SAN FRANCISCO — The average home in the United States costs around $240,000. But in San Francisco, the world’s most expensive place for construction, a two-bedroom apartment of what passes for affordable housing costs around $750,000 just to build.
California’s staggering housing costs have become the most significant driver of inequality in the state. On Wednesday, California’s governor, Gavin Newsom, mentioned the issue 35 times during an impassioned speech, urging lawmakers to solve the state’s homelessness crisis by building more and faster.
But the vertiginous prices of housing in California show how difficult that will be.
Building affordable housing in California costs on average three times as much as Texas or Illinois, according to the federal government.
The reasons for California’s high costs, developers and housing experts say, begin with the price of land and labor in the state. In San Francisco a construction worker earns around $90 an hour on average, according to Turner & Townsend, a real estate consulting company.
But non-construction costs also weigh heavily.
Not taking into account the price of land, around one quarter of the cost of building affordable housing goes to government fees, permits and consulting companies, according to a 2014 study by the California Department of Housing and Community Development.
For a building to be defined as affordable housing it typically obtains tax credits and subsidies. A single affordable housing project requires financing from an average of six different sources — federal, state and local agencies, said Carolina Reid, a researcher at the Terner Center at the University of California, Berkeley, and an author of a forthcoming analysis of affordable housing costs.
She called the process “death by a thousand cuts.”
Senator Brian Jones, a member of California’s State Senate, remembers laboring over an affordable housing project when he was on the City Council of Santee, Calif., near San Diego.
“It literally took us on the City Council six months to get all of our attorneys, all the developer’s attorneys, all the federal government’s attorneys, to agree on the paperwork. And that was just the financing,” Mr. Jones said.
“I walked away from that process and told the developer I cannot believe this project is going to employ more attorneys than construction workers to get built.”
Mr. Jones, who is head of the Republican caucus in the Senate, argues that California’s housing market is vastly overregulated, starting with California Environmental Quality Act.
California law permits anyone to object to a project under the act, which when it was signed by then Governor Ronald Reagan in 1970 was seen as a landmark effort to protect the environment from reckless development.
Today the law is often used as a legal battle ax by anyone who wants to slow a project down or scuttle it altogether, Mr. Jones and many developers and experts say.
“At very little cost one individual can take a project and tie it up in years of litigation,” said Douglas Abbey, a lecturer on real estate at the Stanford Graduate School of Business.
Environmental protection is cherished in California but there is also bipartisan agreement that housing prices are too high. Mr. Newsom has pushed through exemptions to the California Environmental Quality Act for homeless shelters, and he says the state should consider more exemptions.
Mr. Abbey, a former developer and real estate investor, says good intentions are backfiring. He argues that laws requiring developers to build a certain percentage of affordable housing as part of their market-rate projects are a hidden tax and a drag on overall housing construction.
“What the state government and local governments need to recognize is that the housing shortage is purely a supply problem,” Mr. Abbey said. “There are burdens to introducing new housing.”
It’s not uncommon for a project in California to be mired for many years in paperwork over zoning or objections by other property owners before ground is broken.
Judson True, the director of a department in San Francisco city hall that seeks to speed up housing construction projects, says the process of building affordable housing is far too cumbersome.
“Nothing this important should take this long or be this hard,” he said.
Last year San Francisco broke ground on 767 subsidized affordable apartments.
“It’s nowhere near what we need,” Mr. True said.
San Francisco has the highest overall building costs in the world, according to a 2019 report by Turner & Townsend.
The average costs of construction in San Francisco are 13 percent higher than New York, 60 percent more expensive than Chicago and 75 percent more than in Houston, according to the report.
It costs seven times more to build in San Francisco, America’s hub of technology, than in India’s technology capital, Bangalore.
Mr. Newsom says he recognizes the threat that the high costs pose to efforts to get people off the streets.
The average cost of a single affordable housing unit is around $500,000 in Los Angeles and around $600,000 in Oakland, according to data by the Terner Center.
“One word insanity — it’s just insanity,” Mr. Newsom said in an interview last month.
If affordable housing cannot be built more cheaply, he said, “taxpayers aren’t going to support these bonds.”
Mr. Newsom’s budget this year calls for $6.8 billion in affordable housing funding including mortgage assistance for first-time buyers and bonds for veterans’ housing.
Mr. Newsom says he is counting on innovations in housing construction to help reduce costs.
But even with significant savings, housing experts say it would be impossible at current cost levels to build homes for the state’s entire homeless population.
It would cost somewhere around $70 billion to build housing for its current homeless population of 150,000.
Professor Reid at the Terner Center says she agrees with Mr. Newsom’s emergency efforts to get people off the streets and into shelters as well as preventing people who have homes from losing them.
But California, she says, does not have the resources to build enough housing for the state’s current homeless population, not to mention those who might become homeless in years to come.
“We are not going to solve the homelessness crisis if what people are expecting is that cities are going to build affordable housing for every one of those individuals,” Professor Reid said.
“It’s going to cost way too much.”