California has a history of catching dreamers in its gravity, promising good fortunes, sand, sun, and beautiful weather. It all comes with a catch, of course: unspeakably high real estate prices, both for homebuyers and renters.
According to the California Association of Realtors, existing-home purchase prices reached an all-time high in August 2021, topping with an average of $827,940, a 17.1% increase year over year. With unsold housing inventory at just 1.9 months (down 9.5% year over year), it's absolutely no wonder that there's an ongoing and increasing housing crisis in the state.
This is why the California Housing Opportunity and More Efficiency (HOME) Act (SB 9) and SB 10 (another important piece of legislation, just without a fancy name) are absolutely huge, despite their tiny packages. Both have been signed into law as of Sept. 16, 2021, to go into effect Jan. 1, 2022.
SB 9 takes the 'single' out of SFR
The HOME Act is the larger of the two bills and will touch a lot more neighborhoods. In fact, it touches any that are considered to have single-family zoning in urban areas or urban clusters. There are exemptions for properties in high-risk fire or flood zones, as well as historic districts. It unabashedly smashes the concept of single-family residential zoning, allowing for any single-family lot to have up to three additional units placed on it, as well as permitting the lot to be subdivided once.
There are a number of rules about what happens after a lot is subdivided or additional units built, however. Safety standards, minimum lot size requirements, and setbacks still apply, and the owner of the original structure has to commit to living in at least one of the final structures on the property. Existing rentals (or properties that have been rented in the last three years) can't be altered, thus protecting existing tenants from eviction.
SB 10 empowers local developers
SB 10 is a very specific piece of legislation that only does one thing: It allows developers to increase the density of a property without much hassle, provided they're putting 10 or fewer units on the lot, limited to the height requirements of the zoning of the area. This only applies to pieces of land that are considered to be in a "transit-rich area or an urban infill site," so again, this is a bill that's very limited in scope.
However, what it does is tremendous for the neighborhoods it touches. Instead of having to jump through a lot of hoops, developers looking to build in one of these areas need only refer to the list of designated land parcels where so many units can be constructed and start from there. They'll still need all the standard paperwork, but often, changing zoning density is the biggest hurdle in building on the low end of higher-density multifamily. Speeding up the process in any way possible can help put more rental units in place for people who desperately need housing in California.
The Millionacres bottom line
In many of the major urban areas of California, the biggest cost of new construction is land acquisition. It far outpaces the cost of construction in places like Los Angeles, San Diego, San Francisco, and San Jose, for example. With so many troubles related to affordable housing in California, it only makes sense to affect the one thing that can be easily changed: the price of dirt.
So, if you have a homeowner who wants to add three units to their property or add an additional house and then divide that property off onto its own parcel, perhaps with the thought of helping a family member get onto the homeownership ladder, it's not a terrible idea to just let them, given the alternatives. It's not like they're busy making new land in California these days.
The same goes for SB 10's goal of adding up to 10 units to any piece of designated land that will hold that many units, regardless of prior zoning density. It's more housing. And more housing often leads to more affordable housing due to a reduction in competitive pressure.
In the short term, it may seem like it's going to hurt California real estate, but the truth is that, according to Berkeley anyway, for the majority of single-family parcels, it makes no financial sense to add new units today. However, the 700,000 short-term potential new homes will still go a long way to help ease the pressure for housing overall, plus the option to add units at will can make a big dent going into the future.
Although homeowners and renters stand to be big winners from this crop of bills, investors may come out smelling like roses, too, especially if those California investors are more hands-on and looking for projects that allow them to put extra units in quickly. More experienced developers may find opportunity in developing small apartment complexes under SB 10, while house hackers and homeowners simply looking for better solutions to their impressive mortgage payments may find the new freedom under SB 9 to be pretty attractive.