisless than a poverty threshold thatis standard across the nation. Based on this measure, California’s povertyrate is slightly higher thantherest of the United States, as shown in Figure 13. The federal government also reports poverty levels using an alternative measure, the so-called Supplemental Poverty Measure, which adjusts poverty thresholds based onlocalcostsof living. Primarily because of California’s high housing costs,the state’s alternative poverty level is 23.4 percent, the highest in the nation and almost 9 percentage points higher than average. High Housing Costs May Make Personal Finances MoreFragile. One byproduct of spending a large share of one’s income on housingis that personalfinances may be morefragile—meaning a smaller share of a household’s incomeis available for nonhousing goods andservices, including savings. As a result, these households may findit more difficult to accommodate a drop in household incomebecause they have a smaller amountof nonhousing disposable income andlikely have smaller available savings. ‘ Fewer Households OwnTheir Homes Homeownership Helps Households Build Wealth. The federal governmenthasactively promoted homeownership since it restructured the housing finance system during the Great Depression. As a result, beginning in 1940s, the U.S. homeownershiprate rose steadily and substantially, peaking at 70 percentjust before the recent housing crisis. (Since then,it has fallen 64 percent, a low not seen since the 1990s.) Homeownership helps households build wealth, requiring them to amassassets over time. Among homeowners, saving is automatic: every month, part of the mortgage paymentreducesthe total amount owed and thus becomes the homeowner’s equity. For renters, savings requires voluntarily foregoing near-term spending. Due to this and other economicfactors, renter median net worth totaled $5,400 in 2013, a small fraction of the $195,400 median homeowner's net worth. For many households in high housing cost areas, though, homeownership’s benefits remain out of reach,as higher homeprices (relative to area incomes) mean fewer and fewer households canafford to become homeowners. Figure 13 Alternative Poverty Measure Much Percentage of Population Living Below Poverty Threshold From 2011 Through 2013 25% i California Restof U.S. 20 16% Official Poverty Measure Research Supplemental Poverty Measure Higherin California Due to High Housing Costs _ California’s Homeownership Rate Among Lowest in Nation. About 64 percent of U.S. households owntheir homes, but only 54 percent of California households do. (Only New York State and Nevada have lower homeownership rates.) In areas with high housing prices, including those in California, homeownership tendsto lag behind more affordable areas. Figure 14 shows that, across the country, metro areas where homeprices are highrelative to average incomelevels tend to have lower homeownershiprates. Most of California’s major metros, and all of California’s coastal metros, fall into this category. 28 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Households That Do Buy Purchase Later and Take on More Debt. An additional byproduct of higher homeprices is that young peopledelay purchasingtheir first home, possibly because saving for a down payment takes longer or households are not able to generate qualifying incomelevels until later in their careers. According to National Association of Realtors data, the median first-time homebuyerin California in 2013 was 34 years old, three years older than the medianfirst-time homebuyernationwide. In addition, householdsthatare able to purchase a hometypically take on more mortgage debt because homepricesare higher here. Urban Institute data showsthatthe average California homeownerhad $55,000 in mortgage debt outstandingasof 2013, about $17,000 more than the average U.S. homeowner($38,000). Households MoreLikely to Be Crowded WhatIs Crowded Housing? Housing experts measure crowding by comparing the number of people in a household to the numberof roomsin their home, including bedrooms and common roomsbut excluding bathrooms. Althoughseveral definitions exist, we consider a household crowded if there is more than one adult per room, counting two children as equivalent to one adult. Under this definition, a three room apartment(with a kitchen, living room, and one bedroom)is crowded if more than three adults live there. It is also considered crowded if more than two adults and two children live there. Researchers who study crowdingreport that it leads to a wide range of negative outcomes, which we describe below. Researcherfind these outcomes even after they accountfor other Figure 14 Areas With Less Affordable Housing Tend to Have Low Homeownership Rates Homeownership Rates and Ratio of Median Home Values to Median Incomesin Major U.S. Metros, 2013 10 . 94 @ San Francisco Homes Less g | Affordable , @ Los Angeles @SanJose 4 @ @Santa Ana- Anaheim | 6 | San Diegow Oakland : 5 J @Sacramento E 4; @ Fresno Riverside - San Bernardino | 3 | @ Bakersfield Homes More Affordable id 40 45 50 55 60 65 70 75% Lower Homeownership <& 3» Higher Homeownership 4 1 — — 4 www.lao.ca.gov Legislative Analyst’s Office 29 AN LAO REPORT socioeconomic factors that might affect well-being, like income and educational level. Crowded Housing Affects Well-Being and Educational Achievement.Individuals wholive in crowded housing generally have worse educational and behavioral health outcomes than people that do notlive in crowded housing. Amongadults, crowding has been shownto increase stress and aggression,lead to social isolation, and weaken relationships between parents andtheir children. Crowdingalso hasparticularly notable effects on children. Researchers have found that children in crowded housing score lower on standardized math andreading exams.A lack of available and distraction-free studying space appearsto affect educational achievement. Crowding mayalso result in sleep interruptions that affect mood and behavior. As a result, children in crowded housing also displayed more behavioral problemsat school. LAO Analyses of Crowding. In ouranalysis, we examinedtherelationship between California’s high housing costs and overcrowding. Because California has many householdstypes that commonlylive inlarger, multigenerational households (such as households with foreign-born members), we examined different household types separately, as shownin Figure 15. Specifically, in ourfirst analysis, we calculated crowding rates— the share of householdsthat are crowded—for different types of households. Wedothis for California and the rest of the U.S. Then, we examined howlikely each of these household types Figure 15 Crowding Rates Higherin California, Even Among Same Household Types 14% 4 10 + Percentage of Each Household Type Living in Crowded Housing, 2013 California im Rest of U.S. Hispanic Households as : All Households Households WithChildren Households All Owners Ail RentersWithout Children 30 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT is to be crowded based on the cost of housing in their metro. California Households Four Times More Likely to Live in Crowded Housing. Certain household types are morelikely than average to live in crowded housing, such as households headed by foreign-born adults, Hispanics, and those with children. California has a higher share of these household types than the rest of the U.S. Because of this, we would expect California to have a higher crowdingrate. A review of the data, however, showsthat California’s crowding rate is higher than one would expectbasedsolely onits larger share of these household types. This is because crowdingrates for each household type(including those mostlikely to live in crowded housing) are higher in California than they are elsewhere. As a result, California’s overall crowding rate is four times higher than the U.S.average, partly due to demographics and partly to other factors, including higher housing costs, as discussed below. CrowdingAppears Associated With High Housing Costs. Determining whether housing costs affect crowding is challenging because areas with the high housing costs tend to have fewer households types that are likely to be crowded. Using statistical analysis, however, we found that living in a high housing cost area is associated with a higherlikelihoodof living in crowded housing, after accounting for otherfactors that also affect crowdingrates. Figure 16 showsthat thelikelihood of being crowded increases when the area’s median Figure 16 Housing Costs Affect a Household's Likelihood of Living in Crowded Housing 20% 7 [__} Low Housing Costs : Average Housing Costs fag High Housing Costs All Households Estimated Probability of Living in Crowded Housing in California, 2013 Hispanic Households Note: Low housing cost area equal to housing costs in state’s least expensive metro. Average housing costis the statewide average, and high costis equal to housingcosts in the state’s most expensive metro. SES A U A E R E A R o S S a e a e e S Households With Children www.lao.ca.gov Legislative Analyst’s Office 31 AN LAO REPORT homeprice increases (movingfrom left to right). For example, the average household’s likelihood of being crowded in a metro with average homeprices (about $440,000)is about 3 percent, but the same household’s likelihood of being crowded increases more than threefold—to 10 percent—iftheylive in an expensive metro with median homeprices of $900,000. Households Commute Further to Work Each Household Makes Its Own Decisions About Commuting. Housing’s geographic location haslasting and important consequences.Ideally, each household could choose housing in their preferred neighborhood,near good schools and welcoming amenities, with only a short work commute. In practice, though, not only are ideal locationsrelatively sparse, those that do exist are desirable and therefore expensive. In response, households balance their preferences and resources, selecting trade-offs among housing costs, commute times, and neighborhood characteristics. Complex Metro Characteristics Influence Commute Times. Each major metro area in the country has unique characteristics that influence whetherit has above- or below-average commute times. Mostfactors are straightforward— for instance, natural geography,existing transportation infrastructure andthe availability of public transit, and the spatial distribution of jobs relative to that of housing, Otherfactors are less straightforward. A metro’s landarea andits density affect commutetimes, but in complex ways. For example, up to a point, commute times generally increase as areas becomedenser because transportation options become more congested. After densities reach a certain level, however, the viability of public transportation options improves. In some circumstances, this can relieve pressure on other transportation options and reduce average commute times. 