Our Housing Shortage Deepens Racial Inequity

Mayor Matt Mahan
15 min readJun 27, 2020


1937 residential property map in San Jose with redlined neighborhoods.

(I was recently elected to represent San Jose District 10 and take office in January 2021. In the meantime, I started this blog to share what I’m learning about a variety of issues relevant to San Jose and my take on them. I appreciate your feedback and questions as I prepare to represent our community. Sign up to have these posts automatically sent to your inbox: https://forms.gle/N9af77JuK2nJFDMo6.)

Dear Neighbor,

My last post reflected on racial injustice in America and outlined various policing reforms that San Jose’s police department ought to build upon or consider adopting, with the caveat that culture change and accountability are ultimately more important than reforms written on paper. I was blown away by the positive response and constructive feedback. Thank you for reading the post and sharing your perspectives with me.

I’m turning to housing next because it is central to economic opportunity and inequality in America. Moreover, San Jose and our entire region face a housing shortage and affordability crisis that has huge implications for local economic mobility and racial and intergenerational justice. In this post, I’ll briefly cover 1) the historical role of housing as a force for both economic security and exclusion, 2) the housing shortage we face locally, and 3) potential policy solutions.

Separate and Unequal

Historically, homeownership has helped maintain a large middle class in the US while also contributing significantly to economic inequality.

Starting in the 1930s, the Federal Government promoted homeownership by working with the banking industry to insure mortgages, reduce mortgage interest rates and lower down payment requirements. After World War II, government intervention in the housing market went further by subsidizing the build out of the suburbs (e.g. highways, roads, sewers, etc.). Homeownership was also given preferential tax treatment (e.g. mortgage interest deduction and capital gains exclusion).

Unsurprisingly, homeownership rates shot up dramatically in the 20th century — from 45% in 1930 to 65% in 1980. And for many American homeowners during this period, home equity became a vehicle for weathering financial challenges and building personal wealth.

However, Americans did not have equal access to homeownership or its benefits during this period of deep government involvement in the housing market. While encouraging home construction and ownership for White Americans, government policy and banking practices systematically segregated America’s housing stock along racial lines and created barriers to home ownership for communities of color, and Black Americans in particular.

Exclusionary zoning, deed restrictions on selling homes to prospective Black buyers, and redlining — the practice of designating predominantly Black neighborhoods high-risk and therefore ineligible for loans, insurance and other services — all worked to exclude Black Americans from middle class homeownership. Black families that could secure loans were often given poor financing terms and restricted to purchasing homes in neighborhoods that were deemed “declining” or “hazardous” and therefore generally disinvested in by the public and private sector (contributing to lower appreciation, higher crime and other challenges over time). In short, government policy intentionally created many of today’s wealthy White suburbs and poor Black urban neighborhoods.

1937 residential property map in San Jose with redlined neighborhoods. Source: https://joshbegley.com/redlining/sanjose

Though we would like to think this form of discrimination is a thing of the past, in many markets today, Black and Brown loan applicants continue to qualify for home loans at lower rates, even controlling for income, loan amount and location. (If you work for a financial institution, you might consider asking what your firm is doing to achieve racial parity in loan application approval rates for comparable applicants.)

I can hardly do justice to these topics in a short post. For those wanting to go deeper, I highly recommend Richard Rothstein’s book The Color of Law (and NPR’s excellent interview with Rothstein) as a primer on historical segregation and discrimination in the housing market and its ongoing legacy.

Intergenerational Wealth Accumulation

Historical segregation and discrimination in the housing market has translated into large racial wealth disparities today. Nationally, 73.7% of White households are homeowners compared with just 44% of Black households and 48.9% of Hispanic households. Incredibly, the Black-White homeownership gap is larger today than it was in 1900. Moreover, White homeowners are more likely than Black homeowners to own homes in neighborhoods with high property values and greater appreciation over time.

Thus, median White household wealth today is about 10 times greater than median Black household wealth. In other words, the average White family possesses 10 times more wealth than the average Black family, in large part due to their disparate ability to access home loans and buy into “desirable” neighborhoods in past generations. According to one analysis, closing the homeownership gap today, even after decades of disparate wealth accumulation, would shrink the Black-White wealth gap by 31%.

Source: Urban Institute, Wealth Inequality in America.

In recent years, renters — who are disproportionately low-income, younger and people of color — have also tended to lose out in America’s housing market. This is especially true in urban job centers where demand for housing has far outpaced supply, thus driving up housing costs faster than income. Since the 1970s, median home values and rents have increasingly diverged from median incomes, increasing the relative wealth of existing homeowners while making homeownership less attainable and housing generally less affordable:

Source: Clever, Home Price vs. Income Historical Study

These trends have been more pronounced on the West Coast and especially here in Silicon Valley, where rapidly rising housing costs have exacerbated existing economic inequality, displaced low-income workers to cheaper housing markets outside of the Bay Area, consumed an increasing share of household budgets, and threatened to exclude an entire generation from homeownership.

