Why Californians Can’t Afford A Home

The Irresistible Economic Urge to Turn Houses into Vacation Rentals

Credit: Pat Bagley, The Salt Lake Tribune, UT

I walked my dog past the three vacation rentals opposite my rented home. There’s a new one at the corner. I circled the block, passing the fifth and sixth, converted two years ago.

Mine is an old working-class neighborhood in Santa Barbara that saw declines in the ’80s and ’90s, and it’s an area that is now on the rebound. As a new renter in 2009, I joined women in the neighborhood to clean it up, plant greenery, put up a mural, start a neighborhood watch, and create community connections. My rent went from $1,500 to $2,800 as a result. Those women bought homes in other areas. Some of their homes are on the vacation rental market now.

In a crisis, you’re only as good as your neighbor. When your house is on fire, before the fire department can get there, you rely on your neighbors to turn a hose on your roof or make the 9-1-1 call if you’re asleep.

What happens when your neighborhood is all vacation rentals?

Friends own vacation rentals. They insist these were going to be mostly second homes, so there’s no net loss of housing where people would theoretically live. Santa Barbara zoned vacation rentals into neighborhoods like mine, where lower-income families live. Properties went right off the market, converted into vacation rentals. If there are crime issues in the area, or fire hazards, the rental owners don’t care, as they mostly live remotely.

I walk past a homeless guy lying on the sidewalk and realize these things are not unrelated. He probably lived in a community like mine used to be.

Take 100 homes in any community. Some people’s homes were passed down to them. Some rent, and some just bought in. If 20 of those homes are rented for short-term vacations or go to investors, what happens to the families living there? They compete for the remaining 80 homes, whose price automatically goes up. In the 2000s, when my area was rough, homes went for an average of $300k-$600k. Now they’re $800k to $1.5 million because you can financialize them. Your mortgage payment is far more achievable when you can rent the place for $300+ a night, 30 days a month. Lenders love this math. It’s increasingly harder to qualify for a mortgage if you’re just going to live in the home. Financializing homes is much more lucrative.

In this example, 20 families were displaced. Don’t forget them.

Start multiplying that out … in communities across the world.

Major cities like London, Amsterdam, and Barcelona report the same problem. In Los Angeles, 67 percent of housing is owned by investment entities. Financialization of property, according to the United Nations, leads to higher prices and lower affordability for residents. People go further afield to find housing, driving up commuter costs, roadwork repairs, and pollution. They’re tied to cities for work but increasingly can’t afford to live in them. An Amsterdam resident, being pushed out, asked who will be left, other than investors and tourists? Good question.

When we push workers further out, we drive up taxpayer costs for bridges, trains, and roads. That’s a subsidy to businesses who employ people but don’t pay them enough to live near where they work. But don’t expect companies to take their laser-focus off their bottom line to help their workers. Google and Facebook are already cutting salaries of workers who moved out of the Silicon Valley to more affordable areas during the pandemic.

There’s also a more insidious player moving around on this field, largely undetected: the institutional investor, like Blackstone or Deutsche Bank. They buy an older apartment building, evict the tenants, apply a fresh coat of paint, plant some landscaping, and jack the rent. This happened at the Ivy Apartments. Where do the former tenants go? Some move farther away. Some sleep in their cars or public parks, hoping for a better situation to emerge. This is but one way we create homelessness.

Apartment dwellers are not the only victims. Entire subdivisions of houses are purchased by firms like Blackstone or Deutsche Bank. In an overheated stock market, investors flush with pandemic cash seeking a better return discovered Real Estate Investment Trusts (REITs) — now the hottest investment vehicle. The Wall Street Journal ran stories with titles like these: “That Suburban Homebuyer Could Be a Foreign Government” and “Property Investors Bed Down in the Family Home.” They see a problem here.

There’s an old trope that the WSJ is read by the people actually running the country. The Washington Post is read by people who think they’re running the country. The Los Angeles Times is read by people who’d love to run the country but would have to leave California. And so on.