32 Legislative Analyst’s Office www.lao.ca.gov California’s Coastal Metros Have Long Commutes. In 2013, workers in large metros throughout the country spent, on average, 55 minutes commuting each day. Workers in California’s coastal metros averaged 60 minutes, about 10 percent more than the national average. Commute times in Los Angeles, the state’s largest metro, averaged 62 minutes, 12 percent longer than the U.S. average. San Francisco hasthe state’s longest average commutes—72 minutes per day— about 30 percent longer than the U.S. average. How Might Housing Costs Affect Commute Times? The relationship between metropolitan characteristics, including its housing costs, and average commute times is complex. Assuming neighborhoodcharacteristics and other preferences are unchanged,housing costs should decline as one moves further from job centers. This is because commuting involves monetary and nonmonetary costs that must be offset somehow. Neighborhood characteristics and preferences change across metropolitan areas, however, makingthe analysis of commute times and metro characteristics additionally complex. To find housingat a price they are willing to pay, households in more expensive metros might choose to live further from work than they would if housing wereless expensive. This could lead average commute times to be longerin areas with higher housing costs. Not surprisingly, we found that metro areas with higher housing costs tend to have longer average commute times. Do High Housing Costs Lead to Longer Commutes? Ouranalysis found that many importantfactors havestatistically significant effects on commute times. These include: whether the commuterdrives, walks, or takes public transit to work; the metro’s land size, population, and density; the metro’s median income; and weather. After controlling for these factors—in essence isolating the effect of housing costs on AN LAO REPORT commute times—a 10 percentincrease in a metro’s medianrentis associated with a 4.5 percent increase in individual commute times. The fact that California’s average commute times are only moderately above average (despite notably higher housingcosts) suggest that other California-specific factors reduce average commute times. These factors may include weather conditions, widespread developmentandavailability of freeway systems, and an above-average share of commuters who drive to work. (Driving commutes are generally fast, and therefore metros with higher shares of driving commuters tend to have shorter commute times.) Despite these mitigating factors, however, ouranalysis suggests that California’s high housing costs cause workersto live further from where they work,likely because reasonably priced housing options are unavailable in locations nearer to where they work. Housing Costs Influence Where Households Live and Work Decisions About Where to Live and Work Are Complex, Understanding how housingcosts affect a household’s decision about whereto live and workis challenging. This is because regional and state economies are complex and numerous interconnectedfactors influence housing costs (as well as other costs of living) and economic opportunities in these areas. Despite this complexity, economists and other researchers have identified ways that housing costs affect migration—and,in someinstances, have attempted to quantify the magnitudeoftheseeffects. Below, we summarize the aspects of this work we believe are most helpful when considering how housing costs affect migration andthestate’s economy. High Housing Costs Discourage People From Living in California. Housingcosts are a significant driver of migration to and from California, and changesin the state’s housing costs (relative to otherareas of the country) influence migration trends. The ratio of in-migration to out-migration, a measure of populationflow,is lowest when California’s homeprices are high relative to other places. On the other hand,this flowis highest when California housing becomes relatively more affordable comparedto otherstates. Ouranalysis of these trends, which we discussed in the preceding section, suggests that about 7 million additional people wouldlive in California if more housing had beenbuilt here and the state’s housing prices had therefore grown about as quickly as thosein the rest of the country since 1980. High Housing Costs May Makeit Difficult to Recruit Employees. For most businesses, labor costs are their largest operating cost. In areas with highercosts of living, businesses generally must pay employees higher wages because they require additional incometo offset the cost of living differences. California’s cost oflivingis amongthe highestin the nation, largely because California's housingcosts are so high.Asa result, businesses in California’s coastal metros may find it challenging (and expensive) to recruit or retain qualified employees. In a 2014 survey of more than 200 business executives conducted by the Silicon Valley Leadership Group, 72 percent of them cited “housing costs for employees” as the most important challenge facingSilicon Valley businesses. Employee recruitment andretention, closely related to housing costs, was the second most frequently identified challenge. Similarly, other importantsectors of the state’s economy mayfind recruitment challenging and labor costs expensive. For example, some higher education institutions in high housing cost areas provide housing subsidiesin order to recruit successfully top administrators and academicspecialists. Stanford University recently announced plansto lease a 167-unit apartment complexfor their staff and faculty, noting that providing housing helps www.lao.ca.gov Legislative Analyst’s Office 33 AN LAQ REPORT them “competeto recruit the best faculty from other parts of the country, where they experience very differentreal estate markets.” High Housing Costs Mean Fewer Californians Work in State’s Most Productive Cities. In general, businesses and employeesinlarge cities are more economically productive than those in other areas. (Economists use the term “agglomeration economies”to describe these areas. Agglomeration economiesare areas where worker productivity increases as population density increases.) Higher productivity leads to more economic outputper employee, and thus greater economic growth in the region. Under normalcircumstances,these economic opportunities attract new workers from other areas. Historically, this has led to significant population growth in the state’s cities. However, in recent decades, high housing costs have slowed this trend. This is because the expected wage gains (from movingto a city) are not large enoughfor many prospective workers to make upfor their higher housing costs. California's major productive cities have therefore grownless quickly than they otherwise would. Fewer Workers in State’s Most Productive Cities Hinders Economic Growth. The slowing flow of workers to productive cities likely has constrained economic growth because potential workers, unable to move to productivecities due to high housingcosts, do not benefit from the productivity gains occurring in cities. If more workerslived in the state’s highly productivecities (and therefore reaped these cities’ productivity benefits), per capita economicactivity in the state would be greater thanit is today. Estimating the magnitude of this impact involves considerable uncertainty. Recent research, however, may provide a helpful guide as to this impact’s order of magnitude. Economists at the University of California, Berkeley and the University of Chicago recently estimated that annual U.S. economic output—thetotal value of goods and services produced each year—is 13 percent lower today than it otherwise would be due to “increased constraints to housing supply in highly productive cities.” LOOKING AHEAD: WHATIS NEEDED TO CONTAIN CALIFORNIA'S HIGH HOUSING COSTS? California’s high housing costs present many difficult issues for policy makers, residents, and businessesto consider. On the one hand, California’s constraints on housing supply—the primaryfactor driving the state’s high housing costs—shownosignsof abating. If California continues on its current path, the state’s housing costs will remain high andlikely will continue to grow faster than the nation’s. This, in turn, will place substantial burdens on Californians— requiring them to spend more on housing,take on 34 Legislative Analyst’s Office www.lao.ca.gov more debt, commute further to work, andlive in crowded conditions. Growing housing costs also will place a drag on thestate’s economy. Onthe other hand, addressing California’s constraints on housing supply would be extremely challenging and involve major trade-offs. Though the exact numberof new housing units California needsto build is uncertain, the general magnitude is enormous. Ontop of the 100,000 to 140,000 housing units California is currently expected to build, our analysis suggests that the state probably AN LAO REPORT would have to build as many as 100,000 additional units annually—almostexclusively in its coastal communities—to seriously mitigate the state’s problems with housingaffordability. Addingthis many new homes, however, could place strains on the state’s infrastructure and natural resources and couldalter the longstanding and prized character of California’s coastal communities. Facilitating this housing construction also would require the state to make changesto a broad range of policies that affect