Nearly half of San Jose’s renters — disproportionately Black, Latino and younger residents — are rent burdened, which means they spend over 30% of income on housing (50% is not uncommon). Homeownership has become inaccessible for all but the highest income households. In fact, San Jose is now the least affordable homeownership market in the country: the average potential homebuyer here needs to earn $250,000 per year and produce a 20% down payment of nearly $250,000 to qualify for a mortgage.

Supply and Demand

Our affordability crisis is fundamentally driven by a mismatch of supply and demand. Over the last decade, Silicon Valley (defined as Santa Clara and San Mateo counties for purposes of this analysis) has added 39 million square feet of new commercial, industrial and R&D space to support the addition of 411,000 new jobs. In turn, Silicon Valley has also added about 250,000 people (i.e. net migration + births - deaths) over this time period.

In a general sense, all of this growth is a rare and valuable thing — every other region in the world wants to capture the economic vibrancy, innovation and prosperity being created in Silicon Valley today.

But there’s a huge caveat — we’ve failed to manage this growth responsibly by adding housing supply (not to mention transportation and other infrastructure) to match workforce growth. In fact, between 2011 and 2017, Santa Clara County added 5 jobs for each new home built and, even worse, San Mateo County added 10 jobs for each new home built, reflecting a similar trend across the region:

Job growth has vastly outpaced home building across the region. Source: Bloomberg.com, “California Housing Crisis.”

Experts estimate that regional economies need about 1 new home for every 2 new jobs. We are not even close and neither are most parts of the state. In fact, McKinsey estimates that California needs to build 3.5 million new homes by 2025 to meet pent up demand and projected growth. Governor Newsom campaigned on this goal, which would require California to build about 500,000 new housing units (i.e. apartments, condos, single-family homes, etc.) per year. Last year, we built closer to 100,000 units statewide, which was slightly lower than the previous year.

As more people have competed over a relatively static supply of housing, home prices and rents in San Jose have soared (124% and 74%, respectively). In addition to eating up household budgets that could go to health, education and other priorities, high housing costs increase homelessness, increase the displacement of low-income residents and thereby increase racial segregation, reduce homeownership rates, increase commute distances as workers seek cheaper housing farther from job centers, and increase overcrowding, which is likely contributing to higher rates of COVID-19 transmission in low-income neighborhoods (not to mention the untold physical and psychological cost of housing insecurity and these associated challenges).

All of this begs an obvious and critical question: Why aren’t we building enough housing to meet growing demand?

Housing Not Welcome Here

State tax policy is part of the answer. Cities in California are not incentivized to build housing because it generates little, if any, net revenue to improve city services. In other words, the cost to a city to provide services (e.g. public safety, roads, libraries, parks) to additional residents often exceeds the property tax revenue generated by their additional homes. This is not an ironclad rule — high density residential development can generate net positive revenue — but until Sacramento changes cities’ revenue incentives to reward housing production, cities will systematically prefer commercial development (jobs) over residential development (housing).

Community opposition is another major factor. Residents rarely protest commercial development because it tends to occur away from neighborhoods. New housing, almost by definition today, is built in neighborhoods where people currently live. Whether grounded in data or not, many residents fear that more housing will increase crowding, traffic, crime and other quality of life issues. It is hard for elected officials to support housing when they primarily hear from residents who oppose it.

But, lately, more than anything, we’ve stopped building housing because it has become too expensive to build. Per unit construction costs in San Jose are now in the stratospheric $600,000-$700,000 range. San Francisco recently became the most expensive place in the world to build, fully 13% more expensive than New York’s construction market. With costs this high even luxury apartments are struggling to pencil out.

In fact, I’ve spoken with multiple South Bay developers who own property in Downtown San Jose and other areas that desperately need housing and would have little community opposition, but can’t secure financing even for projects targeting high-income renters. Developers don’t have much choice in the matter: they can’t secure financing unless the lender is confident that it will get its investment back with a competitive rate of return. Without that confidence, investment capital goes elsewhere, from homebuilding in other states to alternative types of investments. Clearly, we have a problem on the cost side of the equation.

While publicly subsidized, affordable housing does not face the same financing constraints, our high construction costs mean that taxpayer dollars do less good. For example, at $700,000 per unit, the cost of building apartments for the City’s approximately 6,000 homeless individuals would be about $4.2 billion, or 3.2 years’ worth of San Jose’s total General Fund spending. This estimate doesn’t even begin to address the additional tens of thousands of units that are needed to meet current demand and begin bending the cost curve for low- and middle-income residents.

