On Friday, October 16, the Norris Group proudly presents its 8th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, San Jose Real Estate Investors Association, InvestClub for Women, MVT Productions, First Lending Solutions, White House Catering. For tickets and information, visit isurvivedrealestate.com
Bruce Norris is joined this week by Eileen Reynolds. Eileen is the chairperson of the California Builders Industry Association. She has served in a variety of leadership positions at CBIA, including vice-chair in 2014, chair of the government affairs committee in 2013, and a member of the political action committee, executive committee, and board of directors. Reynolds as the land use and environmental lobbyist for the California Association of Realtors in the state capital. Her 19 years at CAR gave her an understanding of trade associations, development policy and politics. These are some of the strengths she brings to her leadership role at CBIA.
Bruce said when he read her bio, it was almost like she was on the other side. What he means is when he talks to builders they think about all the restrictions, but she is so familiar with everything that it brings quite an asset to CBIA. Eileen said for day job she is the volunteer elected leader of CBIA during this year and the vice-president for government affairs for the Tejon Ranch Company, the largest land owner in California. She handles all the government affairs for the ranch in both Sacramento and Washington, D.C. She feels she has an extensive background in political affairs. Coming to CBIA has given her a lot of association and real estate background along with land use and environmental issues and private property rights.
There has been talk that we are 150,000 units behind where we should be. Bruce thought if a builder could make 150,000 extra homes and make a profit on them, he would do it. There seems to be a disconnect in what people think we can absorb in a marketplace and what we are actually do. Historically right now construction is way down from where we usually are. Bruce asked why this is true. Eileen said they got a boost from the legislative analysts earlier this summer who wrote about the affordable housing prices in California and the affordability problems. It was a lack of supply, and largely this has to do with the availability of buildable land in California, the high cost of land, the severe regulatory environment under which we operate. It is worse here than in any other state.
New home buyers are expected to foot the bill for a number of societal issues. This includes the reduction in green house gases, schools, affordable housing. There are a lot of issues thrown at the industry at the time they are trying to entitle and develop property. It is not letting up at all and is a continual grind to add more housing to the market. They have a complete over demand as far as the ability to supply for the number of people in California. There are families doubled up in existing homes just to make ends meet, and they cannot afford to get into a new home let alone an existing resale home. Usually there is a gap between a new home price and existing home. Bruce wondered if this is now exaggerated more than ever, which Eileen said it is greatly exaggerated.
Eileen said she is most qualified to talk about what is happening right now in the state capital with regulations. It’s crazy what they want to get out of the homebuilding industry. In essence there are certain things pending in the legislature that could put them out of business. There is one piece of legislation on global warming and the reduction of green house gas emissions, and the goal is to emit 80% less emissions than we had in 1990 by the year 2050. Essentially what they believe under the California Environmental Quality Act for New Development is you would have to build a home that is zero net energy use. This means you would not be using energy, but rather turning it back into the grid if you could. We do not yet know how to do this, and it could add $58,000 to the cost of each new single-family home. These are the types of examples of what they do in California, and a lot of these things are already on the books. At CBIA, they are fighting to make sure we can continue to do new development in California in the future.
It is really bad timing to pile on other things. We just got through a great recession, and housing was in the crosshairs of that. New construction of homes is already down. One chart shows construction way back to 1960, and we are still at levels lower than anything else we have seen other than the last few years. It is a horrible time to pile more regulations on the industry, but they are not as successful in making sure regulators feel this way. In California, it is a blue state, especially with global warming and climate change. Our governor wants to go to Paris and deliver a message that we are the world leader on the reduction of greenhouse gas emissions. There is a great big movement in legislature to pass a lot of new laws on that topic.
They recently commissioned a study that says that this is not a wise move right now economically. This was done by the former Department of Finance director and another former legislative analyst. It is a very compelling story to add more to new housing at this time. Bruce finds it interesting that California feels it needs to bear the burden of the whole country. If other people are not contributing a piece of it, it would not be functionally efficient. There are also other ramifications, especially regarding employment in construction. Bruce lives in Riverside, while Eileen is based up near Sacramento. These areas are affected by the lack of construction. The employment that usually provides for both the areas does not exist right now. During the downturn they lost a lot of their good people. They either went to other states or they went to different careers.
Eileen has heard not only from new home builders but also for people trying to remodel existing homes are having trouble finding good workers. Bruce buys and rehabs homes, and he said you do have a gap. There is a certain amount of time you have, like if you have a downturn that is 2-3 years. People are biding their time to come back to that industry and do what they used to do. However, if it goes longer than 5 years, which this has, they relocated to other places, skill sets, and industries. This is what has happened. We have lost a lot of people in construction who might have gone to oil since this is down. Maybe this will recycle.
Bruce asked why California is so aggressive. It seems to be a national issue, yet we have made it our baby. He asked if it is because it is politically expedient to do it. Eileen said we have leaders who believe in it and believe we can set the standards for the world. If we do some of these things in state law, they will set an example. On the greenhouse gas issue, the governor issued an executive order to try to reduce greenhouse gas emissions by 40% below the 1990s levels by 2030. This is already being implemented. An executive order does not have the same force and effect as law. However, it does run with the governor. We are in the final weeks of the legislative session in Sacramento, so hopefully legislative leaders will slow down a little and realize they do not need to put into state law some of these very aggressive limitations for the future. This will definitely adverse the impact of the affordability of housing and the ability to build. Not everyone will retro fit existing homes to that standard, so it is really a cost worn by one piece of the product line.