housing supply directly or indirectly—including manypolicies that have been fundamentaltenets of California governmentfor many years. Despite these challenges, California’s housing problems warrantattention from state leaders. These difficult issues could require years of legislative deliberation, including discussions with all major stakeholders: the administration, local governments, environmental groups, affordable housing developers and advocates, and housing policy experts. In its deliberations, we recommend that the Legislature: » Aim to Build More Housing in Coastal Cities, Densely. The greatest need for additional!housing is in California’s coastal urban areas. We therefore recommend the Legislature focus on what changes are necessary to promote additional housing construction in these areas. + Put All Policy Options on the Table. Given the magnitudeof the problem, the Legislature would needto take a comprehensive approachthat addresses the problem from multiple angles and reexamines major policies. Major changes to local governmentland use authority, local finance, CEQA, and other major polices would be necessary to address California’s high housingcosts. « Recognize Targeted Role ofAffordable Housing Programs. These programsplay an importantrole in assuring housing access for many Californians with unmet housing needs. We note, however, that the scale of these programs—evenif greatly increased—could not meet the magnitude of new housing required that we identify in this report. Accordingly, we recommend the Legislature consider how targeted programs could supplement moreprivate housing construction by assisting those with limited access to market rate housing, such as people experiencing homelessness, those with mental and/or physical health challenges, and those with very low incomes. ¢ Understand That Some Factors Are Beyond Policy Makers’ Control. Much can be donebystate and local governments to promote additional housing construction and therefore slow down growth in home prices and rents going forward. Some factors, however, such as high demand to live in the state and natural limitations on developable land, largely are beyond the control of policy makers. As a result, home prices andrents in Californialikely will remain above-average for the foreseeable future, even if public policies highly favorable to new housing construction were instituted that slowed future growth in housingcosts. www.lao.ca.gov Legislative Analyst’s Office 35 AN LAO REPORT TECHNICAL APPENDIX How Did WeEstimate California’s Need for Additional Housing? California’s housing costs have risen faster than the rest of the country for several decades. Thisis largely because the state has built too little housing to accommodateall of the households that would like to live here. In general, homeprices and rents are determined by the interaction between demand for housing andits supply. Homeprices and rents help balance the numberofhouseholdslooking for housing and the numberofnew housing units constructed. When the numberof households looking for housing exceeds the numberofunits available, households compete for housing andprices and rents rise. High prices and rents, in turn, discourage some households from entering the market, bringing demandandsupply into balance. Conversely, if construction of housing increases, more housingunits are available and therefore competition among householdsis reduced, causing prices andrents to fall. How MuchAdditional Housing Was Needed? Ouranalysis attempts to estimate the amountof additional housing needed to prevent California’s housing costs from growingfaster than the rest of the country in recent decades. In approaching this issue, we first recognized that if California's housing costs had grownonly asfast as the rest of the country, homeprices and rents would have been lower and more households would have desired to live here. To maintain these lower housing costs, additional housing would have been neededto be built to accommodate these new households. Therefore, to answer our question, we considered a similar one:if California’s homeprices andrents hadrisen only asfastas therest of the country during the past three decades, how manyadditional households would have wished to live here (and, consequently, how much additional housing construction would have been needed)? Developing a Model ofSupply and Demandfor Housing. To answerthis question, we developed an econometric modelto estimate the numberofhouseholds that would demandto live in California at a range of homeprices. Because demand for housing varies throughout California, we conducted our analysis at the county level. Our model attempts to estimate a county's housing demandbased on the county’s homeprices, its neighboring counties’ homeprices, and variousother factors thatalso affect the desirability of a location—incomes,population levels and growth rates, unemploymentrate, education levels, and weather. While mostofour analysis centered aroundthe relationship between housing demand and homeprices, we also conducted similar analysis using rents instead ofhome prices. Our analysis using rents yielded similarresults. For our dependentvariable, we used ten-year growth in the numberofhousingunits (bothsingle- family and multifamily housing) from the U.S. Census,corresponding to housing growthin the 1980s, 1990s, and 2000s.Wealso obtained data on homeprices, incomes, population, and education levels from the U.S. Census. For each ofthese variables, we averaged the values at the beginning and end of each decade to obtain a decade average value. Data on unemploymentrates was obtained from the Bureau of LaborStatistics. Weather data was obtained from the National Climatic Data Center. 36 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Estimating Our Model Presents Challenges. Empirically estimating our modelof housing demandpresented two majorchallenges. First, as we discussed above, homeprices andconstruction levels are determined bythe interaction of demand and supply. Home prices generally tend toward a level at which the numberofhouseholds looking for new housing equals the numberof new housing units constructed. In this way, homeprices and buildinglevels are set simultaneously. Similarly, demandfor housing in one countyandits neighbors (and consequently the prices for these homes) often are determined by commonfactors. For example, major regionalshifts in employment can affect many counties simultaneously, Asa result, traditionalstatistical techniques, such as ordinary least squares, would give inaccurate estimatesof the relationship between demand andpricesfor housing in a county and neighboring counties. To estimate this relationship more accurately, we used two-stage least squares, instrumentingfor both a county's homeprices and neighboringcounties’ prices using factors that affect homeprices by influencing the supply of housing. Specifically, we use: the county’s land area, a measure of topographicalconstraints to development, andconstruction labor wages. Changes in these supply factors can result in changes in homeprices but typically are not clearly related to changes in housing demand, making them suitable instrumentalvariables to estimate our model. Data on land areas was obtained from the U.S. Census, while topographical constraints were taken from research conducted by economist Albert Saiz. Construction wage data was taken from the Bureauof LaborStatistics. Our second major challenge wasa limited numberofobservations for California counties. Becauseof data limitations, our analysis was constrained to counties comprising metropolitan areas (metros) of 850,000 or more people—roughlythesize ofthestate’s tenth largest metro, Bakersfield. Withthis limited numberof observations,it was difficult to obtain precise estimates of our model’s parameters. We therefore expanded ourdataset to includeall U.S. counties comprising metros of 850,000 or morepeople, giving us over 1,000 observations. The inclusion of non-California counties, however, comes with a trade-off: we must assumethat households’ demandfor housing responds to homeprices changes the samewayin California as in the rest of the country. Thisis a potential limitation of ouranalysis. Results From Our Analysis. The results of our regression are shownin Figure A-1. As these results show, we found a strongandstatistically significant relationship betweena county’s housing demandandits homeprices: when a Figure A-1 county’s homeprices Housing Demand Regression Results increase 10 percent, DependentVariable: Ten-Year Growth in Housing Units demandfor new IndependentVariable® Coefficient.StandardError “/ housing (the number i : ; Homeprice -0.83° 0.10 of new housing units Average of neighboring counties’ 0.16? 