On Friday, September 28, the Norris Group proudly presents its 11th 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, tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefit Make A Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, Inland Empire Real Estate Investment Club, ThinkRealty, Wilson Investment Properties, Coach Fullerton, First Lending Solutions, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit www.isurvivedrealestate.com for event information, and see Amazon Prime or YouTube for past events.
Bruce Norris is joined this week by Dan Dunmoyer. Dan is president and CEO of the California Builders Industry Association. Dan oversees and manages all aspects of the association. He is a respected and recognized leader, strongly committed to ensuring the CBIA continues to be the leading voice of housing in California as well as efforts to ensure the American dream of homeownership is attainable for all Californians. He is the son of a small home builder from Southern California and a veteran of California public policy issues. He served as president and CEO of the Personal Insurance Federation of California from 1996 to 2005. As Deputy Chief of Staff and Cabinet Secretary for Governor Arnold Schwarzenegger. Most recently he served as Senior Vice President and Head of Government Affairs for Zurich and Farmers Insurance companies.
Bruce asked what the main job of the CBIA is, what they do, and how the membership benefits. Dan said their role to make it easier is to build affordably as possible in every single area of California. It is always a challenge providing clear public policies to help assist them in achieving their goal of building more homes in as many places as possible.
Bruce asked about the process for obtaining approval for a housing project and how it is different in California compared to other states. Dan said in California we have 17-20 of the largest homebuilders in the U.S. There are several different facets, but particularly it is time and delay. In order to build a home in the state of Texas, you look at a piece of land and ask what it will be like in a particular city in the Texas economy in the next six months. When you look at the same size and piece of land in the state of California, you ask what it will like in 15 years to build on the piece of land. The next closes state to time delay is Florida at 18 months versus 15 years. The biggest challenges are time delay and the ability to get a project from thought to actual sale. It takes so much longer in California than in any other place in the U.S.
Because of the risk involved and how many things could change as well as how many cycles you would go through before getting to the finish line, Bruce said he would pass if he were on the other side. Dan said many homebuilders do. It takes a lot of courage since there is so much risk. The ability to counter that risk can be very difficult. What you find, however, is that there are still developers and homebuilders who are willing to take the risk primarily because you cannot move the land. For the time being, there is still a lot of land in California and a tremendous demand for housing. The risk is one homebuilders are taking, but they are taking it much more cautiously than before because of that very concern. If you invest a lot of money, start building, and the market turns on you, you might see 2008 again when half the builders left and never returned. This is why the risk is such a profound risk.
Bruce asked Dan about when his dad was building homes, what era it was in, and how the process was different. Dan said his dad went all the way back to the 1950s when he built some of the first homes of their kind in the Hollywood Hills. He was challenged by the fact that it was so expensive and could cost anywhere from $18-$20,000. He then decided to go to a more affordable place and chose a small community in Southern California called Hemet, 100 miles south of Los Angeles. He built the first apartments in this city.
There were challenges in that people at the time were scared about these newfangled things called apartments. Most people who could not afford a home lived in a motel. They made them put in sidewalks, streetlights, and sewer systems. This did not exist before in this city during the 60s. From there, he continued to build single-family residential homes through the 70s, 80s, and early 90s. For the first time, they started to see together that there were things called developer fees and delay concepts. However, it was much easier once you found land to turn it from dirt to sticks and bricks. This would take months and not years. This was the difference he saw between the 60s, 70s, 80s, early 90s, and 2018.
Bruce asked about the building permit costs in California versus other states. Dan said it is catastrophically and enormously different. This is what is really driving the cost of housing through the roof. A fee permit in almost every other state ranges from a low of $100s of dollars to a high in the other states of $6-$10,000. In California, Dan had a hearing where they asked how much it costs to build in Livermore, and that district was $130,000 in fees. It is $170,000 in parts of San Diego, and it is considered a steal in California if you can move through the developer fee process for under $150,000. There is no other state in the nation that even gets close to that, almost by a factor of 10.
This is one of the key factors when people asked why it costs so much to buy and build a home in California. A lot of it has nothing to do with sticks and bricks. So much of it has to do with time delays, fees, and other factors that really add to the delay process. Bruce is building in Florida, so he pulls those permits for $8,000 and buys building lots for $10,000. You can construct a home that is possible to be a small first-time occupant. All the other pieces are affordable, and all these pieces in California almost prevent you from building the very product that has to be where the shortage is. Right now the average home statewide in California is $575,000-$600,000. This is the average. You can find parts of Riverside County or Central Valley in California where you can find a $350-$380,000 home.