Another issue in California is the drought. Out of the most efficient homes they are building as far as energy and water use efficiency, only 1/3 of them are new homes built since 1980. Otherwise, 2/3 of the homes built in California were built before the more stringent water and energy efficiency standards. We need to get to the existing housing stock, and the only way regulators have figured out to do this is give incentive. Recently the governor and his administration did come out with a $30 million incentive program where people can apply directly online to get rebates to replace their old toilets and fake turf. There are a lot of programs where they are attempting to get to the existing housing stock, but it takes a lot of education. In the case of drought, people aren’t thinking every day about global warming and the greenhouse emissions. However, they are thinking about water use when they see how low their lakes are, especially in Northern California. It is a little more real when they are told they cannot turn on their sprinklers or water their lawns. It would be more worth their while if they retro fit some of their plumbing structures.
When you speak of the drought and add homes to the supply, Bruce asked if there is pressure to put a moratorium on construction of some kind. Eileen said absolutely, and it is necessary statewide. The thing about the drought is the governor came down with the requirement that everybody should reduce by 25% their water usage in urban areas. It gets sent down to local water districts, and it is up to them to implement it. With CBIA, they have 10 regional building industry associations in the local areas working with local counties, cities, and water districts. So far, they have been fortunate to make the case that this drought may not be forever and there are signs we will get a serious El Nino in late fall. However, it is not a good thing to do for the economy to all of a sudden halt economic growth because of water issues, especially when that economic growth delivers some of the most water efficient products that we have never seen in the history of the world. You cannot cut off the economy because you are dealing with drought, but rather find numerous ways to deal with it.
We have been rationed down upon with new fixtures as well as they passed a new water efficiency landscape ordinance that will say you cannot plant more than 25% of the square foot area of your landscaping in turf. There have been new rules placed on the industry as a result, but these are building upon rules that have been on us since the early 80s. We have been successfully arguing that is not appropriate to halt the economy since we are dealing with a 4-year drought.
Bruce asked about the cost to create a house and lots from scratch in California and how it ranks in the other states as far as cost level. Bruce asked if when you can finally build something, are you number one in cost or somewhere in between? Eileen said we are number one, the highest cost and median price of a home is about $440,000. The national average is about $180,000, so it is tremendous here. This is a result of all the rules, fees, and taxes that we have in California that a lot of other states do not. You would think at some point, if you were retiring and looking to expand your budget, you might migrate somewhere else where you normally wouldn’t. A lot of people are doing this, unfortunately.
Bruce asked if there is any positive legislation. Eileen said one thing she is proud of as chairman this year is the provision of school facilities. Last October they were faced with the fact that the state is running out of state funding for school facilities. This was a program called SB 50 that was enacted back in the late 90s that created a state-local-builder match on the funding of school facilities. The program says that if you run out of state funding, the fees on development go up to a point where builders and developers would have to pay 100% of the cost of these schools. Today they are splitting it three ways. They are very worried about the fact that without state money, fees on new housing will triple if not more. This could mean an additional $20,000 or more per home. They would go to what are known as Level 3 fees.
What they did last October in order to continue the successful 3-way program was they helped with an advocate group called the Coalition for Adequate School Housing. They helped them put together a group called Californians for Quality Schools, and they started circulating initiative petitions to qualify a ballot measure for the November 2016 ballot. As of August 3rd, they submitted over 571,000 valid signatures to counties to be counted for qualification on the statewide ballot for next year. They feel good about that, and it is a $9 billion state general obligation bond act that would help the SB 50 3-way program continue into the future. The polling is showing this is a winner since people want to fund school facilities and think the program has been successful. She is excited to do something affirmative since their industry so often is playing defense since so many folks just want to tack more things onto them. In this case, they took the bull by the horns and decided to lead.
Bruce asked who a typical member of CBIA would be. Eileen said they have all different kinds of members. They have very large public builder members, medium-sized, small-sized, partner members such as title companies and elevator companies. Anybody who sees what they are doing is a good thing for their business can join. They have about 3,000 land developer and home builder members statewide. They have a team that compares to no other in Sacramento as far as their government affairs, which they focus on heavily. This is largely the regulations and legislation that could be thrown at them and are hindering the business. They need to have a well-oiled machine in Sacramento to make sure they can continue to build. They are getting stronger as the economy picks up despite having gone through a rough patch for a while.
2008-2010 was tough not only for the building industry but every piece of it. Bruce asked if they coordinate their efforts with a Mortgage Bankers Association and if it was a team effort. Eileen said you cannot do anything in Sacramento without a coalition. It is powers in numbers and works together, so she could identify dozens of issues where they are allied with the California Chamber of Commerce. This includes realtors, mortgage bankers, bankers, and engineers. It is a whole group of folks that care about the ability to build and the housing industry to thrive. You can get some of these opposition letters that have 30 groups listed on them all working together towards the benefit of real estate. What happens is the lobbyists then reach these groups, coordinate with each other, and talk to various members of the legislature to kill bad ideas. Unfortunately, there are more ideas that would hurt the CBIA than help them.
You can find out more about the CBIA on their website at www.cbia.org. Eileen recommends also www.californiansforqualityschools.com since this will be very prevalent from now until the November 2016 election. She is very proud of her employer allowing her to spend her extra time leading CBIA and being involved. Not only does it help all of us, but also her company and development in California. They are always aiming to make sure you can build in all areas of California. This is what CBIA stands for.
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