0.05 demandedas a share homeprices 4 Control variables were also included, but are not reported here. All independent variables, except for dummyvariables,arein logs. decreases by around > Statistically significant at 1 percent evel. of existing housing) www.lao.ca.gov Legislative Analyst’s Office 37 AN LAO REPORT 8 percent. Similarly, we find a significantrelationship between housing demand and neighboring counties’ homeprices: when neighboring counties homeprices increase by 10 percent, demandfor new housingincreases by about 2 percent. Using Analysis to Estimate Number of Units Needed. Thenextstep in our analysis wasto use these findings to answer the question: how many additional units would California have needed to build in orderforits homeprices and rents to have risen only asfast as the rest of the country during the past three decades? To do this, we used the coefficient estimates in Figure A-1 to determine how much housing demand would change in California’s counties if home prices had grownonlyasfast as the rest of the country. The best waytoillustrate these calculations is to walk through an example. We use San Francisco during the 1980sforthis illustration. Our calculation proceeded in two mainsteps: « Step 1: Within County Price Changes. Duringthe 1980s, homeprices in the average major U.S. metro grew by 28 percent. In San Francisco, homeprices increased 80 percent.If San Francisco's homeprices had grown 52 percentage points slower (equalto the national average), our regression results suggest that demand for new housing in San Francisco would have increased by 43 percent (-52 percent multiplied by -0.83, our estimated coefficient for within county homeprice changes). + Step 2: Neighboring County Price Changes. Similarly, homeprices in counties neighboring San Francisco grew by 53 percent during the 1980s, compared to 33 percentfor the rest of the country. If home price growth in San Francisco’s neighbors had been20 percentage points lower (equalto the national average), our analysis suggests that demandfor new housingin San Francisco wouldhave decreased by 3 percent(-20 percent multiplied by 0.16, ourestimated coefficient for neighboring county homeprice changes). Becauseofthis, our calculation from step 1 must be adjusted. We therefore adjust downward our estimate from step 1 by 3 percentage points,arrivingat a final estimate of 40 percent additional housing growth. Asis often true with econometric studies, our analysis is limited by several factors, including the availability and quality of data, potential misspecification of our model, andthe inherentdifficulty of drawing conclusions from nonexperimental data. Becauseof this, we recommendthatelected leaders and residents focus less on ourspecific estimates and more on the overall story theytell (as discussed in the bodyofthis report): to contain rising housingcosts, California would have to build substantially more housing, especially in coastal urban areas. How DoWeEstimate How Housing Costs Affect a Household’s Likelihood of Crowding? Ouranalysis of state and national crowdingtrends is based on 2013 1-year American Community Survey microdata. Microdata arelarge datafiles that include individual-level responsesto the survey - questions. Using them, we can study household-level crowding conditions and how those conditions are affected by a metro area housingcosts. 38 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT A First Look at Crowding. Uponinitial review of the data, we foundthat, throughout the country, renters, households with children, and households headedbyfirst-generation individuals or Hispanic individuals are all more likely than averageto live in crowdedhousing. Also, the likelihoodofliving in crowded housing is muchhigherfor low-income households than for wealthier households. We also found that these types of households make upa larger share ofall householdsin thestate’s inland metroareas (where housingis inexpensive) than they doin the state’s coastal metros (where housingis expensive). As a result, comparing crowdingratesat the metro level to housing costs at the metrolevel would inaccurately suggest that higher housingcosts are associated with lower crowding rates andvice-versa. (Someelementofthis may actually occur, but only insofar as lower-income households moveto less expensive parts of the state to avoid crowding.) A closer examinationof household level data, however, shows that the opposite is ttue—higher housing costs are associated with higher crowdingrates. Developing a Modelto Investigate What Factors Lead to Crowding. To examinetherelationship between households’ likelihood of crowding and housingcosts, we developed a simple econometric modelto estimate the probability of a householdliving in crowded housing. We usea probit regression analysis, which asks: how do various economic and demographicfactorsaffect the probability of a household being crowded? This type of model holds constant each of the economic and demographicfactors so that we are able to isolate them individually and assess how they impact crowding. For instance, weare able to ask the question: how much morelikelyis the statistically-mean California household to live in crowded housing if they moved from a low housingcost area of the state to a more expensive one(holdingallof their other economic and demographic characteristics constant)? Theresults ofthe probit regression analysis arc summarized in Figure A-2. Interpreting Our Findings. The coefficient estimates from probit analysesare noteasily interpretable. To make theseresults easier to understand, weuse the regression results to compare the probability of being crowded for the mean California household(as well as Hispanic-headed households and households with children) when metro area median homeprices are low ($167,000, equalto thestate’s least expensive metro), average ($433,000, the statewide average), and high ($934,000, equalto the state’s most expensive metro). Theresults from this analysis are included in Figure 16 on page 31 of the report. These results show the probably ofliving in crowded housing increases as median homeprices increase, andthat this increase occursfor all household types. How Do We Figure A-2 Estimate How Crowding Regression Results Housing Costs Dependent Variable: Probability That a Household Resides in Crowded Housing Affect Commute = aE <= aaa . independent Variable® 0-0 2ss. © Coefficient“. StandardError Metro area median home price (1,000s) 0.0016 0.000 E Wealso use 44 Control variables were also included, but are not reported here. They include Hispanic headof household, foreign-born head of household, newarrival to the U.S., household income, household incomerelative to area median income, ownership, and presenseofchildren. the 2013 one-year b Statistically significant at 1 percenttevel. responses from www.lao.ca.gov Legislative Analyst's Office 39 AN LAO REPORT American Community Survey to review how housingcosts affect commute timesin different metro areas, For our analysis, we calculated each workers commutetime by lookingatall the individuals who commuted to work in that metro, and not just the individuals who live and work in that metro. In somecases, an individual maylive outside a metro area and commute each day into a metro area for work. For our analysis, those individuals are included in that metro’s commute times. For example, manyindividuals commutefrom the Los Angeles metro into the Santa Ana-Anaheim metro (Orange County) and vice-versa. WhatFactors Affect Commute Times? Various metroarea characteristics affect commute times for workers in that metro. These include physical and geographic factors, such as the metro’s landsize, the numberof people wholive there(related to its density), and the share of land in the metrothatis available for development. For example, metros with a large share of their area occupied by mountains or watertend to have longer commute times because these features may make transportation options morechallenging. Otherfactors also affect a metro’s average commutetimes, suchasthe area's median income and whatshare of the metro’s commutersdrive, take public transportation, or walk. How DoWeEstimate How Housing Prices Affect Commute Times? We develop an econometric modelto estimate how homeprices andrents affect commute times. Similar to our otherregressions, this model holds constantfactors that affect commute times, allowing usto isolate the relationship between average housingprices and commute times in a metro. We developed several models, using both rents and homeprices. We also tested commute timesat the metro level andat the individual level. Our main model is shown and discussed in more detail below. Interpreting Results From Our Analysis. The results of our regression are shownin Figure A-3. Asthese results show, we found strong andstatistically significant relationship between individual commute times andseveralotherfactors, including metro average rent. (We used rents in this case, instead of homeprices, though the choice of which price measure to usehaslittle effect on theresults of the analysis.) The coefficient for medianrent, 0.45, suggests that a 10 percent increase in metro medianrentis associated with a 4.5 percentincrease in average commutetime. Also, notably, the coefficientfor California metrosis significant and negative, suggesting that California's metro areas have somefactors (beyond housing costs, income, density, and commutetype) that lowers overall commute times. We discuss earlier several possible explanations, including widespread development andavailability of freeway systems Figure A-3 throughoutthe state, |Commuting Regression Results whichlikely reduce Dependent Variable:Individual Commute Time, One Way# commute times “IndependentVariable’ —~———~ Coefficient if overall. EH Metro average rent® 0.45¢ 0.01 4 In log form. b Independentvariable is the metro average rent in the metro where the commuterworks,evenif the individual lives in a different metro area or outside the metro area where he or she works. © Control variables were also included, but are not reported here. They include age, ownership, mode of transportation, metro population, metro density, metro median income, annual precipiation, and an indicator variable for California. Ali dependent variables are statistically significant at the 1percentlevel. 