Ezra Klein and Derek Thompson have published an excellent new book titled “Abundance”. The broad message of the book is that the US has hampered its growth and potential with excessive regulations and bureaucratic hurdles in essential areas like housing, infrastructure and clean energy. These policies have been well intentioned, but self sabotaging in many ways and the current Democratic party is now grappling with how to achieve its broader goals without doubling down on these same policy ideas.
This book focuses a good deal on California and its current policy entanglement as it tries to maintain its status as one of the largest economies in the world while also trying to balance social and climate initiatives. As a California resident who has personally encountered many of these controversial issues I want to tell my personal story of “abundance” because it’s a perfect microcosm of Klein and Thompson’s message.
***
In 2017 I settled on my first home purchase based on the thinking that housing (especially with a mortgage) looked relatively attractive when compared to low yielding bonds. I had achieved the so-called “American dream” as I forked over $700,000 for a termite eaten house that hadn’t been updated since 1975. We knew we had bitten off a project, but we had no idea how bad our experience with the local and state government would be. The house was just 1500 square feet with a detached garage that we planned to knock down and attach to the main structure. We were on half an acre with some sloped lot and a very private road. The lots behind us and in front of us were 5 acres of empty land. The lots on our sides were largely undeveloped with small 1500 square foot homes with at least 0.5 acre of property between us. The road in front of us was a single lane road leading to two other houses. Only a handful of cars drive this road on a daily basis. Given the house’s location just 1.5 miles from one of the best beaches in CA it was hard to believe it wasn’t packed in with houses. And without having any knowledge of the local zoning laws one might assume that there would be virtually zero impediments to building. Boy was I wrong.
When we processed our initial plans with the City were were informed that the road in front of us was not the actual 15 feet it measured, but was treated as a fictional 35 foot road in our zone. This meant the entire front 25% of our house and garage were inside of the front setback and could not be remodeled. We couldn’t even add within the 5 foot space that separated the garage and the main house, nevermind that adding anything there would have zero impact on anything relevant to reality since there was already square footage on either side. We had a seasonal creek on part of the lot as well which required a 50 foot setback from the drip line. We were informed that that meant the 0.25 piece of acreage to the east could not be touched and that 25% of the garage was also impeding that setback. We could not build up because the average lot slope exceeded certain limits – a rule intended to protect the views of beachside residents – nevermind that we were on the back side of the slope and didn’t have an ocean view. Instead, we had a nice view of the the largest interstate in the country and building up would be a benefit to everyone around us whose view of this monstrosity would be eliminated. The City proposed we obtain what’s called a “variance”, an unusual exception to the rules where the homeowner cannot build due to updated rules. We would have to build a case over 6 months and present our case to the City Council. I spent hundreds of hours on this in the ensuing months not knowing the City would change the rules later….
During this time I became good friends with the developer who owned the 5 acre parcel behind me. He was trying to put just 5 homes on this huge lot, but he was running into many of the same problems we had. Except he was dealing with it at a much greater scale. The last update I got from him was during a 6 month bird survey he was being required to perform. By this point I was intimately familiar with every bird species that lived nearby. Aside from the occasional Cooper’s Hawk there was nothing interesting. I can’t imagine why a bird survey would be required, let alone a 6 month one. Anyhow, he was exceedingly compliant and the City slowly whittled his project down from 5 to 4 to 3 homes. This treatment took 5 full years and the terms of his investment agreement expired and he was forced to put the lot on the market a few years ago. I’ve since gotten to know the new owner, a wonderful family of 3 with a young son who wants to build a single 3,000 square foot home on a 5 acre lot. He is currently 24 months into his own permitting extravaganza.
During all this time my own experience grew from being crazy to truly insane. We had been told we could add above our garage because it was within the upper limit of the slope requirement if we got our creek setback altered. But then we were informed that the drainage easement on our title was actually a biological preserve. Nevermind that the creek is dry 95% of the year and is almost entirely dead 80% of the year. But there was a struggling willow tree in the creek which the City claimed could make it a protected lagoon. But they would need me to get biological testing done to prove this. Weirdly, a biologist then came out and $5,000 later they informed me that if this dying tree expired then the area would be an easement and not a protected lagoon. Mind you, the City never explained how or why they reclassified this land as a protected lagoon when it had always been called a drainage easement. But that tree magically disappeared and then the City magically determined that the land was what my title always said it was. It all felt like a scam based on legal determinations with fictional criteria that almost no one agreed on.