When the news source for the people actually running the country is scrutinizing the dangers of investors taking over housing, shouldn’t we all pay attention? Since commercial real estate took a hit in the pandemic, single-family homes present the biggest rate of return available. Rents are increasing across Europe by 15 percent, with the U.S. not far behind. Investors are piling on.

California is the world’s fifth largest economy, with 15 percent of the U.S. population and 25 percent of the nation’s homeless. Of course we’d be on the front lines of the housing crisis. Yet our Legislature wants to pass bills that give investors and developers runways to build more luxury housing, rather than affordable housing. Legislators who attempt to get a bill with affordability past the California construction trades unions are swiftly met with hit ads, draped in progressive rhetoric to “end the racist apartheid of single-family zoning.” Communities of color and affordable housing advocates cry foul, for good reason. To develop their home into multiple rental units, as proposed by Senate Bill 9, families need to have paid off their mortgage and have hundreds of thousands of dollars available. Few Californians command such financial resources, but Deutsche Bank and BlackRock certainly do. They can pay cash for a $2 million home today, turn it into eight rentals, or resell the newly developed units for $2 million each.

Who are California’s housing bills for, exactly?

Now seems like a great time for the governor to hit the pause button, declare that he’s convening a Blue Ribbon Commission of smart people from Affordable Housing ranks, tax experts, etc. to solve the crisis of Affordable Housing.

Young, white male YIMBYs (Yes In My Backyard, though they have no yards) paid by tech companies push for building more housing, as though supply-side economics was the sole miracle panacea. Who would have thought Reaganomics’ “trickle down” would become so newly vogue with California progressives? They purport more luxury housing is all good, as it will trickle down eventually. They take aim at local zoning as the problem, but California’s local elected officials increasingly find themselves coping with state mandates for more housing, while the state turns a blind eye to investors outbidding a city’s residents for that same housing.

Markets don’t always function perfectly. Profitizing housing is great for investors and developers, lousy for people needing a place to live, for neighbors who care about their communities, for cities facing the paradox of affordable housing shortages, homelessness, and a spate of building of luxury or market-rate.

Los Angeles has as many vacant homes as it does homeless people. This math for cities, is not hard.

Back to the homeless guy lying on the curb: He’ll never be able to cough up $3,000 rent for a new market-rate unit in built in someone’s backyard under proposed state legislation. There are thousands more like him. These things are not unrelated. A spike in homelessness is a serious warning that something fundamental has stopped working in your housing market.

Australia hosts 116,000 living unsheltered. The U.K. has 260,000. The U.S. has 540,000 people living without a home. Profitizing of housing is a global problem.

If governments worldwide and locally truly want to solve the affordable housing crisis, they’d stop foreign and domestic investors from outbidding families seeking a place to lay their heads. They’d stop AirBNB and VRBO from hollowing out cities for tourists, who should be in hotels. They’d force businesses to provide a living wage, rather than let them screw workers on the taxpayer’s nickel. They’d turn a sharp eye to vacant homes and think about fining owners for vacancies when they have homeless individuals living on their streets. They’d mandate that publicly owned lands to be converted to affordable housing. Case in point: here in Santa Barbara, our Metropolitan Transit District owns a vast, vacant lot off El Sueno Road. The county’s housing authority eagerly bid to build affordable housing there. The Transit District board decided to build “market rate and luxury” homes instead to maximize their return.

Everyone, it seems, is into profitizing homes. Even public agencies that really ought to be thinking about the constituents they serve. There should be a law against this.

People in Amsterdam, being pushed out of their homes, asked, “Who will be here, except for investors and tourists?”

Good question, one that’s pressing on us.

Editor’s Note: While MTD does intend to generate financial support through its property, a spokesperson stated the current proposal is a mix of affordable and market-rate units integrated throughout the project and shared amenities. The project proposes an after-school tutoring and community learning center.


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