40 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT ACKNOWLEDGEMENTS Overthe courseof several months, we consulted with numerous individuals and organizations about housingin California. This report benefited greatly from these conversations. We knowthat they do not always agree with our findings or endorse our conclusions. We nevertheless gratefully acknowledgetheir willingness to discuss these topics with us, provide feedback,and share their valuable experience. We consulted manylocal governmentsin the developmentofthis report, including the California Association of Counties and the Leagueof California Cities; the Cities of Mountain View, Santa Monica, Riverside, San Jose, and Yucaipa; and Marin and Sacramento Counties. Wealso receivedsignificant guidance and feedback from academic economists and other housingexperts, including experts from the Economic and Demographic Research Unitsat the California Departmentof Finance, the Public Policy Institute of California, and the Center for Real Estate Finance Research at New York University. Housing California was particularly helpful as we considered the role that affordable housinginitiatives play within California's broader housing market. The California Building Industry Association provided important information and context about building costs in California. www.lao.ca.gov Legislative Analyst’s Office 41 AN LAO REPORT 42 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT www.lao.ca.gov Legislative Analyst's Office 43 AN LAQ REPORT LAO Publications This report was prepared by Chas AlamoandBrian Uhler, and reviewed by Marianne O'Malley. The Legislative Analyst's Office (LAO) is a nonpartisan office that providesfiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 44 Legislative Analyst’s Office www.lao.ca.gov Document 17. fhHousingEconomics.com = axe. State and Metro Area HousePrices: the “Priced Out” Effect Special Studies, August 1, 2014 by Natalia S. Siniavskata, Ph.D. Oneof the often overlooked impacts of building regulationsis their effect on housing affordability. Every time a local or higher level governmentissues a new construction regulation it raises construction costs by, for example, increasing the price of construction permits or impactfees. Higher costs invariably translate into higher homeprices and higherprices in turn disqualify more households from being able to afford new homes. NAHB Economicsrelies on its Priced Out modelto evaluate effects of pending new regulations on housing affordability in local markets. The model estimates how many households can qualify for a mortgage before andafter a house price increase. The resulting difference is the numberof priced out households. NAHBregularly updates the Priced Out model to account for changing economic environment. This article presents and discusses the new 2014priced out estimates for the United States and 324 metroareas. The 2014 estimates show that nationally a $1,000 increase in the homeprice leads to pricing out about 206,269 households. The size of the impacts varies across states and metro areas and largely depends on their population, income distribution and new homeprices. The Priced Out Methodology and Data Most home buyers take out a mortgageto finance a purchase of a new home,so the Priced Out modelusesability to qualify for a mortgageas an affordability standard. To qualify for conventional loans, housing expenses should not exceed 28 percent of homebuyers’ gross monthly income. Monthly housingcosts include principal and interest on the mortgage, property taxes and homeowner'sInsurance — often abbreviated as “PITI”. The affordability standard is thus a ratio of housing expenses to income, and the number of households that qualify for a mortgage to buy a homeof a given price will depend on the income of households in an area and current mortgagerates. The American Community Survey (ACS) which replaced the decennial Census long form providesthe detailed income distribution for the United States andall states and metro areas with population of 65,000 people or more annually. The most recent income estimates are now available for 2012. To adjust for expected 2012-2014 income growth, NAHB uses the annual estimates of median family income published by the Department of Housing and Urban Development (HUD) for every state and county. The 2014 estimates were madeavailable in December 2013”. To adjust for population growth, NAHB relies on annual household estimates reported by the ACS and extrapolates the most recent household growth into 2014. Table below showsthe projected US household incomedistribution that underlies the 2014 priced out estimates. 1 In cases, where counties comprising a metro area are estimated to have different median incomes, an estimate for the county containing the core urban arealisted first in the name of the metro area is set to represent the median family incomefor the entire metro area. 1 US Household IncomeDistribution for 2014 Income Range: Households Cumulative $0 to $10,219 9,037,576 9,037,576 $10,220 to $15,328 6,661,937 15,699,513 $15,329 to $20,438 6,469,445 22,168,958 $20,439 to $25,548 6,640,002 28,808,960 $25,549 to $30,658 6,039,287 34,848,247 $30,659 to $35,768 6,199,590 41,047,837 $35,769 to $40,877 5,664,673 46,712,511 $40,878 to $45,987 5,635,887 52,348,398 $45,988 to $51,097 4,943,760 57,292,157 $51,098 to $61,317 9,372,913 66,665,070 $61,318 to $76,646 11,849,492 78,514,562 $76,647 to $102,195 14,015,339 92,529,901 $102,196 to $127,744 9,281,283 101,811,184 $127,745 to $153,293 5,330,786 107,141,970 $153,294 to $204,391 5,436,702 112,578,672 $204,392 to More 5,371,513 117,950,185 Other assumptions usedin the priced out calculations are a down payment equal to 10 percent of the purchase price and a 30-yearfixed rate mortgage. The mortgageinterest rate is set at 4.5 percent with zero points. For this typical loan, the model also assumeslenders require private mortgage insurance with an annual premium of 45basis points’. Effective local property tax rates comefrom the 2012 ACS. The ACS reports both median homevalues and real estate taxes pald and, thus, allows estimating the effective property tax rates for all metro areas. For the US, the median rate is $12 per $1,000 of property value. Property hazard insuranceratesare constructed based on the 2007 ACSPublic Use Microdata Sample (PUMS)*. For the US as a whole, the insurance rates work out to $5 per $1,000 of property value. House Prices The priced out analysis requires a representative house price as a starting point. Data availability pretty much limits the choices to basic summary statistics, like the median or average homeprice. Of the two, the medianusually makes a better starting point for priced-outcalculations, as the average tends to be skewed upward by a handful of expensive homes, while the median typicallylies in the center of the price range where more new homesare built. To analyze changesin regulatory or other construction costs, prices of new homes are most relevant, since new homesare the ones directly affected by new regulations. The median new homeprice for the United Statesis set at $275,000 for 2014.It is based on monthly median new home prices reported by the Census Bureau over 2013andthefirst four months of 2014. First, the average of monthly 2 in the PITI formula, mortgageinsuranceis essentially treated as part of the interest payment. Like interest on the loan,it is a percentageof the declining mortgage balance. * Producing metro level estimates from the ACS PUMSinvolves aggregating PUMA level data according to the latest definitions of metropolitan areas, Due to complexity of these procedures and since metro level insurance rates tend to remain stable over time, NAHBrevises these estimates only periodically. 2 mediansis estimated over 2013. It is then adjusted for expected inflation based on price appreciation that took place overthe first four months of 2014. To estimate median new homeprices for states and metropolitan areas, NAHB relies on data reported by the 2013 Census Bureau’s Building Permits Survey and Survey of Construction (SOC). The Permits Survey provides both the numberand aggregatevalue of new housingunits authorized by building permits and, thus, allows calculating average permit valuesforall states and metro areas. For metro areas where average permit valuesare highly volatile and likely to have a large margin of error, the averages are smoothed outacross mostrecentyears. Permit values, however, do not include brokerage commissions, marketing/finance costs, the cost of raw land and may not include the cost of lot’s development. These additional costsarelikely to differ across geographic areas but not available for metro areas. Nevertheless, the SOC provides enough data to tabulate median new homepricesforall nine Census divisions and, consequently, division-wide ratios of median new homeprices to average permit value. The ratios are then used as scaling mark-ups to convert state and metro average permit values into median new homeprices. The resultant median new homepricesrange from less than $116,704 in Brownsville-Harlingen, TX to more than $878,625in Bridgeport-Stamford-Norwalk, CT (see Table 2). Metro Priced Out Results Table 1 and Table 2 present the priced out results and data that underlie the estimatesfor all states and 324 metropolitan areas. In addition to median new homeprices, the tables display income neededto qualify for a mortgage to buy a median price new and the number of households thatwill be priced out of the market for a new homeifits price increases by $1,000. A typical household in Brownsville-Harlingen, TX, where half of all new homesare sold forless than $116,704, needs an annual income of $35,831 to qualify for a mortgage, while a household in Bridgeport-Stamford-Norwalk, CT will need to earn $240,996to qualify for a new homeloan. Clearly, these differences are driven by large divergences in new home prices across metropolitan areas. The more expensive new homes, the higher monthly principal and interest payments, the higher income required to qualify for a mortgage. But the relationship is not always linear as property tax and insurance paymentsalso affect monthly housing costs. For example, even though Brownsville-Harlingen, TX metro area has the lowest median price new homes,the income neededto qualify for a mortgage to buy these homesare not the lowest in the nation. Sumter, SC, Florence-Muscle Shoals, AL, Valdosta, GA, Clarksville, TN-KY all have ne w homesthat are more expensive but require a lower income to qualify for a mortgage. This is a result of higher property t ax and insurance paymentsin Texas. Next, the priced out model estimates how many households in each state and metro area actually earn enough i ncome to qualify for new homeloans, Notsurprisingly, in Bridgeport-Stamford-Norwalk, CT metro area where new h omes largely target the high income households,only 1 percent of all households residing in this metro area earn e nough moneyto qualify for a new homeloan. Amongother metro areas withleast affordable new homesare Buffalo-Niagara Falls, NY, Barnstable Town, MA, Sebastian-Vero Beach,FL, and Napa, CA whereless than 15 percent ofall hou seholds can afford a median price new home.In sharp contrast stand metro areas like Dover, DE and Jacksonville, NC where two out of three households residing in these metros can afford a median-priced new home. Thesedifferences translate into different effects of adding $1,000 to a new homeprice. Whenstarting affordability of new homesis low the priced out effects will be small since they would only affect a few householdsat the thin end of the household incomedistribution. On the contrary,if new homesarewidely affordable,rising homeprices wouldaffect a biggerslice of householdsin the thicker part of the income distribution and the priced outeffectswill be larger. 