Whether market-rate or affordable, if we want to build more housing, we need to figure out how to reduce costs. For market-rate development, which has traditionally been and will likely continue to be the engine of homebuilding at scale, costs need to be low enough to make our region an attractive place to invest.

Bending the Cost Curve

I believe there are about a half-dozen big areas of opportunity for cost reduction. The following suggestions are largely based on research done by Berkeley’s Terner Center for Housing Innovation, the state’s Legislative Analyst’s Office, and my own interviews with local developers, housing advocates and policymakers:

  1. Zoning: While we can’t make land less expensive, we can get more value out of a given parcel. Up-zoning would allow greater densities in a given development. With a record 94% of San Jose’s residential neighborhoods zoned for single-family, detached homes, we have an opportunity to strategically build up near transit stations and along corridors that can sustain more residents. City Council’s recent move to increase height limits in Downtown San Jose is a step in the right direction. In areas with viable public transit alternatives, parking requirements can also be relaxed to enable more units and lower costs per project. Part of the solution will be a greater diversity of housing stock with options for more compact, affordable-by-design housing. Up-zoning is not all upside. It risks increasing the displacement of renters as low-density buildings are replaced with higher-density ones that are relatively more expensive simply because they are built at today’s costs. We need to find creative ways of supporting and, ideally, compensating renters to reduce the hardship imposed by massive turnover in the housing market. For example, residents of the Winchester Mobile Home Park and a prospective developer recently found a win-win solution that preserves an existing community while adding a substantial number of additional homes to our housing stock.
  2. Skilled Workforce: The Great Recession pushed tens of thousands of skilled workers out of the building trades and into other industries and other states. Homebuilders continue to face a labor shortage and competition from large commercial development, which drives up labor costs. Labor, followed by land and materials, is the most expensive component of homebuilding. Moreover, to increase homebuilding to a pace that would start to impact affordability, California will need at least 200,000 additional construction workers. While it won’t affect costs overnight, the state ought to invest heavily in skilled labor training and apprenticeships through our already robust community college system. As an added benefit, filling more skilled building trades jobs would help fuel our economic recovery from COVID-19.
  3. Permitting: California cities, including San Jose, tend to have slow and complicated project review and approval (i.e. entitlement) processes. Project approval processes for larger residential developments often take two years or longer. The extra time and uncertainty created by these processes increases project risk and cost (and when it comes to project financing and calculating rates of return, time literally is money). San Jose’s Planning, Building and Inspections Department (PBID), which is funded by development fees, ought to offer a fully online permitting process. Moreover, at least in priority development areas, pre-defined zoning and city ordinances ought to streamline the review process, leaving less room for subjective back-and-forth between city planners, angry neighbors and developers. Obviously, permit review and community input are important but our processes should not be so onerous that they prevent housing from being built.
  4. Project Fees: One unintended consequence of Prop 13’s cap on property taxes is that cities began using development fees to generate additional revenue. This shift has been pennywise (i.e. one-time fees fill immediate revenue needs), but pound foolish (i.e. cities’ ongoing property and sales tax base is smaller as a result). Fees alone can add 10–15% to a project’s cost. According to a 2018 City Council study session on the topic, San Jose’s standard housing construction fees (including inclusionary zoning requirements) tend to be in the range of $40-$65k per unit. Total fees are also hard to predict. Mayor Liccardo has proposed a simpler, “universal” development fee to reduce complexity. I’d also like to see the City engage outside economists to study the long-term tradeoff between one-time development fees and the opportunity cost of a larger tax base, to help us make smart long-term decisions. Finally, San Jose’s all-in fee levels need to be competitive given our market position. We often use cities like Palo Alto and Mountain View as comparison points, but the truth is that projects in those cities are able to command higher rents once completed. San Jose needs to prioritize attracting investment and building job and residential density in our urban core before our market conditions will resemble those in cities like Palo Alto and Mountain View.
  5. CEQA: As an environmentalist, I’m glad that California reviews projects for environmental impact and works to reduce urban sprawl and vehicle miles traveled. However, the state’s environmental quality act (CEQA) has come to be abused by a small number of irresponsible actors who wield the law to kill unwanted development or extract special concessions, irrespective of the environmental merits. In fact, CEQA lawsuits disproportionately target transit investments, new housing and urban infill development. It’s telling that the state’s largest projects, from sports stadiums to airport expansions, seek and typically receive CEQA exemptions to avoid the added costs and risks. We do not need to walk back our commitment to environmental protection to enable greater homebuilding. In fact, ironically, the more CEQA is used to reduce urban infill development in cities like San Jose, the more we enable far more environmentally destructive sprawl in areas with cheaper land and laxer environmental regulations. Common sense improvements in the law, including expanding streamlining tools, eliminating the anonymity of lawsuit filers, and even requiring losing parties to pay legal fees might all work to align current practices with the intent of the law.
  6. Private sector innovation: Public sector policies also need to encourage and reward private sector actors who embrace innovation. After decades of low productivity growth, the construction market is responding to higher costs by experimenting with a range of promising new methods and tools, including prefabrication and modular techniques, cross-laminated timber, co-living and other affordable design approaches. City government can help facilitate this innovation by ensuring that zoning and ordinances, project review processes and fee structures are conducive to new development models.

