How San Diego’s Housing Shortage Became So Dire

Housing has emerged as the dominant political fight in both San Diego and California.

There’s no shortage of ways to describe the effects of the housing shortage. More than any time in history, Californians say housing affordability is a big problem – and the 71 percent of San Diegans who say so is higher than in the rest of the state. Just 27 percent of households can afford the county’s median home, at $655,000. Low-income San Diegans spend nearly their entire paycheck on rent. And so on.

But the dire situation in which the region finds itself did not arrive suddenly.

San Diego County has failed to build enough homes to keep pace with the rate of economic and population growth for many decades. That’s true not just of San Diego, but the rest of coastal California, too.

“When people say there’s a housing shortage, I think what’s happening is that people who want to move to another unit can’t find one that is available and affordable in their price range,” said Ray Major, chief economist for the San Diego Association of Governments.

Since the end of the Great Recession, homebuilding in the region truly bottomed out. By one simple measure, San Diego’s lack of homebuilding since 2010 has resulted in 59,000 fewer units than what’s needed to match the population growth in that time.

But looking back more than two decades, Stephen Russell, executive director of the San Diego Housing Federation, an industry group for low-income housing developers, pegs the built-up deficit at closer to 140,000 homes.

“We’ve simply failed to build enough housing, year-over-year, compared to the number of households formed in the region for more than 20 years,” he said.

But the idea that we’ve underbuilt our needs can be an unsatisfying explanation for the crushing costs of housing in San Diego. After all, a view of downtown reveals cranes from East Village to Little Italy, each hovering over a hole in the ground that will soon be home to yet another condo tower. Residents of every neighborhood can probably recall a recent housing development nearby. Despite what the numbers say, it might not feel like we’ve stopped building new homes.

But the numbers speak for themselves.

Governments in San Diego issued permits for roughly 25,000 new homes per year through the 1970s and 1980s. San Diego was in a booming period of growth at the time, and developers filled suburban areas like Mira Mesa, Scripps Ranch, Rancho Peñasquitos and Carmel Valley with new homes.

“The last time we had sufficient housing was when we had many square miles of mesa tops we could develop,” Russell said.

Since a recession hit Southern California in the early 1990s, though, homebuilding never recovered.

In the three decades since, San Diego has struggled to issue even the 12,000 housing permits per year needed to keep up with population growth.

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In the last few years, lackluster homebuilding has started to resonate with a broad swath of the population.

That’s because of what happened in the housing market during the depth of the Great Recession, Major said.

The mortgage crisis that caused the recession resulted in many homeowners owing more for their homes than they were worth. Between foreclosures and short sales, that meant many of those underwater homes hit the market. But San Diegans didn’t get to benefit from what should have been lower-cost homes.

“What ended up happening is that it wasn’t the normal residents who were able to purchase those houses,” Major said. “It was investors who came in to flip them for profit. So we weren’t able to take advantage of the fact that prices were lower and mortgage rates were coming down. And then as the population started to grow through the recession – we came out of the recession adding about 20,000 people per year due to natural increase and in-migration … then all of a sudden you’re in a situation where people are ready to start moving out, and we haven’t built enough housing units for this set of people.”

And by its own historical standard, there’s no question San Diego has built a tiny number of homes since coming out of the recession.

One way of describing that historic slowdown is to compare the percentage of the region’s housing represented by new homes.

As San Diego has grown up, that number has steadily declined, which is perhaps not surprising. It was easier and cheaper to fill the region with new homes when there were fewer homes here. But while that number has trended downward over the last 70 years, it had previously still spiked and regressed along with economic cycles.

It has now settled into a persistent malaise, with new homes in a given year representing a tiny percentage of homes in the region.

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Since 1950, new housing has represented an average of 3 percent of our region’s housing stock in a given year. That number has been in decline for years, but has since bottomed out at its current rate below 1 percent.

“During the ‘80s and ‘90s, we still had land available for these mass housing tracts that we were putting in,” Major said. “That type of construction is much cheaper than infill housing. You’re putting in 1,000 homes and you just put in sewers and roads and you connect everything, it’s simple. It’s inexpensive compared to, you have a house on a parcel with 100-year-old plumbing and you want to pull that out and put down eight units, and you can barely fit it.”

Not everyone will care whether we make room for more people to live in San Diego by building new homes, per se.

Instead, it’s the cost of housing that 71 percent of San Diegans say is a big problem.

But the lack of new homebuilding has a direct result on housing prices – it might just take some time for the result to materialize.

That’s because new homes – like new cars, new sneakers and new computers – are expensive. But like those other items, housing gets less desirable, and therefore less expensive, as it ages.

