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
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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.
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"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.
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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.
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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."
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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
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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.
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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
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“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.
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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
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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.
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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
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What Was The Most Important Thing You Learned?
It is really hard to balance the budget as a government.
- Butte, CA
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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. 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
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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
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California Middle Wage Employment
Q1-04 to Q4-14
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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
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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
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* 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
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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
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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
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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
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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
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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
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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.
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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. Follow her at Twitter. com/s_baldi.
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