single family zoning

Goodbye single family zoning. If you didn’t know, two weeks ago SB9 was signed into law in California, which now allows property owners to build a duplex on any residential lot or subdivide to build up to four units. This is massive news, so let’s talk about it. I’d love to hear your take in the comments.

Some perspective (not arguing for or against):

We need time: This is a huge change, but will it alter what neighborhoods look like? In short, there are some sensational ideas floating around, but we need time to tell. With that said, it seems so far news sources are talking about only modest change. For instance, First Tuesday quotes a study stating at the very most we could see an impact to 410,000 parcels (roughly 5.4% of parcels).

By the way, here is a CalMatters piece that goes into more depth on some of the details of this bill (or read the bill here).

Minneapolis as a case study: In 2019 Minneapolis legalized triplexes to be built on single family lots and Axios points out there was little change. In fact, there were only 70 units added in 2020 (20 brand new units and 50 single family units converted to multi-units). Oregon has also banned single family zoning in most cities, so let’s keep an eye on Oregon too.

Scared of renters: I’ve heard some fear about more renters moving into neighborhoods, but did you know roughly 45% of residents in California are renters? Let’s be cautious about vilifying half the population.

Expensive to pull off: Just because zoning has been modified doesn’t mean we will see a big change in the market. It is still going to be really expensive to build, there is a labor shortage, and land in California is pricey.

Three units were already allowed: Under existing California law home owners have already been allowed to build two other units on site. If you didn’t know, you can build an ADU (accessory dwelling unit) and JADU (junior accessory dwelling unit). This is good to keep in mind as we talk about the end of single family zoning and the idea that new units are now possible because of SB9. All I’m saying is technically more units have already been possible.

Highest and best use: As far as highest and best use in appraisal reports, that’s something appraisers will need to think about as they craft highest and best use statements. Let’s remember highest and best use isn’t just about what is legally possible, but also what is financially feasible and even physically possible. In short, it’s not going to be financially realistic to see multi-units built on every single family lot, so the highest and best use will continue to be the existence of single family homes. Of course we’re going to have to see if SB9 affects some neighborhoods or price ranges more than others. Moreover, it could be difficult to fit a multi-unit property on a postage stamp lot, so it really might not even be physically possible in some cases.

We need more inventory (but not like this): For years we’ve been saying we need more housing inventory, but when SB9 became law so many have said, “It is true we need inventory, but not inventory like this.” I completely get it and I’m not here to argue. Ultimately this new law is likely to expose NIMBYism (not in my backyard) and YIMBYism (yes in my backyard).

Other: What else? What’s on your mind? What did I miss? What are you concerned or excited about?

In closing, this change in zoning is certainly unconventional and even scary to many, but the impact is still to be determined. My advice? Let’s be objective about the issues, listen, embrace facts, and avoid sensationalism.

I hope this was helpful. Thanks for being here.

Questions: What do you think about the end of single family zoning? Is this good or bad? What opportunities and threats will exist as a result of this?

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What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?

Class I’m teaching on Jan 16th: I’m doing a big market update at SAR from 9-10:30am. We’ll talk through where the market is at, tips for talking to clients, and ideas for where to focus business. I’d love to see you there. Sign up here.

TRENDS TO WATCH IN 2020:

Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.

Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.

Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.

Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).

Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?

Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.

Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.

Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.

Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.

Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.

More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.

Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.

Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.

Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.

By the way, click to see 2019 market recap images for a few local counties.