People in California are building tiny homes in their backyards. This trend has become an example for towns across the U.S. that are having trouble finding enough housing.
The area where high school math teacher Kelly Abbott lives is one of the most expensive in the country. She thought she got a great deal when she bought her single-family home in the Bay Area for less than $385,000. for the first time.
She had no idea that her good deal would become her golden ticket in the end.
Some of the strictest single-family zoning laws in the country are in the Bay Area, which is where Alameda is located. Historians say that these laws have helped keep racial housing segregation going in the U.S. A 2020 study from the University of California, Berkeley found that 85% of residential land in the Bay Area is zoned for single-family homes only. This means that denser types of growth, like apartments, cannot be built there.
Because of this, there aren’t many cheap houses in the area. Real estate website Zillow Z -1.71% ZG -1.76% says that the average home in Alameda was worth $1.2 million at the end of October.
Abbott had an idea after living in her house for seven years. She had heard that more people were building accessory dwelling units (ADUs) in their backyards. An ADU is a separate living unit that is attached to an existing single-family lot. A web search took her to a business that built ADUs.
She was interested. To keep her choices as broad as possible, she was a full-time single mom. Could she make the house bigger by adding an ADU that is connected to her main house? She could build a separate ADU in the garden and rent it out, or she could live in the ADU and rent out the main house.
She called a mortgage loan officer she had worked with before, and they told her that the value of her home had gone up to $850,000. This meant that she could refinance her mortgage to a higher value and use the extra money to build an ADU. When Abbott refinanced, her debt went from $350,000 to $600,000, and the interest rate went up to about 3.6%. The cost of building the ADU was about $215,000.
Abbott says that her home’s value has almost tripled in just over a decade. The main house and the ADU are now worth more than $1 million. About 60% of her mortgage payments are now covered by the rent from her ADU. She’s on track to pay off her mortgage faster than she was before the swap.
And her yard is still big enough even with the ADU on it.
Many people in the U.S., including Abbott, are adding extra homes to their single-family lots. This is seen as a small step toward solving the country’s ongoing housing affordability problem by housing advocates.
Price of homes and interest rates are too high for many Americans to pay. Zillow did an analysis in February that showed the average family would need to make about $106,000 a year to be able to buy a $343,000 home without going over their budget. For its study, the company used a mortgage rate of 6.6% as a starting point.
Rates and home prices are even higher now: As of Thursday, the 30-year mortgage rate was over 7%, and the average price of a home in September was around $404,500.
California builds the most ADUs.
ADUs are a popular way to get around California’s strict zoning laws that make it hard to build multifamily homes. California is one of the most expensive states in the country.
The California Department of Housing and Community Development says that in 2023, one out of every five applications for a building permit in California was for an ADU. When it came to the amount of ADU units that could be built that year, Los Angeles had the most.
People in other cities and states are also excited about the idea of building more homes without changing the local zoning rules. Cities and towns in New Jersey like Jersey City, Maplewood, and Montclair, as well as states like New York and Vermont, are doing more to get people to build an ADU on their land.
Building an ADU can cost anywhere from $40,000 to $360,000, according to the home improvement website Angi ANGI -1.71%. The price can change based on things like whether the unit is linked or detached, and whether the garage is being turned into an ADU.
The New York program, which was launched last year, gave 15 eligible homeowners low- or no-interest capital loans and construction financing to build or convert ADUs on their own land. New York City’s Department of Housing Preservation and Development told MarketWatch that about nine homes were found. Four of them have started the process, and five are still waiting to hear if they meet the income requirements.
An expert from the left-leaning Urban Institute, Yonah Freemark, told MarketWatch that the current ADU movement is not really a brand-new idea. “We’ve had ‘granny flats’ in our backyards for many decades,” he said.
What’s new is that states and cities are now actively trying to encourage the building of ADUs, seeing them as a way to increase the number of homes available in places that are having trouble meeting demand.
The recent rise in interest in ADUs is just the latest step that U.S. lawmakers are taking to try to find a solution to the lack of affordable housing. The Mortgage Bankers Association says that there is a shortage of about 1.5 million homes because more people want to buy them than are available.
Some of the things that have been tried in the past are turning empty factories or office buildings that aren’t used into homes, changing the current zoning rules to allow for more units, and building townhomes with two to four units in one building to increase density.
Some towns in the South of the United States have come a long way in building more homes. So many homes are being built in Austin, Texas that supply has risen above demand, and home prices have dropped. Real estate company Redfin RDFN -3.90% says that the typical price of a home sold in Austin on November 10 was 1.3% less than it was at the same time last year.
Even though these efforts are making progress, there are still problems. Americans need to buy homes badly, especially in big areas where they work, but there aren’t enough for everyone.
Problems that come up when building an outdoor unit
Different places have different zoning reforms. In many big cities, where people have a lot of money locked up in their homes, there has been strong opposition to building big apartment buildings.
