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California housing permitting collapses 45% from 2022 to 2023

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(The Center Square) – California housing permitting collapsed 45% from 135,565 homes in 2022 to just 74,720 in 2023, according to the California Department of Housing and Community Development’s data at time of the story’s publication. Housing experts say rising interest rates are largely to blame for the phenomenon as rising construction costs and interest payments make fewer projects pencil out for developers.

“Housing production is decreasing across the country and a significant component of that is the interest rates,” said Los Angeles Housing Production Institute director Joseph Coen in an interview with The Center Square. “When it’s a lot harder to be able to finance a project and banks are more hesitant to lend to development projects, it’s also harder to raise capital.”

With the state facing a 4.5 million home housing shortage, it will take over 60 years at current permitting levels to overcome the housing shortage. Just because a project is permitted does not mean it will be built, as developers and owners may choose to sell land if they are not able to secure further financing to meet rising building costs.

This means housing production may come in at far less than what is permitted over time, as it may take several years for a permitted project to be completed. In 2022, when California permitted 135,565 homes, 116,000 homes were completed.

Newly proposed changes to California housing law could improve construction in the long run by reducing so-called inclusionary zoning requirements in the 40% of cities and counties with housing elements not certified by the state. Inclusionary zoning requires a certain amount of housing to be affordable to households making a certain share of the area median income, and California allows developers to gain easy approval for projects in the 40% of cities and counties with housing elements — housing plans — not certified by the state. By reducing inclusionary zoning requirements, the goal is to reduce the number of often money-losing “affordable” units in a property to drive more overall construction and thus larger decreases in rent in the long term.