In recent years, we’ve failed at one of our most consequential public policy objectives: building enough housing for a growing population. Because of our history of discrimination in the housing market, the cost of failing to build enough housing has been disproportionately borne by communities of color. Other vulnerable populations have also been especially impacted. Our homeless population, for example, has grown rapidly in recent years as neighbors struggling with mental health, substance abuse, job loss or domestic violence have been unable to keep up with rising housing costs.

We have a responsibility to ensure that our public policies enable home construction in tandem with job and population growth. Certainly, publicly subsidized housing should be part of the solution, focused on our worst-off neighbors whom the private market won’t adequately serve at existing costs/prices. But ultimately, the scale of our accumulated housing shortfall far exceeds the resources of state government, local governments and housing philanthropists combined. California needs to build dramatically more housing per year than we do today. The best and perhaps only way to build housing at the scale required is to reduce costs, eliminate barriers to homebuilding and attract investment on the order trillions, not billions, of dollars.

Beyond More Homes

More homes and lower housing costs are the most important steps we can take to address the disparate impact that high housing costs have on communities of color and younger residents. But, alone, they will not remedy the ongoing legacy of past racial segregation and discrimination in the housing market. Just as government policy deepened and institutionalized racial disparities in the 20th century, we should try to design our today to address those disparities. Doing so without further distorting the housing market and creating new risks is easier said than done (e.g. subprime mortgage crisis of 2007–2008), but I believe it’s possible.

To start, we should call on our federal representatives to provide short-term emergency rental assistance to the nearly 10 million low-income renters in the country who are at risk of displacement due to COVID-19 related loss of income. The cost of keeping the most vulnerable renters housed would equal approximately just 5% of federal COVID-related stimulus funds deployed to date; certainly a bearable cost, but one that requires political will. Doing so would prevent vast human suffering, stabilize the rental market for all participants, including property owners, and likely cost less over time than the increased personal bankruptcies and homelessness caused by inaction.

Government has other tools at its disposal. It should increase enforcement of anti-discrimination laws to increase access to loans and home ownership in wealthier neighborhoods. Expanding the Earned Income Tax Credit (EITC), while not explicitly a housing policy, would reduce the number of households that are severely rent burdened and reduce displacement rates. Federal and state representatives should also consider expanding the Low-Income Housing Tax Credit (LIHTC), which is a minimally market-distorting means of incentivizing affordable housing development.

Government should also continue promoting homeownership, but carefully, heeding the lessons of the subprime mortgage crisis. Expanding rent-to-own approaches to homeownership — if properly designed — might help renters incrementally improve credit scores and build equity on their way to eventual ownership. Organizations that promote homeownership carefully and responsibly, like Housing Trust Silicon Valley, are good investments. Going farther, the Federal Government could even — as a means of addressing past wrongs in the housing market — dedicate revenue from the estate tax (i.e. taxes on inherited wealth) to reducing the racial homeownership gap and supporting minority-owned small businesses. These would be meaningful steps toward rebalancing the uneven financial playing field that was established by government housing policy in the last century.

Beyond housing, perhaps the most important thing we can do to further racial equity is to ensure that every young person in American is prepared to succeed in today’s economy, which is the next topic I plan to examine. Until then, I look forward to hearing your comments and critiques!



Councilmember-elect, San Jose District 10; matt@mahanforsanjose.com, 408–891–9708

Matt is Councilmember-elect for San Jose District 10, which includes Almaden Valley and Blossom Valley. Matt takes office in January 2021 and uses this blog to share what he’s learning about a variety of local issues and his take on those issues. Matt and his wife, Silvia, are proud to be raising their two young children, Nina and Luke, in District 10. You can subscribe to Matt’s updates here: https://forms.gle/ycvcf3fbKSFU2JfA6



Mayor Matt Mahan

Mayor, San Jose. Former D10 Councilmember, Brigade CEO & Co-founder, SVLG and Joint Venture Silicon Valley Boards, and SJ Clean Energy Commission