But the easement still had its own 25 foot setback and the City agreed to let us build within that setback so long as the California Department of Fish and Wildlife agreed. But DFW would not agree. They wanted no involvement in any of this unless the city would agree to perpetual mitigation of the easement. But the City didn’t want to be responsible for that. But now they were in breach of part of their own municipal code relative to the variance requirements. The City laws were so complex that they couldn’t comply with the state laws which now held up a small remodel in a creek that wasn’t really a creek that was impeding an imaginary setback on square footage that was above the footprint that had existed for 40 years. And keep in mind that we hadn’t even started our process with the EPA and the California Coastal Commission, two larger entities that we would be required to get approval from because our zoning laws placed us in the same regulatory framework as a house that is on a California beach. Nevermind that we are a full 1.5 miles from the beach and cannot even see a beach.
I could go on with these stories for days as I eventually ended up building half the house personally, due to the timing around our first child. I would wake up at 5AM and work my investment job until 3PM every day until donning a construction outfit every afternoon and evening for 12 months. The stress, the nearly lost limbs, the time, the endless frustrations navigating the ongoing regulatory process. I could have written an entire book about those adventures and the hilarious hurdles I had to leap over. You wouldn’t believe half of it. But before we even got to the building part the City eventually folded on everything because they couldn’t comply with DFW and after 2 years they approved a building permit only after we wasted tens of thousands of dollars on things we should have never had to do in the first place. Any reasonable process probably could have approved our project in 3-6 months and encouraged MORE square footage and perhaps even ways to add housing to the existing lot, given its size. Instead, we got nothing but pushback about any way to add livable space and an area that is in desperate need of more livable space.
The craziest part is my wife is very Liberal. I am generally Moderate and try, as many of you know, to understand both sides of the political spectrum with the (naive?) hope of finding common ground. But as this process dragged on I found myself becoming a near Libertarian on private property regulations. The process was so much worse than I could have ever imagined and it made California’s housing problems so abundantly obvious – the rules make sense at a broader macro level, but make no sense at all on a micro level. And then the rules are so complex that the building departments don’t even understand half of them. And the rules at the local level don’t even comply with many of the rules at the state level, which don’t comply with the rules at the federal level. It’s all gotten so complex that I am not sure anyone knows how to unscramble the egg.
The irony in all of this is that it all turned out to be enormously beneficial at a personal level and counterproductive at a broader macro level. When Covid broke out my house appreciated by 50%+ in a few years, in part because of the huge supply shortage. I was able to refi at 2.5% and my monthly mortgage on a $2.5MM house is now so low I am embarrassed to even say what it is. In other words, all of this regulatory madness, while well intentioned, has exacerbated inequality and locked out young people from being able to even fathom the American Dream I achieved just 8 years ago. And all for what? I don’t honestly know. It makes no sense.
And don’t get it twisted – I am very aware that I am a rich guy complaining about a process that ultimately made me richer, despite the personal frustrations I encountered along the way. But that’s exactly the problem. I shouldn’t be rich from this. And other people hoping to live where I live shouldn’t feel poor because of this. But they do, in part, because there aren’t 100 homes around me that could have made the area more affordable, homes that, if they existed, would have more evenly distributed my wealth gains across more people. And that’s due to the fact that the only thing that’s been built around me in the last 50 years is the 1,000 foot addition I built, mainly because I was stubborn enough to fight thru all the silly rules that tried to make it impossible.
The worst part is, modern life is exceedingly complex as it is. Me and my wife both work while trying to raise two kids. I am incredibly grateful for everything I have, but as I get older I find myself knowing that complexity breeds the necessity for simplicity. The simpler I can make everything in my life the more I can handle the madness of the broader complexity. I increasingly want to throw away everything I own because owning things adds to complexity. And I think most people feel this complexity at some level. So, when we see the rules and regulations constraining life becoming increasingly complex it feels like the government is working against us, not for us. And where does it end? Does it end? Or are we just tying ourselves in regulatory knots just for the sake of covering our own butts from various forms of litigation while adding laws that are cloaked as innovation that are nothing more than red tape on top of red tape. I don’t know.
What I do know is that my situation is unique. California is unique. And I think the rest of the country looks at California and says “don’t bring that to my backyard“. And so the pendulum has swung. In a big way. In a way that many people find uncomfortable. But we need to find some better semblance of balance here because we can’t keep compounding the complexity.
I don’t know the right answer. I am not promoting a growth initiative or a climate initiative. I care about both, but above all else I want a world where my children can grow up without feeling stressed about things that shouldn’t compound what will be an inevitably more complex world. And so as I read “Abundance” I find myself nodding my head, not because I want to become a neoliberal who rips out all the well-meaning regulations. But because life is complex enough as it is and only getting more complex. And we need to establish processes to navigate this complex world without driving us all mad. I think the majority of people out there feel this, even if they’ve been priced out of the experience I was (un)fortunate to endure. And that breeds the necessity for simplicity, especially in the ways we regulate one another’s actions.
NB – This post might not be specifically related to portfolio construction, but it is surely tangential. In my opinion this whole narrative is part of why simple portfolios are better portfolios. A simple portfolio streamlines your financial life in a way that helps you better optimize all the other complexities in life.