Building an ADU isn’t much easier when it comes to paperwork, but many people would rather have one than a new apartment building completed. Anthony Dedousis, founder and CEO of Revival Homes, a business based in Los Angeles that builds and finances ADUs, told MarketWatch that the steps are very different from town to town, city to city, and state to state.
In order to get a building permit on your own, Dedousis said, you may have to wait anywhere from one to six months. He said, “If we are just converting a garage, I usually tell customers to expect a four- to six-month process” for getting the necessary permits. “But people should plan on six to nine months if they are starting from scratch.”
“So it takes one to one and a half years from start to finish,” Dedousis said.
Some California homes have built illegal ADUs without the right permits to avoid delays and paperwork. A study from Stanford University that came out in June found that between 2016 and 2020, almost 80% of the ADUs built in San Jose did not have the right permits.
The process of filing for and getting permits has been a pain point for all builders, not just people who want to build an ADU.
James Gallagher, founder and CEO of GreenLite, a company that aims to make the permit process more efficient, told MarketWatch that the process needs a lot of changes in both blue and red states. He said it makes sense for local officials to look over building plans to make sure they meet fire safety and electricity standards. However, the process can be hard to understand at times, and getting approvals can take a long time.
“The main problem of inefficiency stays the same whether red states focus on lowering regulatory barriers or blue states focus on affordability and access,” Gallagher said.
ADUs sold as separate property
California lawmakers have also been introducing new rules to allow for more ADU development. The changes have created more incentives for homeowners to build tiny homes in their backyards.
Among the numerous ADU-related bills that California Gov. Gavin Newsom has signed into law, one enacted in January has changed the calculus for some homeowners by allowing ADUs to be sold separately from the primary dwelling unit. In other words, a homeowner can build a backyard ADU and create a condo that they can sell separately.
The fact that the ADU can both provide rental income and potentially be sold as a separate house made buying a property with an attached ADU all the more compelling, Karina Ramos, a 48-year-old lawyer from Los Angeles, told MarketWatch.
Ramos, a first-time homeowner, bought her home in the West Adams neighborhood of Los Angeles in 2022 for $1.12 million. The home came with a garage that the previous homeowner had been in the process of turning into an ADU, and they handed Ramos the documents so she could start construction. The clincher: The paperwork and permits had already been approved.
“I was renting before I bought, and so I know the market in L.A., and I just figured this is a great advantage to be able to have this as a guest house,” Ramos said. “But, more importantly, to help with the mortgage.”
Ramos enlisted Dedousis to help build and finance the ADU, which wound up costing her about $130,000. She plans to rent out the ADU to a local university student or another tenant she is able to trust, since the person will be living in her backyard. She expects to charge about $2,200 a month for the studio, which is in line with the median price of a studio apartment in Los Angeles. The median rent in West Adams was $2,425 as of November, according to Zumper, a rental platform.
The rental income would cover about 40% of her mortgage. And she would be adding to the city’s housing supply: 78% of the residential land in “housing-starved” greater Los Angeles is reserved for single-family homes, UC Berkeley found in a 2022 study.
Some people really want ADUs when they buy a house.
Some people want to buy homes with ADUs because they can be used as rental units and bring in extra money. A study by Freddie Mac found that the percentage of open listings with ADUs rose from 3.5% in 2009 to 6.6% in 2019.
But there aren’t as many homes with ADUs on the market right now because there aren’t as many houses in general. The real estate company Realtor.com says that in September, only 3.2% of all listings for sale had an ADU mentioned in the description.
The median listing price was almost 55% higher than the median price of similar homes that didn’t have ADUs. The company said this was partly because houses with an ADU have more square footage.
A senior economic research analyst at Realtor.com told MarketWatch that homes with an ADU tend to be more expensive because buyers pay for the square footage of the extra living room as well. “But buyers can get around this by renting out the extra space or adding a family member to their home.”
(Realtor.com is run by Move Inc., a division of News Corp. The company that owns BourseWatch is Dow Jones, which is itself a part of News Corp.
A less controversial way to deal with the housing shortage
People like Ramos and Abbott are working to build more homes in parts of California that are known as “NIMBY” (not in my backyard), which is a term for people who are against local growth like affordable housing.
Freemark of the Urban Institute said, “It’s still going to be a few years before we likely see a whole lot of them being built.” People on the East Coast are excited about ADUs. He also said, “California has really taken the lead on this issue.” He added, “Folks on the East Coast are just a bit behind the curve,” but they are making up time.
In the end, ADUs are, at least for now, a more widely accepted way to get around the fact that there aren’t enough homes on the market because of strict zoning laws. With homeowners pushing back on zoning reform that would allow for denser housing, the market and local officials are pushing a less controversial, alternative way of bringing more rental and for-sale units to the market — and it’s helping all parties involved.
ABC, the Alameda math teacher, is happy that she built an ADU. She said it gave her and her 9-year-old child more choices.
She hasn’t raised the rent since her tenant, a former student of hers who is now a police officer, moved in. He said, “I love her; she’s like a daughter to me.”
