BERKELEY, Calif. – Anthony Downs believes California should knock down all regulations that prevent new houses from being constructed. The result, Downs said, would be enough supply to handle the demand and a resulting decrease in the state’s sky-high home prices.

But he also knows it won’t happen. Homeowners would be against it, as well as real estate agents, lenders, secondary mortgage giants Fannie Mae and Freddie Mac, local governments, politicians and even retail outlets, according to Downs.

“Practically everybody is opposed to having home prices decline,” said Downs, senior fellow for the past 25 years at the Brookings Institution, a Washington D.C.-based think tank.

Downs shared his views on California’s housing industry on Friday during a lunchtime seminar through U.C. Berkeley’s Program on Housing and Urban Policy. Downs began his talk by joking that the seminar’s title, “Some Thoughts on Affordable Housing in California,” was a bit of an oxymoron.

He rattled off statistics to prove that point, saying that from 1999 to 2004, California homeowners gained almost as much in gross real estate wealth as all homeowners in all other states combined during that same time frame. Since 1997, California home prices have increased by about 123 percent, while home prices throughout the rest of the country have increased about 43 percent, Downs said.

But the income of California’s workers hasn’t been keeping pace. In California, the ratio of the median priced home to the median income is 10 to 1. Nationwide, it’s 3 to 1. The difference in California’s median priced home and income isn’t sustainable, Downs said. He doubts home prices will collapse because of it, but they may level off slightly.

In Downs’ view, the state’s high housing prices are a “self-inflicted injury.” Californians love the state, its amenities and weather and are willing to pay what it takes to own a home, he said. In many instances, they’ve lowered their standards and often become more supportive of state housing prices once they own homes. Homeowners often pressure local governments to keep rules in place that prevent more housing development–such as density restrictions.

However, ridding the state of such rules and building enough housing to meet demand is the only way California’s rising home prices will come back in line, Downs said. But it won’t happen politically, he said, nor would subsidizing housing for those who cannot afford market-priced homes.

Instead, he offered his second-best move in the right direction – requiring statewide inclusionary zoning, which would require anyone who builds housing to set aside a portion for “affordable housing” units or for below-market prices. Home builders generally dislike those regulations since they shift the burden of the state’s housing problems from governments to builders, Downs said, but those companies might be more receptive if they received certain benefits like density bonuses or tax advantages.

Inclusionary zoning won’t solve the state’s high-priced housing, but it could help alleviate the problem for some residents. Of course, Downs said, some Californians will argue that nothing needs to be done about housing prices, saying that if people can’t cope with the cost of buying a home, they can simply move elsewhere. In Downs’ view, there is a public policy responsibility as well as economic pressure to help out.

It’s difficult to determine whether California’s high home prices impact its economy and by how much, but Downs said at least one study showed that California businesses were looking outside the state. Toss in other factors such as a state government with little money, and it’s easy to see why businesses might forgo expanding in California, Downs said.


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