Bad To Worse
From insurance to affordable housing mandates, California's regulatory noose tightens over wildfire rebuilding efforts.
Happy Tuesday, and welcome to another edition of Rent Free. This week's issue takes a look at the regulatory regime holding back the Los Angeles area's wildfire rebuilding efforts. Stories include:
- California policymakers running in the opposite direction of productive property insurance reforms,
- Nightmare tales of past wildfire rebuilding efforts being strangled in red tape, and
- One possible solution to speed up permitting for wildfire rebuilds and housing generally.
But first, a look at how Gov. Gavin Newsom's latest "streamlining" executive order might actually make Los Angeles' rebuilding efforts much more difficult.
Newsom's Phony Red Tape Cutting
On February 13, California Gov. Gavin Newsom issued another executive order that purports to ease burdensome red tape on property owners trying to build after the recent devastating wildfires in Los Angeles.
"We will not let overly strict regulations get in the way of rebuilding these communities," said the governor in a statement.
Like his last two streamlining orders, Newsom's latest directive waives the requirements of the California Environmental Quality Act (CEQA) and the Coastal Act for property owners rebuilding homes and businesses and adding new accessory dwelling units (ADUs) to their properties.
The biggest apparent innovation in the governor's new order is a provision that exempts wildfire rebuilds in the City of Los Angeles from a state law requiring that new housing projects replace any "protected" housing units they demolish with new affordable housing.
A Positive Reform on the Surface
At first blush, this would appear to be major regulatory relief.
Under California's Housing Crisis Act, a protected unit includes units covered by rent control, a deed restriction that caps rents, or a unit that's been occupied by a low-income renter within the past five years.
To date, there's been a lot of uncertainty around whether protected units destroyed in the recent fires would count as demolished units that need to be rebuilt as low-income affordable housing.
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Builders have been deeply concerned they would be, given the huge effective tax that would apply to wildfire rebuilds.
Under normal circumstances, developers are only going to take on the cost of redeveloping a property if they can add more units and charge higher, market-rate rents for them. Where developers do build below-market-rate units, it's because they're receiving some sort of subsidy or because those units are a required part of a larger, mostly market-rate project.
If rebuilt fire-destroyed housing did have to be rented at prefire rates, "nobody is ever going to rebuild," Mott Smith, a developer in the Los Angeles area and chairman of the Council of Infill Builders, told Reason last month.
Given that protected units include unsubsidized market-rate units occupied by low-income tenants within the past five years (regardless of what the rents were or who lived in the unit at the time of the fires), it's even possible property owners would have to lower their rents on rebuilt fire-damaged units.
Toothless in Practice
By waiving the state's requirement that protected units be replaced with new affordable units, Newsom's order would seem to allay builders' fears that they'd have to rebuild under these burdensome unit replacement mandates.
The trouble is that the city of Los Angeles just passed its own protected unit replacement standards into local law.
Two days prior to Newsom's order, Los Angeles' Resident Protections Ordinance went into effect. It effectively copy-and-pastes the state's protected unit replacement requirements into local law, while also tightening them in some respects.
The governor's waiver does not apply to Los Angeles' new local standards.
So, the primary practical upshot of Newsom's order would be a confirmation that protected units destroyed by fires should be considered demolished units—and, therefore, units that have to be rebuilt as low-income units.
Since Los Angeles' Resident Protection Ordinance so closely mirrors state law and explicitly states in the text that it "shall be implemented consistent with the requirements" of the Housing Crisis Act, there doesn't seem to be any reason to doubt the state and local unit replacement requirements are the same.
Lingering Questions
Newsom's order does contain some potentially ambiguous language saying that state unit replacement requirements are waived "to the extent" that they would otherwise apply to wildfire rebuilds.
It would not be an atypical Newsom ploy to streamline rebuilding efforts by waiving inapplicable state regulations. The governor waived CEQA and Coastal Act requirements for wildfire rebuilds, despite both laws already broadly exempting disaster rebuilds.
In the days and weeks prior to the governor's latest order, Reason repeatedly requested comment from both the state Department of Housing and Community Development (HCD) and the City of Los Angeles on whether state and local law requires fire-destroyed protected units be replaced. Neither has responded.
The most literal reading of Newsom's order is that the Housing Crisis Act's protected-unit replacement requirements apply to units destroyed by wildfire, meaning the city's near-identical rules do as well.
The state requirements are now suspended, but the local rules remain in effect.
Absent any additional action from Los Angeles Mayor Karen Bass or the city council, the upshot of Newsom's latest executive order is to make rebuilding in Los Angeles harder, not easier.
After the Fires, California Policymakers Commit to Dysfunctional Insurance Regulations
Meanwhile, things are going from bad to worse in California's property insurance market, raising the specter of a public bailout of the state's insurer of last resort and more private insurance companies fleeing the state.
On February 11, California Insurance Commissioner Ricardo Lara greenlit a request from the state's badly undercapitalized FAIR Plan to levy a $1 billion assessment on the private insurers that collectively fund the insurer of last resort.
Insurers will be allowed to pass on half of that $1 billion to their policyholders via a temporary rate hike. The other half will have to be absorbed by the companies themselves.
Meanwhile, Lara is resisting insurance companies' own emergency requests for rate hikes in the aftermath of the Los Angeles fires.
