California wants new houses, bubble or not

For first time in decades, the state considers ways to make it easier for construction companies to build, even as prices shoot up.

When Harlan Findley decided to enter the California housing market, he set a timetable: If he didn't find a new home within a year, he would give up. Last year, when he finally closed on a house just south of Oakland - four bids later and $37,000 over the asking price - he had just one month left on his self-imposed deadline.

On one hand, it is classic California - the familiar tale of a man and his fiancée who needed the better part of a year simply to find a three-bedroom home in a modest Bay Area neighborhood, despite some $200,000 in annual income. Yet these days, it points to something beyond the ordinary for both the Golden State and the nation.

Earlier this year, the housing boom that has defied a dotcom bust, a war in Iraq, and virtually all predictions set a new high-water mark, as the inventory of houses on the market hit an all-time low. Nationwide, the record demand suggests a shift, with Americans putting more of their wealth into shingles and bedrooms rather than stocks and bonds.

But in California, where the median single-family home costs $485,700, there are signs that the boom has reached a pivotal moment. For the first time in decades, the state is considering ways to make it easier - not harder - for construction companies to build. The change of heart in this environmentally conscious state is an indication of how dire the situation has become. Moreover, it is a cautionary tale - particularly for the pricey Northeast - as home prices increasingly split Californians into haves and have-nots who are either reaping the benefit of a historic run or finding themselves priced out of the American dream.

"We're near a tipping point for public policy," says Duane Bay, a housing consultant in East Palo Alto, Calif. "There is broad consensus that we have to build additional housing."

The statistics in California have become almost comical. California's homeownership rates put it at No. 48 in the United States. By another measure, 19 of the 25 cities with the least amount of affordable housing are in California. The median home price in the San Francisco Bay Area, traditionally the costliest market in the nation, stands at $666,740, according to the California Association of Realtors.

And no indication suggests it will change any time soon. Bay Area real estate agent Scott Harrison looks across the market and says things are as tight as they've ever been. Last year at this time, he had 80 listings. This year he has 43. Recently, he got nine offers on a three-bedroom, one-bath home listed at 1,050 square feet - raising the price nearly $30,000.

"There are so many people for a good home and so few houses to choose from," says Mr. Harrison.

Though most of the rest of the nation has felt these pressures to a far lesser degree than California, some experts say that Americans have begun to adopt a typically Golden State solution. During the boom days of the 1980s, Californians put as much as 60 percent of their net worth into their homes. Now, with the stock market gurgling uncertainly and interest rates still hovering near historic lows, Americans appear to be investing more of their cash in houses.

"We're starting to see these trends emerge in other areas," says John Karevoll of real estate analyst DataQuick in La Jolla, Calif.

For his part, Mr. Findley wasn't willing to go as far as the Californians of the 1980s and ended up with a $549,000 home when some brokers were trying to get him into a $700,000 unit. Each of the four houses that he and his fiancée bid on had at least seven other bids, and the bidding wars eventually led him to abandon nicer neighborhoods for blue-collar San Leandro.

"Especially in the Bay Area, the classic American model of owning a house is going away," he says. "I talk to people in the Midwest, and getting a house there is not a life-changing trauma."

Indeed, in other areas of the country, there is evidence that the shortage will gradually ease. National home-building is on a record pace in order to keep up with demand. And even in the Northeast, where localities hold a tighter rein on construction, most metropolitan areas still have "enormous amounts of farmland to chew up" if they choose, says William Fulton of the Solimar Research Group in Ventura, Calif.

In California, however, the major coastal population centers are hemmed in by mountains. Suburbs have spilled ever farther inland to find space. Yet even there, citizens have long been loath to unleash developers, fearing greater congestion as well as environmental desecration.

But the hefty home prices have begun to erode that monolithic stance against home construction. Reversing years of policy, cities have begun to develop new houses and lofts on empty lots and in abandoned warehouses.

And this year, both the state Senate majority leader and Gov. Arnold Schwarzenegger have proposed easing a landmark California environmental law to increase home construction. If Governor Schwarzenegger can find any time for the issue in a year when he is championing a suite of major state reforms, policies in the ascendant since the 1970s could start to change.

Says Mr. Fulton: "The stars are about to align on all this."