California Leads the Way for Production of ADUs
A study released by the Joint Center for Housing Studies of Harvard University (JCHS) found that production of accessory dwelling units (ADUs) in California spiked after statewide policy changes, supported by the CALIFORNIA ASSOCIATION OF REALTORS®, were implemented. From 2016 to 2022, production increased from 1,269 units to 24,000, an increase of elevenfold. Before these policy changes were implemented, ADUs accounted for approximately one percent of new housing being built, and in 2022, ADU production accounted for about 18 percent.
California law allows for the development of ADUs by-right, meaning property owners who follow existing zoning codes can build and develop on their own parcel of land without going through a discretionary approval process. Local municipalities are required to allow for the construction of ADUs by following a standardized state approach, given less autonomy in how they decide upon ADU development.
JCHS found that states which don’t implement ADUs by-right approval have significantly less development than states with this policy. The study noted a 2020 review of MLS listings with ADUs. In northern states that generally lack by-right local approvals, listings grew only from 2.7 percent to 4.1 percent. However, in sunbelt states with more amenable policies, listings grew from 4.3 percent to 9.2 percent.
The benefits of by-right policy may not be merely limited to an increase in overall production. ADU development also has economic, social, and environmental benefits for households and families. The JCHS report states that homeowners investing in the development of an ADU potentially experience property values increases by up to 25 percent with the average return on investment around 10 percent.
As for societal benefits, lower-income households seeking access to neighborhoods, schools, and resources that otherwise would have been priced of the homeownership market, could have the opportunity to rent ADUs in a more affluent market. Environmentally, the JCHS study points to 2013 Oregon Department of Environmental Quality survey finding “that an ADU’s median living area per person is 44 percent lower than newly constructed single-family residences.”
Even with the policy changes and potential benefits of ADU production, barriers still exist to increasing the number of units. Referencing a 2020 survey of California homeowners, the study stated financing as “the number one barrier to more widespread ADU construction.” Some lenders are more stringent in their willingness to finance ADU construction, and government regulations can also serve as an impediment.
However, action by the federal government to loosen some of those regulations might change the current production trajectory. The U.S. Department of Housing and Urban Development (HUD) announced that the Federal Housing Administration (FHA) will allow for lenders to include potential ADU rental income their mortgage applications. The announcement by HUD includes renovation loans, under the 203(k) program, which could be an appealing option for homeowners with little savings or equity in the home. These expanded financing options could lead to more ADU development per the study’s findings.
The JCHS report concludes that for other states to experience substantial increases in ADU productions, by-right approval policies are an essential foundation. California serves as a national leader on ADU development, attributed largely to its statewide policies. And while ADU production alone will not solve the state or nation’s shortage of housing, additional units serve as another tool in overall housing production landscape.