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. . . But Lack of New Construction Can Slow <br />This Process. When new construction is abundant, <br />middle-income households looking to upgrade <br />the quality of their housing often move from <br />older, more affordable housing to new housing. <br />As these middle-income households move out <br />of older housing it becomes available for lower- <br />income households. This is less likely to occur in <br />communities where new housing construction is <br />limited. Faced with heightened competition for <br />scarce housing, middle-income households may <br />live longer in aging housing. Instead of upgrading <br />by moving to a new home, owners of aging homes <br />may choose to remodel their existing homes. <br />Similarly, landlords of aging rental housing may <br />elect to update their properties so that they can <br />continue to market them to middle-income <br />households. As a result, less housing transitions to <br />the lower-end of the housing market over time. One <br />study of housing costs in the U.S. found that rental <br />housing generally depreciated by about 2.5 percent <br />per year between 1985 and 2011, but that this rate <br />was considerably lower (1.8 percent per year) in <br />regions with relatively limited housing supply. <br />New Housing Construction Eases Competition <br />Between Middle- and Low-Income Households. <br />Another result of too little housing construction <br />is that more affluent households, faced with <br />limited housing choices, may choose to live in <br />neighborhoods and housing units that historically <br />have been occupied by low-income households. <br />This reduces the amount of housing available for <br />low-income households. Various economic studies <br />have documented this result. One analysis of <br />American Housing Survey data by researchers at <br />the Federal Reserve Bank of New York found that <br />“the more constrained the supply response for new <br />residential units to demand shocks, the greater the <br />probability that an affordable unit will filter up and <br />out of the affordable stock.” Other researchers have <br />found that low-income neighborhoods are more <br />likely to experience an influx of higher-income <br />households when they are in close proximity to <br />affluent neighborhoods with tight housing markets. <br />More Supply Places Downward Pressure on <br />Prices and Rents. When the number of housing <br />units available at the lower end of a community’s <br />housing market increases, growth in prices <br />and rents slows. Evidence <br />supporting this relationship <br />can be found by comparing <br />housing expenditures of <br />low-income households living <br />in California’s slow-growing <br />coastal communities to <br />those living in fast-growing <br />communities elsewhere <br />in the country. Between <br />1980 and 2013, the housing <br />stock in California’s coastal <br />urban counties (counties <br />comprising metropolitan <br />areas with populations greater <br />than 500,000) grew by only <br />34 percent, compared to <br />ARTWORK #160020 <br />Figure 1 <br />Housing Becomes Less Expensive as It Ages <br />Percentile Rank of the Rent for Housing Built Between 1980 and 1985 <br />10 <br />20 <br />30 <br />40 <br />50 <br />60 <br />70 <br />80 <br />90% <br />Los Angeles San Francisco <br />1985 <br />2011 <br />Template_LAOReport_sm.ait <br />Graphic Sign Off <br />Secretary <br />Analyst <br />MPA <br />Deputy <br />8 Legislative Analyst’s Office www.lao.ca.gov <br />AN LAO BRIEF8.A - Page 16