Rate Rejections
On Friday, he rejected State Farm's request for an average 22 percent rate hike on homeowners, saying that the insurer had not satisfied state regulatory requirements to prove that this rate increase is needed now.
Lara has asked State Farm to provide information on "what, if anything, has changed for State Farm between June 2024 [the last time the company requested a rate hike] and now that necessitates emergency relief?"
The big change would appear to be the devastating Los Angeles–area wildfires that caused some $250 billion in economic damages and exposed insurers to an estimated $45 billion in losses.
Preexisting Problems
In the years prior to the L.A. fires, California's insurers were already struggling to cope with massive losses from past wildfires that had wiped out a quarter century of industry profits.
State Farm had announced that it would stop issuing new policies in California in May 2023. The state's other major insurers had made similar moves to scale back their California business. Nonrenewal rates have surged, leading to more and more homeowners ending up on the badly undercapitalized FAIR plan.
This insurance market crisis is downstream of California's cumbersome, voter-approved insurance regulations that limit the ability of insurers to raise rates to cope with increased wildfire risks. Those same regulations also require that rate hikes be approved by the state's elected insurance commissioner and that third parties are allowed to challenge requested rate hikes.
A 2023 report from the International Center for Law and Economics found that California has the most suppressed insurance rates in the country and that it takes almost a year for the state to approve rate hikes.
The same ballot initiative that created California's insurance regulations also requires a ballot initiative to change them.
Backing Away From Reform
But in a brief acknowledgment of reality, Lara had issued emergency regulations in December 2024 that gave insurers greater flexibility to raise rates in exchange for a requirement that they issue new policies in wildfire zones.
Those reforms came too little, too late for insurers who now have to cover what is likely the most expensive wildfire in the state's history.
The politics of the post-fire moment are such that neither Lara nor anyone else appears particularly keen on giving insurers more freedom to raise rates on policyholders.
Instead, the state's politicians have gone fishing for more pots of money to shore up the insurance market.
Lara has supported recently introduced legislation that would allow the FAIR Plan to borrow money from California's state-owned Infrastructure and Economic Development Bank. Another California bill would allow insurers to sue oil companies to recover their losses from wildfires.
Other bills introduced in the California Legislature would provide tax-free grants to homeowners to harden their homes to fire risks.
Forever Rebuilds From the Last Fire
If past wildfire rebuilding efforts in the Los Angeles area are any guide, it's going to take a long time for the region to recover.
This past week, the Los Angeles Times published a lengthy investigation of rebuilding progress in Malibu after the 2018 Woolsey Fire. The topline figures are not pretty.
Of the 465 single-family homes that were destroyed in the fire, only 40 percent have been completely rebuilt. Another 192 are under construction or in the planning process, while another 90 were left destroyed.
As with the most recent fires, emergency waivers and regulatory exemptions were supposed to ease the building process. But homeowners complain that a confusing, contradictory tangle of red tape has nevertheless prevented them from starting over.
The Times covers the case of George Hauptman who is still waiting on permission to reoccupy his now-rebuilt home:
They pursued a disaster relief waiver and have now fully rebuilt their home down to bolting in the numbers in their address above the exterior entryway. Yet the city has not issued a certificate of occupancy for the Hauptmans to move in. New fire codes required them to provide more water storage at this house than the previous one. So they bought a bigger water tank, and put it where it best fit. But the city told him the spot straddled the property line with his neighbor. After Hauptman hired a surveyor to prove the tank was on his land, the city said its location still violated setback restrictions.
Reason recently covered the case of Maui, where some 18 months after the August 2023 wildfires, only a handful of new homes have been built. The obvious worry is that this will be Los Angeles' fate as well.
One Idea To Speed Things Along
Writing in The Atlantic, M. Nolan Gray, Nicole Nabulsi Nosek, and Grimes (yes, that Grimes) suggest one way Los Angeles could rebuild faster: allow private third-party reviewers to sign off on building permits.
Los Angeles' permit approvals were already painfully slow before the fire. A flood of fire rebuild applications will only make things worse, despite the tepid promises of permit streamlining from city hall.
Gray, Nosek, and Grimes cite examples of reforms allowing private permit reviewers to step in for overtaxed bureaucrats in Texas, Tennessee, and Florida. The latter state has apparently seen success:
And as of 2021, developers in Florida can request a refund on fees if regulators take too long to decide on a permit—a reform that increased on-time reviews in some parts of the state by 70 percent. Last year, Florida empowered applicants to go to third-party reviewers and inspectors from the start.
A California bill has been introduced to allow third-party permit reviews for smaller projects. You can read Reason's coverage of Texas' reforms and the promise it offers for faster approvals.
Quick Links
- A DOGE task force has been established at the U.S. Department of Housing and Urban Development and has reportedly already led to millions in savings, although details are predictably missing.
- Forget office-to-residential conversions. Hospital-to-residential conversions are the new hot thing, reports The Wall Street Journal.
- New Hampshire is considering a trio of housing bills that would allow accessory dwelling units statewide, shrink minimum lot sizes, and permit residential development in commercial zones.
- Wyoming legislators are considering a bill that would make it harder for neighboring property owners to protest zoning changes in their area. So-called petition rights are often used to stop new development.
- The Arizona League of Cities and Towns is promoting a bill that would make building starter homes modestly easier in Arizona cities, while also capping the price at which the new homes could be sold. Read Reason's past coverage on the league's opposition to past, more liberal starter home reforms.