3 Increasing a price of a new homein New York-Northern New Jersey-Long Island, NY-NJ-PA, by $1,000 disqualifies 5,742 households from buying a new home.This is by far the largest priced out effect among metropolitan areas, mainly as a result of being the most populous metro area with morethan 7 million households. The secondlargest numberof priced out householdsis in Chicago-Naperville-Joliet, IL-IN-WI, where more than 5,325 householdsare priced out. The Chicago metrois half the size of the New-York metro area but the priced outeffects are similarly large. This is because the Chicagoareais relatively more affordable to begin with. Close toa third of all local households are able to afford new homeshere while in the New-Yorkarea only 19 percentof households can qualify for new home mortgagesbefore any price hikes. Los Angeles-Long Beach-Santa Ana, CA - the second most populous metro area with more than 4 million households but low affordability — registers only the sixth highest numberof priced out households, 3,813. Ahead of Los Angeles on the priced-out effects list are three large metro areas with more affordable new homes. In Houston-Sugar Land-Baytown, T X and Atlanta-Sandy Springs-Marietta, GA, where almosthalf of all households can afford new homes,the priced out effects exceed 4,000 households. In Philadelphia~-Camden-Wilmington, PA-NJ-DE-MD where 41 percent of household s can afford new homesan increasein new homeprice of $1,000 disqualifies 3,914 households. At the other end of the spectrum are small and often unaffordable high new home priced metropolitan areas.In Barnstable Town, MA wherehalfofall new homessell for more than $616,381, adding another thousandto a price, affects only 24 households, since there were only a few of them who could afford such expensive new homesin thefirst place. In Napa, CA, where new homesaresimilarly unaffordable the priced outeffects are only limited to 19 households. Looking at the affordable metro areas, where close or morethan fifty percent of households can affo rd new homes, the priced out effects are typically large and can often disqualify thousands of new homebuyers, as in case of Hou ston- Sugar Land-Baytown,TX, Atlanta-Sandy Springs-Marietta, GA, Las Vegas-Paradise, NV MSA,Baltimor e-Towson, MD among other metro areas. Amongthe states, Texas registers the highest priced out effects where more than 18,000 households c an be pushed out of the market for a median-priced new homehereifits price increases by $1,000. California that is more populous but has less affordable new homesregister the second highest priced out effects — 14,423 households. Conclusion Quite frequently and often unintentionally local regulations raise construction costs and trigger hikes i n homeprices. NAHB consistently relies on the priced out modelto estimate the impacts of price changes. Even tho ugh the model does neither answerall questions norestimate effects of regulation on new home sales or housing starts, it h ighlights often overlookedeffects of regulation on affordability of new homes. The new 2014 estimates showthat , in relatively affordable metro areas, hundreds and sometimes thousands of households can be priced out of the new home markets as a result of prices rising by $1000. Note: Regulatory Costs Boost HomePrices by up to 39 Percent More than Building Fee Increases Hidden in median new homepricesis the cost of governmentregulations. NAHB research showsthat, on average, regulations imposed by governmentatall level accountfor 25 percentofthe fina! price of a new single family homebuilt for sale’. Every time a local or regional governmentraises construction costs by, for example, increasing the price of construction permits or impactfees, the cost of building a houserises. In fact, the final price of th e hometo the buyers will usually go up by morethantheincrease in the government fee. This is because each time constru ction costs 4 see P, Emrath “How Government Regulation Affects the Price of a New Home”, Housing Economics Online, July 2011 4 increase other costs such as commissions and financing charges automatically rise as well. As a result, most cost increasesare passed on to the buyers with additional charges. The size of these charges depends bothonthetype of fee/cost increase and whenit is imposed in the development/construction process. NAHB estimates that the add-on charges range from 0 percentif a fee is imposed directly on buyers to 39 percent if cost is incurred when applying for site development approval(see Table 3). So that for every $1 increasein fees incurred, for example, when acquiring a building permit, the final price of a new hometoits final customerrises by $1.20. Alternatively, every $833increasein fees results in a $1,000 increase in houseprices. Table 3: Additional Charges on Building Fees Building Costs/Fees Add-on Charges Imposed directly on buyer 0% During construction 16% At start of construction 18% When building permit acquired 20% During development 37% When applying for site development approval 39% NATIONAL ASSOCIATION OF HOME BUILDERS Tablel. Households Priced Out of the Market by a 51,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Households HomePrice Needed to”Al PricedOut. Qualify Abilene, TX MSA 240,384 71,059 62,311 144 Akron, OH MSA 269,153 75,822 293,691 407 Albany, GA MSA 140,973 38,181 56,249 160 Albany-Schenectady-Troy, NY MSA 401,105 117,214 336,867 369 Albuquerque, NM MSA 225,407 57,214 344,294 659 Alexandria, LA MSA 207,636 51,993 69,543 178 Allentown-Bethlehem-Easton, PA-NJ MSA 307,829 87,794 318,081 513 Altoona, PA MSA 349,984 92,322 48,629 44 Amarillo, TX MSA 272,883 83,203 94,499 142 Ames, [A MSA 284,375 78,675 37,083 53 Anchorage, AK MSA 373,186 98,659 131,380 192 Anderson, IN MSA 259,819 70,209 47,967 105 Anderson, SC MSA 230,499 56,789 71,988 110 Ann Arbor, MI MSA 270,400 78,181 143,994 233 Anniston-Oxford, AL MSA 171,771 43,116 48,622 117 Appleton, WI MSA 251,328 72,245 87,202 212 Asheville, NC MSA 240,017 $8,015 173,969 333 Athens-Clarke County, GA MSA 228,491 58,608 70,685 128 Atlanta-Sandy Springs-Marietta, GA MSA 221,742 56,955 1,980,222 4,135 Atlantic City-Hammonton, NJ MSA 299,539 90,537 100,674 136 Aubum-Opelika, AL MSA 314,741 78,066 $4,042 74 Augusta-Richmond County, GA-SC MSA 208,798 52,477 198,133 407 Austin-Round Rock-San Marcos, TX MSA 232,454 69,043 667,355 1,28 5 Bakersfield-Delano, CA MSA 241,976 62,459 258,396 479 Baltimore-Towson, MD MSA 228,013 57,989 1,060,179 2,014 Bamstable Town, MA MSA 616,381 151,432 80,879 24 Baton Rouge, LA MSA 226,874 56,548 306,517 530 Battle Creek, MI. MSA 241,340 72,350 56,027 114 Bay City, MI MSA 240,615 70,478 45,788 79 Beaumont-Port Arthur, TX MSA 183,574 55,775 142,970 349 Bellingham, WA MSA 293,969 72,746 77,203 145 Bend, OR MSA 326,459 81,842 68,995 101 Billings, MT MSA 247,752 63,972 67,882 [53 Binghamton, NY MSA 255,988 82,431 103,527 164 Birmingham-Hoover, AL MSA 263,064 64,348 447,016 681 Blacksburg-Christiansburg-Radford, VA MS/ 210,790 52,204 67,158 14] Bloomington, IN MSA 205,783 51,066 771,320 147 Bloomington-Normal, 1L MSA 207,654 62,994 71,053 172 Boise City-Nampa, ID MSA 269,591 66,056 239,837 474 Boston-Cambridge-Quincy, MA-NH MSA 430,296 131,855 1,749,426 1,829 Boulder, CO MSA 310,031 74,378 128,370 191 Bowling Green, KY MSA 202,515 52,107 53,579 93 Bremerton-Silverdale, WA MSA 293,074 74,090 90,100 167 Bridgeport-Stamford-Norwalk, CT MSA 878,625 240,996 339,772 186 Brownsville-Harlingen, TX MSA 116,704 35,831 126,119 478 Brunswick, GA MSA 289,183 73,721 40,866 59 Buffalo-Niagara Falls, NY MSA 395,105 128,302 469,199 266 Burlington, NC MSA 155,202 38,966 56,995 154 Canton-Massillon, OH MSA 220,267 60,406 165,387 326 Cape Coral-Fort Myers, FL MSA 292,932 80,100 259,094 279 Carson City, NV MSA 343,367 84,201 22,243 30 Cedar Rapids, [A MSA 146,885 41,106 99,047 218 Champaign-Urbana, IL MSA 254,760 76,429 93,065 141 Charleston-North Charleston-Summerville, SC 288,677 72,424 269,643 49} Charlotte-Gastonia-Rock Hill, NC-SC MSA 243,499 62,366 683,782 1,181 Charlottesville, VA MSA 262,901 63,558 78,144 128 Chattanooga, TN-GA MSA 182,679 46,376 210,567 510 NATIONAL ASSOCIATION OF HOME BUILDERS -Tablel. Households Priced Out of the Market by a $1,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Households HomePrice Needed to”AT” Qualify Chicago-Joliet-Naperville, IL-IN-WI MSA 308,424 92,108 3,473,022 §,325 Chico, CA MSA 274,636 67,806 89,007 128 Cincinnati-Middletown, OH-KY-IN MSA 244,344 66,318 865,663 1,623 Clarksville, TN-KY MSA 140,513 35,802 103,093 306 Cleveland, TN MSA 159,148 39,165 49,234 138 Cleveland-Elyria-Mentor, OH MSA 272,149 79,010 830,043 1,103 Coeur d'Alene, ID MSA 250,758 60,527 55,100 100 College Station-Bryan, TX MSA 192,998 56,025 88,453 198 Columbia, MO MSA 214,130 54,865 76,589 128 Columbia, SC MSA 213,026 52,771 291,253 670 Columbus, GA-AL MSA 188,924 47,549 114,070 247 Columbus, IN MSA 270,724 69,587 30,780 66 Columbus, OH MSA 254,712 72,249 725,749 1,452 Corpus Christi, TX MSA 192,237 59,548 163,365 405 Dallas-Fort Worth-Arlington, TX MSA 289,824 89,627 2,412,714 3,676 Dalton, GA MSA 168,738 42,291 48,593 122 Danville, IL MSA 130,985 39,651 32,323 106 Danville, VA MSA 167,278 41,519 49,204 168 Davenport-Moline-Rock Island, IA-IL MSA 220,693 64,422 158,920 363 Dayton, OH MSA 291,432 84,249 333,881 41} Decatur, AL MSA 179,407 45,017 61,915 106 Decatur, IL MSA 225,354 69,191 52,324 109 Deltona-Daytona Beach-Ormond Beach, FL 357,650 96,058 213,555 214 Denver-Aurora-Broomfield, CO MSA 306,315 74,688 1,049,652 1,791 Des Moines-West Des Moines, [A MSA 269,083 76,308 245,972 507 Detroit-Warren-Livonia, MI MSA 294,783 91,235 1,666,009 2,434 Dothan, AL MSA © 238,111 58,693 53,913 93 Dover, DE MSA 158,002 37,589 65,290 148 Duluth, MN-WI MSA 214,426 56,782 117,200 287 Durham-Chapel Hill, NC MSA 252,354 65,845 216,839 353 Eau Claire, WI MSA 223,405 63,094 64,452 158 El Centro, CA MSA 234,495 59,418 42,914 68 El Paso, TX MSA 171,999 $1,310 267,497 694 Elizabethtown, KY MSA 178,046 45,538 48,608 175 Elkhart-Goshen, IN MSA 218,863 $7,199 70,981 161 Erie, PA MSA 300,781 88,158 111,662 188 Eugene-Springfield, OR MSA 286,284 73,007 147,425 227 Evansville, IN-KY MSA 183,817 47,332 149,798 256 Fairbanks, AK MSA 228,035 61,929 33,892 98 Fargo, ND-MN MSA 223,606 62,807 91,187 195 Farmington, NM MSA 254,662 62,485 35,965 90 Fayetteville, NC MSA 203,097 53,953 147,433 393 Fayetteville-Springdale-Rogers, AR-MO MS4 271,763 67,378 182,509 276 Flagstaff, AZ MSA 229,039 54,724 49,607 94 Flint, MI MSA 225,094 71,795 171,869 342 Florence-Muscle Shoals, AL MSA 138,41! 