“Market-rate housing constructed now will therefore add to a community’s stock of lower-cost housing in the future as these new homes age and become more affordable,” according to a recent analysis by the California Legislative Analyst’s Office.

The Legislative Analyst’s Office backs up its explanation with an analysis of rents for housing built between 1980 and 1985 in Los Angeles. In 1985, those new homes rented in the top fifth of all rental units on the market. By 2011, when they were 30 years old, they had aged into homes that rented for the median of the market.

“Housing that likely was considered luxury when first built declined to the middle of the housing market within 25 years,” the Legislative Analyst’s Office wrote.

That means the region’s collapse in home construction in the early 1990s represents the lack of mid-priced homes available today, and the lack of homes built today will represent a shortage of mid-priced homes available 25 years from now.

That delayed effect doesn’t just result in lower affordability for people shopping in the middle of the housing market. It also pushes its way down, potentially contributing to gentrification and displacement.

“If we built more homes 35 years ago, we’d have fewer people who would be in the market for those 35-year-old homes looking into markets that they’d never look to before, like we see in City Heights today, or like we’re starting to see in southeastern San Diego and National City. Once market attitudes change, people buy it out,” said Russell. “There are two waves that are going to be crushing: phantom homes that weren’t built and so can’t age into affordability, and people who will be forced to rent their entire lives who are retiring soon without the retirement protection that comes with home ownership.”

San Diego doesn’t just build fewer homes now than it used to. That wouldn’t be so much of a problem, in fact, if the region had stopped growing alongside that slowdown.

Instead, the region keeps adding jobs – and people – even as it produces fewer places for those people to sleep at night.

Beginning in the 1970s, for instance, the region managed to add homes effectively at the same rate it added jobs.

If you look at the percentage change in homes alongside the percentage change in jobs, the two numbers basically track with each other, rising and falling in lockstep alongside economic cycles.

Then the 1990s happened. Something broke in the marriage, and we no longer added many more homes, regardless of how fast or slow we were adding jobs.

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That’s now led to two strong recovery periods, one in the mid-1990s, and one that we’re living through right now, where all the people who were newly gainfully employed weren’t met with another new home as part of the housing stock, leaving them to instead bid against everyone else for existing homes.

It’s the same story when comparing housing growth to population growth.

In that case, the region managed to add housing at the same pace it added people through the 1960s, but started to fall behind even in the 1970s when it was permitting roughly twice as many homes a year as it is today.

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The years of slow development alongside persistent job and population growth have taken their toll.

Now, even a relative surge of new homes wouldn’t be able to make a big difference.

“Given the amount of pent-up demand that we have – these numbers don’t include, for instance, all the units that have been taken off the market because of short-term rentals – so you have incredibly pent up demand right now. If you built 10,000 units, they would be snapped up because, because there’s latent demand and there’s people who are willing to move,” Major said.

San Diego is not so different than other coastal California cities, but is quite different from other western and Sun Belt cities that, like San Diego, were primarily developed after the advent of the automobile and have continued to see steady job and population growth in recent decades.

Compared with those cities outside California, San Diego permits far fewer new homes per year, relative to each city’s population.

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In other words, don’t let your eyes deceive you.

All those cranes you see downtown, and the construction projects it seems like are always bothering you on your morning commute, still account for a far slower pace of homebuilding than what occurs in the other major metropolitan areas that San Diego competes with for talent – or where people from here might move if they decide they’ve had enough.

But not all housing is necessarily created equal, even if it does tend to get cheaper over time.

Not only is San Diego not building much housing, but what it is building is overwhelmingly coming in at the high end of the housing market.

From 2003 through 2010, for instance, the state of California set a goal for San Diego to build 107,000 new homes, broken down into specific targets for homes reserved for very low, low, moderate and above moderate incomes.

The region ended up building about 75 percent of that goal – but it actually overproduced homes in the above-market category. New homes in the very low, low and moderate segments, meanwhile, each came in at about 25 percent or lower what the state had envisioned.

Altogether, homebuilders in the region put up 18,167 very low, low and moderate income homes from 2003 through 2013, out of 88,801 total homes built in that time.

Russell has taken to calling the region’s housing production a “martini glass.” You can see why.

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“The housing crisis, for many years we spoke about the poorest amongst us being the first to feel it,” Russell said. “The first 20 years of our organization’s history was trying to convince people there was a crisis. Only in recent years it started to affect the lower middle class and the middle class. Then it became a hot political topic. That’s one reason for optimism: It’s a political issue now, so the reason for a solution might be possible.”