When you compare the national average to California, our state is 2 ½ times the national average. If you are fortunate enough to live in San Jose or San Francisco, you will pay 8-9 times more than the national average for a home. Right now, in San Francisco the average home is approximately $1.5-$1.6 million. You could build a home like that in Florida for $350-$400,000 or in Texas for $280-$300,000. The housing crisis in California makes things very difficult, even for people who make substantial sums of money. An engineer at Facebook who makes $180,000 can’t even qualify. If he buys or builds a home in San Jose, he has to commute 2 hours in to work. Even a husband and wife working in Central Valley would have to commute to find an affordable place to live, even if their combined incomes are over $300,000.
Bruce asked what the unintended consequences are. Building numbers are down after having a stretch of 8 years of price increases. The number of single-family homes being constructed mimics a recession number. The number of permits pulled last year in California were roughly 110-115,000, both single and multi-family residence. It was almost half and half of those two entities. The demand just based on birth and growth of population is 180,000 according to the California Housing Community Development Department. Just to maintain the status quo of demand, you need to build 180,000 homes just based on birth and population growth. They are pulling 110-120,000 permits and building roughly the same number. They are not keeping up with demand just based on population.
Depending on which study you look at, there are housing stock needs somewhere in the neighborhood of 2 million to 3 million homes. Demand is off the charts, but we are building at the recessionary levels because the costs are so prohibitive and the ability for traditional homebuyers to access the market is getting more difficult every day.
Bruce asked if would-be buyers are migrating out to somewhere they can afford. Dan said for the most part yes. California has been a great state to live in since the day he was born, but the challenge is the quality of life gets questioned because of that requirement to migrate. It is not uncommon in this great state for a person to have a 25 hour a week commute. You could be driving in from Riverside County to work in Los Angeles or from Merced to work in San Jose or San Francisco or Sacramento to work in San Francisco. Most of the law enforcement officers in San Francisco do not live there. Neither do school teachers and first responders; it is impossible. Only 0.5% of school teachers get qualified for a house in San Francisco, so they live 1-2 hours away. This is how long they are in their car, so they are spending 4 hours in their car, five days a week, 20-25 hours total.
When you have a young family and are spending this much time commuting, your kids might be awake when you get home for you to kiss them goodnight, but many times they are not. The commute and quality of life is creating this challenge for the homebuyer as this is all being impacted by the inability to build the affordable home. Last year, for most of the year California was at 31% affordability, and that number is not really considered low. In both 1989 and 2005, we were at 17% affordability. California managed to build over 155,000 single-family homes in those years when affordability was 17%. Last year, we were at 31% and built over 55,000, 100,000 less. Bruce was trying to understand the math of it since affordability was a lot lower and we had a lot more building happening. Bruce wondered what the difference was, and Dan said this is something they are still trying to unravel.
Dan said what they are seeing is tremendous schizophrenia from a public policy perspective. Dan has not met an elected or appointed official who does not recognize or call out the housing crisis we have. The good news is that there is a recognition of a problem. The challenge is the policies, actions, and regulations on a local, state, and Federal level are not making it easier to build in California. We are actually making it much harder, so a lot more regulations have been added in the last decade. The cost of building has gone up even though during that cycle the state regulations created delays in the state laws, like SEQA. Even with the Federal issues we have these hoops and hurdles and run into the army corp. engineer who tries to say what the state is recommending from an environmental perspective is unacceptable. This even occurred in the Obama and Jerry Brown administration. We saw two similar parties with two different bureaucracies that would create delays, confusion, and requirements to redo or reschedule how they would build things. In the last decade, they really had become a state where they need homes but the policies, regulations, and approval process completely contradict that statement.
Bruce asked if it is solvable and how. Dan thinks it is and would require a Marshall plan like we had in World War 2. It requires the desire, the will, and the commitment to set a goal and remove the impediments to get there. Dan is quite convinced that both the candidates for governor in California have expressed a commitment to build more housing. One mentioned 425,000 homes a year, which we have never done in California but it is a great aspiration. The way you can do that is to incentive local governments to get out of their own way to build homes. It is working with state agencies and say as a governor, “This is what I want to accomplish. I have put together an internal group that will look at all the different projects we as a state are delaying and ask why and what can be done to change those.” There are probably 50,000 homes that can be built between Newhall and Town Ranch within the next 3-4 years if bureaucracy would get out of the way.
To Dan, it is having the will as leaders of the state to step in and take the necessary steps to protect the environment, create nice roads, and have good schools and fire and police departments. They need to build them and do it quickly. There is the path to do it, and we certainly have the homebuilders willing to do it who have these great home products to sell. It will require someone to really break through that bureaucracy, make the realistic goal, and carry it out. Bruce asked Dan when he talks about permit cost being in the ballpark of the cheap $50,000-$150,000 and it is only $10 grand in Florida. He wondered why all that money is necessary in California and not Florida. Dan said a lot of it is tax policies. Local governments are trying to find ways to increase, despite tax revenues growing really fast because of home prices. Property taxes go up when the value of homes goes up.