34,354 54,083 175 Fond du Lac, WI MSA 244,900 71,637 41,020 105 Fort Colliris-Loveland, CO MSA 289,367 70,156 128,382 199 Fort Smith, AR-OK MSA 190,863 48,139 124,807 289 Fort Wayne, IN MSA 238,403 62,176 167,061 338 Fresno, CA MSA 293,061 73,897 304,713 456 Gadsden, AL MSA 170,888 43,165 36,353 62 Gainesville, FL MSA 202,516 53,567 94,526 184 Gainesville, GA MSA 207,524 51,934 61,424 152 Glens Falls, NY MSA 269,828 77,148 $1,033 75 Goldsboro, NC MSA 188,687 49,767 45,559 106 Grand Junction, CO MSA 258,995 60,551 56,846 88 NATIONAL ASSOCIATION OF HOME BUILDERS Tablel. Households Priced Out of the Market by a $1,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Households HomePrice Needed to All Priced Out Qualify Grand Rapids-Wyoming, MI MSA 253,115 71,378 297,890 641 Greeley, CO MSA 269,681 64,966 96,568 189 Green Bay, WI MSA 231,028 65,732 124,309 224 Greensboro-High Point, NC MSA 288,492 74,552 295,059 445 Greenville, NC MSA 184,839 48,872 90,674 204 Greenville-Mauldin-Easley, SC MSA 277,468 67,903 254,703 380 Gulfport-Biloxi, MS MSA 162,576 44,342 108,125 270 Hagerstown-Martinsburg, MD-WV MSA 206,117 $1,465 106,312 238 Hanford-Corcoran, CA MSA 189,803 47,603 39,541 114 Harrisburg-Carlisle, PA MSA 323,166 87,531 219,380 310 Harrisonburg, VA MSA 175,588 41,958 47,538 122 Hartford-West Hartford-East Hartford, CT M: 319,298 91,708 477,064 723 Hattiesburg, MS MSA 243,791 64,017 52,169 88 Hickory-Lenoir-Morganton, NC MSA 252,219 62,967 150,672 276 Holland-Grand Haven, MI MSA ~ 247,807 67,911 97,057 222 Honolulu, HI MSA 393,669 87,662 307,228 420 Hot Springs, AR MSA 262,134 65,875 46,326 66 Houma-Bayou Cane-Thibodaux, LA MSA 271,420 69,031 72,220 115 Houston-Sugar Land-Baytown, TX MSA 195,144 60,997 2,167,245 4,234 Huntsville: AL MSA 165,823 40,142 171,08) 384 Idaho Falls, ID MSA 161,729 40,306 41,575 108 Indianapolis-Carmel, IN MSA 260,699 67,557 697,114 1,312 lowa City, IA MSA 271,832 76,239 67,287 132 Ithaca, NY MSA 280,564 89,282 36,575 40 Jackson, MI MSA 188,708 52,506 63,934 190 Jackson, MS MSA 244,997 63,545 192,760 370 Jackson, TN MSA 193,808 49,633 47,158 84 Jacksonville, FL MSA 280,185 73,490 508,999 856 Jacksonville, NC MSA 148,170 37,704 66,124 233 Janesville, WI MSA 213,437 64,369 62,636 152 Jefferson City, MO MSA 224,583 57,677 59,464 126 JohnsonCity, TN MSA 163,973 40,268 83,177 239 Johnstown,PA MSA 301,932 84,153 60,029 66 Joplin, MO MSA 144,861 37,416 72,896 245 Kalamazoo-Portage, MI MSA 254,025 72,309 135,068 243 Kankakee-Bradlcy, IL MSA 191,793 58,765 41,504 11 Kansas City, MO-KS MSA 292,243 80,318 814,964 1,194 Kennewick-Pasco-Richland, WA MSA 328,527 85,647 92,841 129 Killeen-Temple:Fort Hood, TX MSA 169,434 50,058 146,822 367 Kingsport-Bristol-Bristol, TN-VA MSA 179,999 45,171 122,105 323 Kingston, NY MSA 377,249 114,249 72,871 74 Knoxville, TN MSA 213,424 52,723 294,901 537 Kokomo,.IN MSA 215,884 54,403 39,545 70 La Crosse, WI-MN MSA 219,155 62,946 57,652 92 Lafayette, IN MSA 231,863 58,658 80,628 156 Lafayette, LA MSA 187,491 47,716 110,350 217 Lake Charles, LA MSA 234,773 60,482 81,131 147 Lakeland-Winter Haven, FL MSA 236,300 64,659 235,702 358 Lancaster, PA MSA 269,950 74,049. 196,147 413 Lansing-East Lansing, MI MSA 254,683 75,840 184,760 390 Laredo, TX MSA__ 164,186 50,884 72,117 196 Las Cruces, NM MSA 231,803 57,551 71,069 130 Las Vegas-Paradise, NV MSA 182,564 46,013 755,412 2,044 Lebanon, PA MSA 262,028 71,597 53,811 115 Lewiston, ID-WA MSA 255,924 65,790 26,662 59 Lexington-Fayette, KY MSA 175,954 44,491 194,617 509 Lima, OH MSA | 213,974 58,512 40,561 100 / NATIONAL ASSOCIATION OF HOME BUILDERS Tablel. Households Priced Out of the Market by a $1,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Households , HomePrice Needed toAl PricedOut. Qualify Lincoln, NE MSA 229,995 66,939 123,808 266 Little Rock-North Little Rock-Conway, AR M 207,826 $2,753 283,816 636 Logan, UT-ID MSA 223,458 53,659 42,138 82 Longview, TX MSA 155,971 44,591 72,341 218 Longview, WA MSA 246,663 65,225 35,426 77 Los Angeles-Long Beach-Santa Ana, CA MS, 445,105 107,294 4,292,536 3,813 Louisville/Jefferson County, KY-IN MSA 229,997 $9,226 533,456 1,140 Lubbock, TX MSA 250,013 76,069 111,958 173 Lynchburg, VA MSA 223,782 54,240 102,347 196 Macon, GA MSA 198,624 52,472 84,446 169 Madera-Chowchilla, CA MSA 271,959 67,513 41,538 3 Madison, WI MSA 293,258 83,743 244,625 381 Manchester-Nashua, NH MSA 323,009 95,042 159,493 230 Mansfield, OH MSA 222,557 61,861 48,355 103 McAllen-Edinburg-Mission, TX MSA 137,758 42,748 237,476 656 Medford, OR MSA 272,536 69,332 74,464 156 Memphis, TN-MS-AR MSA 194,193 52,811 493,575 1,183 Merced, CA MSA .. 351,321 88,213 79,793 92 Miami-Fort Lauderdale-Pompano Beach, FL h 342,099 97,050 2,058,718 1,953 Midland, TX MSA 240,632 69,973 51,972 111 Milwaukee-Waukesha-West Allis, WI MSA 346,831 100,131 641,192 943 Minneapolis-St. Paul-Bloomington, MN-WI 336,496 89,372 1,327,842 2,009 Mobile, AL MSA : 163,596 42,440 154,719 327 Modesto, CAMSA 255,320 64,669 166,773 281 Monroe, LA MSA 196,501 50,170 70,146 106 Monroe, MI MSA 227,025 62,366 57,536 106 Montgomery, AL MSA 199,530 48,515 150,721 276 Morgantown, WV MSA 208,761 51,142 51,113 107 Morristown, TN MSA 203,473 50,167 50,289 100 Mount Vernon-Anacortes, WA MSA 245,286 62,316 42,494 71 Muncie, INMSA ~ 208,458 55,525 48,842 103 Muskegon-Norton Shores, MI MSA 205,803 60,633 65,952 129 Myrtle Beach-North Myrtle Beach-Conway, S 203,843 50,379 137,484 283 Napa, CA MSA 580,197 142,369 44,979 19 Naples-MarcoIsland, FL MSA 413,389 105,952 123,245 75 Nashville-Davidson--Murfreesboro--Franklin, 261,290 65,354 622,873 1,096 New Haven-Milford, CT MSA 318,180 93,482 337 ,231 514 New Orleans-Metairie-Kenner, LA MSA 248,612 65,357 476,731 750 New York-Northern New Jersey-LongIsland, 407,805 113,408 7,040,717 §,742 Niles-Benton Harbor, MI MSA 355,099 96,306 67 ,997 80 North Port-Bradenton-Sarasota, FL MSA 290,155 78,160 294,796 371 Ocala, FL MSA 226,250 60,413 134,869 333 Ocean City, NJMSA_ | 448,406 118,716 39,273 35 Odessa, TX MSA 216,022 62,359 48,352 108 Ogden-Clearfield, UT MSA 285,382 69,601 182,900 391 Oklahoma City, OK MSA 230,816 63,382 487,440 935 Olympia, WA MSA 290,425 74,854 103,069 207 Omaha-Council Bluffs, NE-IA MSA 219,334 65,366 356,329 731 Orlando-Kissimmee-Sanford, FL MSA 323,141 85,927 805,830 955 Oshkosh-Neenah, WI MSA 249,872 72,679 66,752 154 Oxnard-Thousand Oaks-Ventura, CA MSA 391,706 94,599 272 ,7\1 343 Palm Bay-Melboure-Titusville, FL MSA 359,862 98,315 221 ,973 257 Panama City-Lynn Haven-Panama City Beach 187,641 48,955 66,256 123 Pascagoula, MS MSA 162,073 44,932 55,327 161 Pensacola-Férry Pass-Brent, FL MSA 171,995 45,705 187,473 489 Peoria, IL MSA 279,063 83,796 154,710 283 Philadel phia-Camden-Wilmington, PA-NJ-DE 270,854 75,346 2,240,167 3,914 NATIONAL ASSOCIATION OF HOME BUILDERS _Tablel. Households Priced Out of the Market by a $1,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Households : HomePrice Needed to All Priced Out Qualify Phoenix-Mesa-Glendale, AZ MSA 299,444 74,110 1,594,811 2,670 Pittsburgh, PA MSA _ 383,844 110,558 1,012,323 934 Port St. Lucie, FL MSA 346,618 99,486 183,423 199 Portland-South Portland-Biddeford, ME MSA 321,500 84,074 218,046 281 Portland- Vancouver-Hillsboro, OR-WA MSA 324,988 83,386 873,789 1,190 Poughkeepsie-Newburgh-Middletown, NY M 315,346 93,615 231,194 383 Prescott, AZ MSA 271,476 65,766 98,451 184 Providence-New Bedford-Fall River, RI-MA 1 314,448 84,389 623,169 805 Provo-Orem, UT MSA 289,202 68,850 149,368 309 Pueblo, CO MSA 212,056 54,060 62,804 182 Punta Gorda, FL MSA 255,458 72,257 79,495 189 Racine, WI MSA 283,360 83,396 75,451 110 Raleigh-Cary, NC MSA 239,300 60,054 477,13 986 Reading, PA MSA 255,169 74,361 143,350 309 Redding, CA MSA 242,398 60,089 66,329 109 Reno-Sparks, NV MSA 302,827 75,485 173,013 295 Richmond, VA MSA 220,984 54,604 481,937 1,003 Riverside-San Bernardino-Ontario, CA MSA 294,917 74,642 1,269,021 2 ,050 Roanoke, VA MSA 247,589 61,709 138,319 310 Rochester, MN'MSA 289,029 76,208 74,890 139 Rochester, NY MSA 363,279 149,792 421,843 418 Rockford, IL MSA 161,275 52,310 132,629 402 Rocky Mount, NC MSA 197,825 52,868 52,983 107 Rome, GA MSA 233,496 60,762 33,306 73 Sacramento--Arden-Arcade--Roseville, CA M 368,853 92,854 796,644 1,004 Saginaw-Saginaw Township North, MI MSA 220,475 64,958 81,456 155 Salem, OR MSA 278,962 72,881 149,861 271 Salinas, CA MSA 336,843 81,481 125,003 156 Salisbury,MD MSA 172,707 43,739 44,757 78 Salt Lake City, UT MSA 286,243 69,358 389,439 777 San Antonio-New Braunfels, TX MSA 227,539 68,643 774,537 1,712 San Diego-Carlsbad-San Marcos, CA MSA 443,256 106,876 1,117,831 912 San Francisco-Oakland-Fremont, CA MSA 441,837 106,571 1,665,167 1,597 San Jose-Sunnyvale-Santa Clara, CA MSA 447,432 107,821 647,818 729 San LuisObispo-Paso Robles, CA MSA 419,878 100,466 103,348 137 Sandusky, OH MSA 243,727 66,843 32,955 68 Santa Barbara-Santa Maria-Goleta, CA MSA 427,335 101,612 143,151 120 Santa Cruz-Watsonville, CA MSA 287,744 68,260 90,282 15] Santa Fe, NM MSA 180,544 42,743 65,157 119 Santa Rosa-Petaluma, CA MSA 325,692 79,106 191,860 262 Savannah, GA MSA 205,157 53,207 139,421 3it Scranton--Wilkes-Barre, PA MSA 345,255 96,513 222,523 274 Seattle-Tacoma-Bellevue, WA MSA 368,710 94,273 1,397,266 1,775 Sebastian-Vero Beach, FL MSA 433,676 117,492 61,928 37 Sheboygan, WI MSA 295,862 85,947 48,035 719 Shreveport-Bossier City, LA MSA 199,792 $1,275 151,106 284 Sioux City, IA-NE-SD MSA 269,059 78,691 50,974 72 Sioux