Randall Lewis Opines on Barriers to Increased Housing Production

You are an industry leader in housing and healthy communities, from the Inland Empire all the way to the Central Valley. What are your thoughts on how we ought to meet the housing demand in the Southern California region?

Randall Lewis: I break down supply in terms of numbers, price, and product type. All three are important.

Rick Cole recently said in The Planning Report, “They haven’t repealed the law of supply and demand.” Just creating a greater absolute number of housing units would have a huge impact on prices, in addition to the social, economic, and health benefits that housing would bring.

I believe that infill versus suburban housing is a false choice. We need the total supply of housing to go up, both in the close-in, and also greenfield areas. Now, we probably don’t need a lot more million-dollar houses—although we do need some, since they create some move-up opportunity. But more so, we need housing for middle-class and lower-middle-class families. We need housing for adults looking to downsize. For example, as Dowell Myers of USC has said, we should build more active adult housing—a need the industry has not responded to very well. As active adults move into the kind of housing that better meets their needs, it will create opportunities for someone to move into their existing houses.

We also have to recognize that the rental component is a significant part of this equation. Homeownership rates in Southern California are significantly below those in most of the United States, and most experts think they are going to go even lower. In other words, more people are going to be renting—some by choice, some not—so we’re also going to need an adequate supply of rental housing.

What factors have constrained the housing supply side since the deep recession in 2008?

Number one is CEQA misuse. When CEQA is abused, it adds to the cost of doing business. Now, when you’re starting a new project, you have to factor in higher legal costs. You know you’re probably going to get sued by somebody, and it’s probably going to add at least a few months and many dollars, even if it’s a lawsuit without any merit.

In addition, just getting through the process in most cities in Southern California is very difficult. In some other states, they can get you going in months. Here, if you have a good project—a non-controversial project—you would be lucky to get it through the entitlement process in a year. It would not be at all unusual for it to take 18-24 months—and if there are complexities, it could take a lot longer than that.

Another constraint is the labor force. Many workers left the construction labor market during the last economic downturn, and immigration policies have also had an impact. Virtually every homebuilder we work with says they have a hard time getting qualified labor to build a project. That means that for the labor that is available, costs go up quite a bit. It also takes a lot longer—there are projects just waiting for workers.

We’re seeing tremendous cost increases across the board, including for materials. For example, the current dispute between the U.S. and Canada almost certainly has impacted, and will continue to impact, lumber prices. Also, energy costs are higher. California’s got very strict energy requirements—not that that’s a bad thing, but it can drive up the upfront costs.

Some costs are increasing because product types are changing. With the higher densities that are being built now, projects are becoming more complicated to build. There are structural issues, fire issues, drainage issues, etc. that drive up costs.

What needs to be overcome in public policy and land-use culture to build the tens of thousands of units we need in Southern California?

If you’re a city councilmember or planning commissioner, and there are people protesting at City Hall, it’s tough to approve a project. It takes a lot of political courage. There has to be a movement to say “Yes in My Backyard.”

As builders, housing advocates, and employers—the people who employ schoolteachers, nurses, public safety officials, and everyone else needed for a good society—we are a group of stakeholders. We have to build awareness that housing is a vital need, and that we have to give support to our elected officials against the people that just don’t want any growth.

Cities and counties also need to do some hard work on process improvement. This is an area I think Riverside County is going to be a real leader in; they know that if they could shave a few months off the process, they could get a lot more housing going. For developers, big or small, tying up land is expensive, and just a few months makes a big difference in terms of savings.

We’ve seen process improvement go both ways. A lot of times, jurisdictions can tell the private sector how to turn in better plans upfront, and thereby get through the process a lot quicker. It’s a two-way dialogue.

Also, there needs to be an ongoing education process for city councils and planning commissioners, so they can make the best decisions possible. In the Inland Empire, commissioners in different cities have told us that there isn’t a good forum to keep learning and sharing best practices. So a group of colleagues and planning directors are organizing a meeting of 40-60 planning commissioners to hear Randy Jackson of Placeworks speak on demographics and future trends. It will be the first time something like this has been done in the Inland Empire, but it’s just one meeting. This education needs to be an ongoing process.

We want planning commissioners to understand that there are alternatives to the 7,200-square-foot lot. There are new ways of dealing with parking. Mobility choices are changing, and are going to change dramatically in the years ahead. They need to be thinking about that. Do we need so many parking spaces long term? Do we need so many garages long term? We want them to understand that consumer preferences are changing. People are interested in very different kinds of housing now. Price is certainly part of that, but lifestyle and community elements go into it, too.

What needs to happen at the federal level to contribute to the development of healthier communities and a great number more housing units? 