The tax system in California takes a lot of the local tax monies and puts it into the state. As a result of that, many local governments place these large fees to fund their governments. What is so sad about this is the new homebuilder and buyer and bearing the brunt of those excessive fees that not only drive up the cost of the new homes but also pull up all the cost of existing home stock. It really is about looking at the tax structure and the fact that you have to make a decision as a state that if you have needs, it has to be borne by all the tax payers and not just the new homebuyer. The policy in California is because there is no limit on fees you can place in new home development, they will pay for everything through that process. In Florida, Texas, Utah, or Arizona, that is born by the community. In California, this is born by the new homebuyer. This is what is pushing this price point through the stratosphere. It is also in the process of delay combined with those fees that is pushing the cost through the stratosphere.
Bruce asked if there is any legislation in place or on the way to help things out. Dan said this year they did actively sponsor a number of bills called “housing creators” and opposed a number of bills labeled housing “killers.” There have been some steps taken. In the last legislative year, about 15 bills were enacted. The good news is those generally were positive. Most of them tried to calculate what the problem is and truly understand what is happening. It is more a data collecting effort than a home-building effort. This year, they put a couple bills into the offer in order to address some things. One was the Housing Accountability Act that would remove the ability for local governments to create what they thought were strawmen who would make it more difficult to build. They are taking some of these regulatory impediments out of the system, but right now they have been baby steps. They hope that with the new administration and more focus and attention on housing, there can be more legislation that addresses delay in cost and complexity.
Bruce asked about 2020 and if we have a requirement for homes to have solar power. Dan said the California Energy Commission has adopted regulations that requires homes built after 2020 to have a solar component within their housing built. Bruce asked if this is unusual for California to do and Florida to not. Dan said it is in the sense it is a mandate. Most consumers will review the option of solar, especially if you are living in a sun state like Florida, Arizona, Texas, California and opt in on your own. What is unique here is with the mandate; and since we have a technical expert called Bob Raymer who works at CBIA who worked closely with the CEC to make the requirements manageable and cost-effective. Instead of having enormous amounts of solar placed on your roof, a modest amount can be placed. This effectively offset the cost of building this over time. We can also have storage in California to offset this.
One of the things the regulations allow for is them to partner with utilities and have solar farms. As long as they are bringing in solar energy, you don’t even need to have a solar panel on top of the roof. They still comply with the law to achieve the use of solar within the home energy process. It is a flexible regulation they think they can work with, and with the entrance of those relationships into the utility industry it may only cost $200 to comply with the regulations. If you put the solar roof on, it is close to $10,000. If you work with the local utilities, you can comply with this new regulation for as low as $200. There is some flexibility there, but their preference is always voluntary, but California is very committed to renewable energy.
Bruce had never heard of ADUs before, and now he hears about it every time he goes somewhere to speak. Bruce asked if accessory dwelling units is one of the ways we will solve the affordable housing issue. Dan said yes, and it is a great way. They are very supportive and sad to see Senate Bill 831 that would have made building ADUs in California easier was defeated. It was mostly because the attempt was to build these without the excessive fees, and local governments opposed these. The CBIA sees it as a great way to provide affordable housing. They are called both ADUs and granny flats.
A lot of people are taking care of their children and parents, and ADUs would be a great solution for effectively assisted living in the backyard. You can just walk over and see your mother or father and help them go through the aging process in an honorable way. It is also a great way for college students living in a community to rent a room from a family and have their back room on property. What is frustrating is they are find a lot of the people who use the ADUs or granny flats don’t add to school fees since they are elderly, don’t have children, or are children or in college and not having kids. They cannot effectively add a housing solution without adding a lot cost to society. Their hope is that they start to take off more and offer solutions for dealing with millennials and seniors.
California is a great place to live, but it is so different now. In the 1980s, Bruce could walk up and buy a brand new house that was 1,300 square feet. We just cannot do that anymore. Dan, being the father of three children who want to stay in California, is working hard to make sure solutions are provided for millennials and a lot of the lower-income minorities so they have a place they can call home. Most importantly, they should be able to buy a place to call home so they can grow their personal assets and wealth to have the American Dream. This is their goal and commitment..
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jason Thorman with Coldwell Banker, Jennifer Buys Houses, Keystone CPA, LA South REIA, Las Brisas Escrow, Lawyers Title, Michael Ryan & Associates, New Western, NorcalREIA, NSDREI, Orange County Real Estate Investors, the Outspoken Investor, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, SJREI, Spinnaker Loans, South OC REIA, Tri-Counties Association of Realtors, uDirect IRA Services, White House Catering. See www.isurvivedrealestate.com for event information.