Falls, SD MSA 180,932 49,784 89,630 283 South Bend-Mishawaka, IN-M] MSA 275,678 72,826 119,914 222 Spartanburg, SC MSA 169,499 42,354 115,152 317 Spokane, WA MSA 358,134 93,874 192,335 244 Springfield, IL MSA 248,178 74,317 87,129 142 Springfield, MA MSA 357,528 97,210 259,426 343 Springfield, MO MSA 240,300 53,752 184,137 450 Springfield, OH MSA 245,947 68,424 $3,722 95 St. Cloud, MN MSA- 238,803 62,543 71,849 136 218,646 52,782 $2,381 121St. George, UT MSA NATIONAL ASSOCIATION OF HOME BUILDERS Tablel. Households Priced Out of the Market by a $1,000 Price Increase, 2014 Metropolitan Statistical Area Median New Income Houscholds Home Price |Neededto”Al PricedOut oo Qualify St. Joseph, MO-KS-MSA 212,137 55,439 50,925 103 St. Louis, MO-IL MSA 263,137 72,040 1,115,669 2,071 State College, PA MSA 261,048 69,018 53,699 88 Stockton, CA MSA° 311,589 78,983 219,842 252 Sumter, SC MSA 131,871 33,549 38,919 124 Syracuse, NY MSA 299,007 95,900 268,267 387 Tallahassee, FL MSA 220,666 56,798 137,300 279 Tampa-St. Petersburg-Clearwater, FL MSA 376,565 103,652 1,177,086 842 Terre Haute, IN MSA 203,506 54,299 73,531 173 Toledo, OH MSA 255,682 73,852 260,186 362 Topeka, KS MSA 216,320 62,215 91,646 221 Trenton-Ewing, NJ MSA 446,961 136,243 134,536 88 Tucson, AZ MSA 287,021 73,702 399,026 660 Tulsa, OK MSA 223,880 60,536 375,628 867 Tuscaloosa, AL MSA 248,394 59,158 79,981 120 Tyler, TX MSA” 232,175 65,966 74,360 129 Utica-Rome, NY MSA 298,972 94,627 118,949 169 Valdosta, GA MSA 137,268 35,630 54,958 196 Vallejo-Fairfield, CA MSA 255,570 64,307 143,461 259 Vinéland-Millville-Bridgeton, NJ MSA 177,370 55,125 50,779 104 Virginia Beach-Norfolk-Newport News, VA-] 234,587 59,056 648,268 1,370 Visalia-Porterville, CA MSA 253,824 63,209 134,074 272 Waco, FX’MSA ~ -*, 201,313 60,613 87,319 163 WamerRobins, GA MSA 232,089 60,349 53,293 116 Waterloo-CedarFalls, [A MSA 232,706 64,308 65,726 166 Wausau, WI MSA | 243,269 70,353 49,835 M1 Wenatchee-East Wenatchee, WA MSA 239,422 60,552 42,564 94 Wichita Falls, TX MSA 223,899 70,763 64,542 159 Wichita, KS MSA, 226,945 64,818 245,039 586 Williamsport, PA MSA 289,987 79,994 43,826 70 Wilmington, NC MSA 266,712 66,865 152,944 282 Winchester, VA-WV MSA 233,050 56,203 51,402 62 Winston-Salem, NC MSA 189,420 48,459 201,425 445 Worcester, MA MSA 296,995 79,168 307,142 428 Yakima, WA MSA 276,602 72,065 75,369 135 York-Hanoyer,PA MSA 265,832 74,801 170,288 352 Youngstown-Warren-Boardman, OH-PA MSs 232,467 65,474 224,983 405 Yuba City, CA MSA 246,352 63,666 57,492 115 Yuma, AZ MSA 478,173 46,100 69,720 187 NATIONAL ASSOCIATION OF HOME BUILDERS Table 2. Households Priced Out of the Market by a $1,000 Price Increase, 2014 State Median New Income Needed Households HomePrice to Qualify All Priced Out United States 275,000 73,649 117,950,185 206,269 Alabama 216,824 54,196 1,846,416 3,459 Alaska 325,180 86,106 240,666 365 Arizona 287,001 71,864 2,466,063 4,157 Arkansas 219,523 56,290 1,177,040 2,568 California 365,167 89,309 12,722,186 14,423 Colorado 342,690 82,957 2,038,141 2,540 Connecticut 491,425 140,012 1,370,235 1,018 Delaware 152,017 36,066 354,999 720 Florida 319,174 86,902 7,384,825 8,296 Georgia 217,402 56,242 3,610,908 7,302 Hawaii 384,693 85,981 446,122 594 Idaho 252,325 62,339 588,976 1,088 Itlinois 278,778 85,014 4,836,857 7,578 Indiana 247,100 64,441 2,506,214 4,683 lowa* - 192,500 54,379 1,247,875 3,126 Kansas 264,152 75,540 1,138,738 2,263 Kentucky 191,386 49,975 1,778,941 3,927 Louisiana 222,820 57,406 1,754,897 3,189 Maine - ~~ 305,742 81,351 559,561 679 Maryland 236,366 60,421 2,204,876 4,077 Massachusetts 432,724 111,864 2,503,159 2,506 Michigan 262,479 76,700 3,914,075 5,158 Minnesota 299,182 79,693 2,143,218 3,172 Mississippi 181,372 48,929 1,109,834 2,338 Missouri 241,663 64,150 2,395,676 4,160 Montana _ 252,007 64,633 418,478 806 Nebraska 224,127 67,330 753,507 1,632 Nevada 203,067 51,139 1,056,922 2,470 New Hampshire 351,646 103,152 §24,545 632 New Jersey 320,667 95,594 3,262,062 4,897 New Mexico 232,383 58,481 760,438 1,389 New York 411,169 113,548 7,341,977 6,794 North Carolina 236,763 60,597 3,829,129 7,913 North Dakota 228,691 64,894 306,553 628 Ohio 254,742 71,471 4,587,078 8,724 Oklahoma 221,891 60,090 1,454,571 3,157 Oregon 308,706 79,240 1,516,913 1,839 Pennsylvania 318,277 88,292 5,000,347 6,820 Rhode Island 315,209 87,044 414,736 549 South Carolina 264,082 65,971 1,824,935 2,880 South Dakota 200,313 56,488 324,868 752 Tennessee 217,429 55,269 2,505,609 5,227 Texas 222,052 68,010 9,217,089 18,250 Utah 277,172 67,170 919,013 1,838 Vermont 341,178 95,924 260,860 383 Virginia 225,747 55,851 3,137,955 5,779 Washington 331,450 85,484 2,645,229 3,469 West Virginia 199,156 50,250 753,970 1,629 Wisconsin 260,618 75,572 2,314,606 4,912 Wyoming 335,960 $2,560 225,474 313 *New homeprice provided by a local HBA Document 18 Page 1 of 2 Housing costs push commuters outward, expanding definition of Bay Area, study says By Erin Saldassari, ebaidassari@bayareanewsgroup.com East Bay Times Posted: Thu Jun 30 01:61:00 MOT 2016 OAKLAND-- Over the past decade or more, the Bay Area's boundaries have been bleeding into surrounding counties as skyrocketing housing prices pushresidentsfarther from jobs centered in Silicon Valley and San Francisco. Thoseresidentsare still employed in the Bay Area though, leading to longer commutes and mounting pressure on the region's roads and rails. While that trend has been ongoing for sometime, the problemsresulting from it have become particularly acute, according to a new report released Thursday by the Bay Area Council, a business-sponsored public policy advocate. "All these people are moving around on the most congestedcorridors,” said Jeff Bellisario, the research managerforthe Bay Area Council Economic Institute, "and there's no great transit options for these commuters." Approximately 602,000 vehicles enter and exit the nine-county Bay Area from other parts of whatthe council has dubbed the "Northern California Megaregion,” an area comprising six counties in and around Sacramento,three Northern San Joaquin Valley area counties, and three Monterey Bay area counties. The Northern San Joaquin Valley area is leading the region in the numberof workers it is sending to Bay Area companies. Between 1990 and 2013, the number of people commuting from the valley to job centers in the Bay Area more than doubled, growing around 32,000 commuters to nearly 65,000, according to the report. "Silicon Valley really likes our labor force, but ourlaborforce really doesn'tlike the Silicon Valley's housing costs,” said Mike Ammann,president and CEO of San Joaquin Partnership, a nonprofit economic developmentcorporation. San Joaquin Valley wasalso oneof the hardesthit in the housing market crash that spurred the Great Recession, but Ammannsaid the double-digit unemployment numbers in the area have since come down. Manufacturing has picked up, as has the county's distribution and transportation industries, and more housing is being built in the region again, he said. However, this uneven growthin jobs and housing has caused gridlock onInterstate 580, and while the Altamont Corridor Expresstrain, or ACE, is not yet at capacity, it soon will be, said Dan Leavitt, the transit agency's manager ofregional initiatives. The agency's ridership has roughly doubled in the past five years, and ACEis looking for ways to expand, Levitt said. It's currently in the processofdrafting an environmental impactreport, set to be released in thefall, that would study an increase in the numberof roundtrips from fourto six, and within the next decade, Leavitt said the agency hopesto offer 10 roundtrips. To do that, the passenger service needs to add a secondsetofrailroad tracks in someplaces, as well as make other improvements, Leavitt said, a roughly $200 million investmentforthe first phase and another $200 million for the second. ACEalready has funding for the planning and preconstruction phaseof the project, but not the actual construction, he said. “In order for us to (expand service), we would need moreinfrastructure along our lines, but also other things like equipment and more parking," Leavitt said. "First and foremost, the biggest hurdle is funding.” While the state has some cap-and-trade funds available for commuterrail projects, Leavitt said the projectwill require investment from counties along the rail line serves. Encouraging local governmentsto think regionally has never been easy, said Randy Rentschler, the legislation and public affairs director of the Metropolitan Transportation Commission, but encouraging municipal and county governments to do so has never been morecritical, he said. http://www.eastbayti mes.com/portlet/article/htm!/fragments/print_article.jsp?articleld=3007... 7/5/2016 Page 2 of2 He pointed to the express lane on Interstate 580, which openedearlier this year, as an example of regional collaboration that provided somerelief to drivers stuck in gridlock. "The planning and the fight ... to get that moneyon those lanes; we had to take on mostofthe rest of the state to make sure that these congested areas wereprioritized,” Rentschler said. "We succeeded in part because we workedclosely with our friends in the San Joaquin Valley area." As people continue to movefurther from job centers in search of cheaper housing, Rentschler said the problems will only get worse. , “Being the repository for your neighbor's housing stock can only go sofar," he said. The report recommends, amongotherthings,investing in regionalrail lines, streamlining permitting for housing construction so it can be built.closer to job centers, and encouraging job growth in the San Joaquin Valley and Sacramento areas to help relieve the daily migration to the Bay Area. Coupled with that is a long-term strategy to invest in education in placeslike Sacramento and Merced, so that companies can more readily access a high-skilled labor pool, Bellisario said. “Part of the conversation is about transportation, part is about the economy,but really, they both go together," Bellisario said. "We need to spread the economic footprint more evenly across the entire megaregion." Contact Erin Baldassari at 510-208-6428. 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