The Economics Of Why Homelessness Worsens As Governments Spend Even More On The Problem

Tuesday, June 18, 2019
Housing
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Pupes, Shutterstock

California’s homeless population rose rapidly last year despite substantially higher government spending on the problem. There are roughly 60,000 homeless people in LA County, and homelessness has increased as much as 43 percent over the last year in parts of the San Francisco Bay Area. The latest statistics are shocking state and local politicians, who have been pouring billions of dollars into addressing homelessness. “It’s like cold water being thrown in one’s face after all this good work,” said Los Angeles County supervisor Mark Ridley-Thomas, who cochairs the state’s Homelessness Task Force.

But politicians should not be shocked by the rise in homelessness, because state and local government policies do not address the obvious supply-and-demand factors that are creating such large numbers of homeless people in California.

Despite more than $1.2 billion being spent on this issue in the coming year in LA County alone—roughly $20,000 per homeless person—homelessness will almost certainly worsen in the coming years. And today’s politicians who are trying to deal with roughly 135,000 homeless people within the state can thank previous generations of politicians who presided over decades of badly designed public policies that created this problem in the first place.

There are two aspects to this issue. One is the supply of housing. Relatively little new construction is being built, particularly in the very popular coastal areas that include Los Angeles, the San Francisco Bay Area, and San Diego. The current level of residential building permits in California is as much as 70 percent lower than it was during California’s building heyday of the 1950s and 1960s. And what does get built is very expensive, far beyond the budgets of most California households. Construction costs in California are roughly five times as high as the national average. The average cost for building an “affordable” two-bedroom unit is $425,000.

Substantial regulatory burdens and permit costs are key reasons why building costs are so high in California. Environmental lawsuits can be a nearly endless stream and derail development for 25 years or more. Cash-strapped local governments frequently require enormous buy-ins before granting development permits. Recently, the city of San Jose tried to force a $50,000 payment on an apartment owner to provide maintenance for a park in return for granting a permit to convert his apartment’s recreation room into two small studio units.

Moreover, building affordable housing for the homeless is frequently fought tooth and nail by current residents in the proposed neighborhoods. Many blame existing homeowners for “NIMBYism” and trying to block these developments, but many of these homeowners have invested virtually all their assets in extremely expensive California housing and are doing whatever they can to protect their investments. Housing was never intended to be a family’s primary investment vehicle, but that is now more often the case in California. One really should blame not the residents but rather the politicians who have done nothing for decades to address unaffordable housing.

The second part of the problem is the one that no politician wants to talk about. Given that housing supply will expand much more slowly than demand, there are far too many people who want to live in the most popular—and expensive—California cities than who can be housed. The average apartment rental in Los Angeles is now about $2,400 for less than 800 square feet. The income required to rent such an apartment is about $95,000 per year, which is well above the area’s median household income of about $61,000 per year.

The real estate market is telling California loud and clear that there are way too many people in the most densely populated California cities. But this important information is being buried because it would be political suicide for any politician to discuss these economic issues, lest they be construed as being insensitive towards the homeless.

But it gets even worse. About 54 percent of renters within the state have rental payments that exceed thirty percent of household income, which is the standard national income limit for approval;Even more troubling is that nearly 29 percent of renters pay rent that is 50 percent or more of their household income. These households are living beyond their means, and some are just a rent increase or a car repair away from losing their housing. Once a scarce, low-income housing unit is built and occupied by a homeless family, another family—or more than one—will suffer a financial setback and become homeless. The state’s current policy is analogous to slowly adding water to a leaking bucket rather than fixing the leaking bucket. A much more cost-effective solution is to focus development in the non-coastal areas of California, where both land prices and construction costs are much lower than in locations such as San Francisco and Los Angeles, and in which there likely would be fewer lawsuits.

This approach could be combined with sensible state infrastructure investments and tax incentives for companies that wish to locate to more affordable locations. This would be an ideal time to repurpose the funding for the state’s high-speed rail project to more worthwhile investments. Presently, the cost of connecting; limited route of;Bakersfield to Merced is roughly $20 billion. Just imagine how schools, infrastructure, and new business investments could improve with this level of state funding, which in turn would increase the desirability of living in non-coastal California.

California cities also need to enforce laws to address the homeless crisis. Typhus, tuberculosis, and hepatitis are widespread in some areas of Los Angeles, San Francisco, and San Diego. City streets are littered with human waste and 2 million used hypodermic needles annually in San Francisco, where one out of every 38 residents has a substance-abuse problem. Tolerating this aspect of homelessness makes everyone, including the homeless, much worse off.

California’s homelessness crisis is becoming more severe despite more taxpayer-financed spending and is occurring in a hot economy with a historically low unemployment rate. This problem will balloon during the state’s next economic downturn if the state does not substantially change its policies.