With local elections on the horizon, it is essential to understand the significant impact that our newly elected leaders will have on real estate values in our area. Most individuals consider housing, or shelter, to be a necessity item on par with essentials such as food and water. However, unlike commodity items like milk or wheat, housing supply is completely unregulated by the federal government. The Subdivision Map Act provides the State of California with a very slight amount of power to regulate housing since California’s cities are required to report their General Plans for anticipated growth to the State for approval, but the State’s process for approval does not focus on economic factors like near-term housing supply and demand. As a result, the vast majority of housing development regulation is enacted and enforced by local city governments. To illustrate the tremendous burden this responsibility places upon planning commissioners and city council members, it is important to understand how the fundamental economic concept of supply and demand is applied to housing. If the supply of housing rises to a level of a surplus without a correlating increase in demand, housing values will decrease. This concept may seem to be obvious now that housing prices have plummeted up and down the state, but many of California’s local leaders were amazingly oblivious to this notion during the real estate boom years several years ago. Shortly after the turn of the century and during one of the fastest appreciating real estate markets in history, many local governments justified their seemingly endless approval of residential development projects by citing to the increase in city revenues and jobs that these developments will generate. Unfortunately we now know how quickly these benefits can be erased by not paying attention to supply and demand principles. Once buyers’ demand could not keep up with escalating home prices, unprecedented numbers of home builders began to reduce the prices of their homes in order to compete with one another. This caused housing prices to begin falling. Home values began to drop so rapidly that foreclosures became the only viable option for many borrowers as selling or re-financing became impossible since all the equity in their homes had been wiped out by this excessive competition. Soon foreclosures began to flood the market driving supply up even further. Home builders were then forced to reduce their prices further to compete with banks that were offering their foreclosed-upon homes for much lower prices. All the while the values of homes caught in the cross-fire were diminished to astonishingly low levels and the fear of continuous declines in housing prices kept buyers on the sidelines and demand at historical lows. Now it is easy to ignore a potential lesson learned here by simply claiming that this was a national housing crisis that local government leaders had no power to avoid. In reality, it was these civic leaders alone that could have prevented such wide-spread economic devastation within their respective municipalities. Had they simply assessed local statistics addressing population growth, income levels and existing housing supplies prior to handing out rubber-stamp approvals, they might have learned that their local housing supply was quickly outpacing demand. In addition, not all cities succumbed to the pressures of filling city coffers and decreasing short-term unemployment figures. In fact, those cities that have traditionally regulated their housing supply by more intensely scrutinizing proposed developments have mitigated their pain relatively effectively. Cities that were more selective in their approval of residential developments can be found throughout California. There are many cities across the country that restricted growth to keep foreclosures at bay and local economies intact. It is no surprise that local candidates for office are now uniformly using smart growth and concentric development as primary focuses of their campaign platforms. It is our job as voting citizens to ensure that they maintain these pledges when our local economy once again finds its pulse. We must remember that although it is tempting to rely on the principles of free-market economics, our local leaders must not overlook the fundamental economic principle of supply and demand. Otherwise, local residents may not like the results with which they are left.
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