Accessory Dwelling Units in California: The Roles of the Private and Public Sectors

Description

This case examines California’s housing crisis and the growing market for Accessory Dwelling Units (ADUs)—secondary housing units built on single-family primary residential lots—within the state. California housing was in high demand but limited supply, and prices were such that many lower- and middle-income people struggled to find affordable housing. As of 2021, the median price for a home in California topped $600,000, more than twice the national level, and the state was home to four of the most expensive residential markets in the country. Regulators reacted by passing several housing bills to subsidize affordable housing, roll back restrictions, and lower other fees and bureaucracy that contributed to the problem. Many believed the best chance to rapidly impact California’s housing issues could be found in encouraging the construction of ADUs on a statewide level. One of the more formidable obstacles to ADU development was the requirement that conforming loans (which accounted for the bulk of real estate lending) meet minimum loan-to-value requirements that were designed for financing primary residences. The case offers background on California’s situation, the rise of ADUs, public and institutional views of secondary housing units, government-sponsored enterprises, and initiatives aimed at ameliorating high housing costs. By following the fictional protagonist, Sandy Martinez, a new MBA graduate working as a business-development analyst at a private mortgage originator in Los Angeles, the case engages students by asking them to make a recommendation for what the private mortgage originator should do in light of the situation. This case is used at Darden in the “Markets, Government, and Society” MBA course, in the module on housing markets. It would also be suitable in elective and Executive Education classes covering real estate, public finance, and courses that emphasize situations in which well-intended policy decisions meant to address one set of problems may constrain solutions to other related problems.

Keywords

female protagonist