One thing that could make a big difference immediately is raising the FHA loan limit. In the Inland Empire right now, FHA limits are in the mid-to-high $300,000 range. But in a lot of areas, it’s very hard to find housing under $400,000 or even $500,000. That change would go very far, and a lot of people have worked for it. So far, HUD has shown no willingness.

If the current administration becomes punitive to California on infrastructure funding, that could hurt us. We need to be diligent to make sure we get our fair share.

But most of the issues we deal with are at the state and local levels. That’s where the bigger battles are going to come.

Post-2008 housing finance today is unlike what your family experienced when they founded the Lewis Group of Companies decades ago. Are banks still in the game to fund robust housing developments, whether through equity or debt?

They are—but they’re a lot pickier, a lot more restrictive, and a lot more expensive. We’ve heard quite a bit from smaller independent companies that getting construction financing and equity is a challenge. As a result, housing production has become more concentrated among the larger national builders.

Lewis Homes’ master-planned communities are known for integrating design features to facilitate healthy communities. Does design contribute to making density acceptable?

Design matters so much. When you do visual preference studies, you find that good projects with density often are preferred over lower density projects that don’t have as much good design.

When I say design, I mean a new way of thinking. Stanford has pioneered work in a field called “Design thinking.” It’s design in the sense of architecture and in the sense of landscaping, but also design of programs and processes—how we rethink the design process of building great communities.

Our company is a research-focused company. We’re always talking to our customers in focus groups to understand what matters to them. It’s very rare that the actual lot size matters to people, but it matters if the home has enough windows so that it feels light. It matters if there is enough private outdoor space, if there are gathering spaces, and if there’s a sense of community.

We’re doing a series of communities called Harvest. Each will be individualized, but their common theme will be growing fruits, vegetables, and flowers. They’ll have edible landscaping, community gardens, and rich programming in partnership with the schools. We really think people in one of these communities will live healthier and better lives.

We’ve worked for two decades with the philosophy that where you live is a key determinant of your health. Where you live can make a difference, not just in how you live, but in how healthy you are and how educated you are. We do intentional, purposeful development through the lens of health and education. And the more we do it, the more we see how important it is. 

In your recent State of the Inland Empire remarks, you called 2017 “the best year in a decade” to buy a house. Elaborate.

When I look at all the factors coming together right now, everything points to higher costs and higher prices going forward.

We’ve had a good run in this cycle, but as a consequence, almost any piece of land that could be developed easily has already been developed. In Orange County and Los Angeles County, there isn’t a lot of empty land left. There’s always a bowling alley or a drive-in theater to be torn down, or a parking lot somewhere that can be reused, but all of those sites are so hard to find now—and there’s such competition to buy them. It seems like we’re going into a period where no matter how much we advocate for housing supply, it’s still going to be constrained.

Prices in the Inland Empire are driven in large part by housing costs in Orange County and LA, and they are going up faster and faster. That’s why I think 2017 is an outstanding year to buy a house: because interest rates are great, and it’s almost certain that financing, land, and construction costs will be much higher five years from now.

The California Legislature is entertaining scores of bills to address what they’ve described as a “housing crisis.” Where should they focus their attention to address the challenge of too little housing?

They need to understand that housing right now is used as a tool, in many cases, to finance other projects. That brings up new challenges. For example, if a community needs subsidized affordable housing, to what extent should it be paid for by the new homeowner versus by the community at large?

The Legislature should take a more holistic view at the unintended effects of their actions. It is possible that in trying to solve a problem through housing, you could make the housing situation even worse. For example, it was suggested in the L.A. Times that if Los Angeles charged a linkage fee, that may get some affordable housing built, but it may make new housing altogether significantly more expensive.

Your father, Ralph Lewis, helped shape Southern California’s housing industry and was a champion of building in the Inland Empire. What do you think he would say about housing and community development in 2017?

I recently rediscovered a speech my father gave as president of his old local builders chapter. He said things like, “Building is getting more and more complicated. The regulations are terrible. Issues around density are terrible. I just don’t know how we’re going to build affordable housing in Southern California.” That was around 1963, so I think if he were here today, he would smile and say, “I told you so.”

He was a big believer in education, and I think he would urge our industry to build even closer relations with academic institutions—both major and local universities—to find solutions to our problems. There’s so much intellectual horsepower in the planning schools like USC, UCLA, and Cal Poly.

My father was also a believer in regional solutions. That’s why there’s something at UCLA called the Lewis Center for Regional Policy Studies. When my father was active, the Southern California Association of Governments (SCAG) was just getting started. I think if I told him the great things SCAG would do, he would have been thrilled, and he would have wanted to be more involved.

I’ve been on SCAG’s Executive Committee for eight years. We recently had a retreat to plan the next few years. One of the things that came up was: If not SCAG, who? There is not one other organization over the entire region that could have the impact of SCAG. SCAG has done great work for decades, and they’re going to be a key player in this dialogue on housing.