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California has gotten so unaffordable that you can now only own the guest house of a mansion you’ll never afford. It’s like renting a tuxedo for a wedding but only getting the sleeves.

In the heart of California’s Silicon Valley, where starter homes cost as much as tech startups, a quiet revolution is unfolding—in backyards. Homeowners like Joyce Higashi are turning their extra space into accessory dwelling units (ADUs) and now, thanks to a new law, can sell these mini-homes. Higashi, who calls her ADU "the ATM in my backyard," rents out her cottage to traveling professionals but could eventually sell it to pay off her mortgage or fund an unexpected medical expense. Welcome to the new frontier of affordable housing—no lottery ticket required.

San Jose is the first California city to take advantage of a state law allowing homeowners to sell their ADUs as condominiums. Inspired by Seattle and Austin, the legislation could mark a turning point for housing affordability across the state. For cities like San Jose, where the median home price is well north of $1 million, this presents a way to add affordable starter homes to the market without building new single-family neighborhoods or high-rise apartments.

But don’t be fooled: selling your backyard cottage isn’t some urban legend. It’s a real solution for two major housing problems—making homeownership attainable for more buyers and providing homeowners with a flexible financial lifeline.

A Starter Home… in Someone Else’s Backyard?

California’s housing crisis is well-documented, but the creativity of cities like San Jose could finally move the needle. "People don’t just want to rent; they want to own their own piece of the American dream," says Rafael Perez, board chair of the Casita Coalition, a nonprofit dedicated to housing policy in the state. He highlights how a policy once centered on renting ADUs is now evolving to support homeownership.

For instance, in Seattle, where selling ADUs as condos has been allowed for years, one-third of new ADU permits in 2021 were for condos. And while $730,000 for an ADU might still seem high, it’s a steal compared to Seattle's median home price of $1.2 million. The difference in cost can be even more pronounced in San Jose, where ADUs are expected to sell for 40% to 60% less than traditional single-family homes.

"Think of it as a starter home—just with a shared driveway," Perez quips.

The concept is simple: homeowners can build and sell their backyard cottages, instantly lowering their mortgage burden. Buyers, in turn, get a more affordable entry point into the market. It’s like a win-win, except no one needs to move to Texas.

ADUs: The Solution We Didn’t See Coming

ADUs have always been pitched as a tool to help with California’s housing shortage. After the state changed laws in 2016 to make ADUs easier to build, the number of permits jumped from around 5,000 in 2017 to nearly 25,000 in 2022. But while more people were building these backyard units, many would-be homeowners were left out of the equation.

"Oftentimes, people building ADUs already own their homes and have enough income to finance construction," says Perez. “What was missing was the homeownership angle.” That’s where the idea of selling ADUs as condos came in, giving buyers a chance to own a slice of the pie without needing a seven-figure bank account.

But it’s not just the potential buyers who benefit. "The No. 1 reason we see people wanting to sell their ADUs is to eliminate their mortgage," Perez explains. Take a semi-retired couple nearing the end of their careers: rather than working another 10 years to pay off their house, they can sell an ADU and clear the debt.

And in places like Austin, Texas, the results have been transformative. ADU laws enacted in 2015 tripled the number of units being built, offering homeowners a way to unlock equity and giving homebuyers affordable options in a hot market. "Flexibility is key," says Jake Wegmann, a UT Austin’s School of Architecture professor. "Even if ADU construction slows in the short term, having these laws in place means cities won’t be playing catch-up during the next housing boom."

Why ADUs Could Be the Future of California Housing

The big question now is whether more California cities will adopt these rules. San Jose’s move has already piqued the interest of several other cities, and the state’s ambitious housing goals make ADU sales a tempting strategy.

A separate state law, Senate Bill 9, already allows homeowners to subdivide their lots and sell off part of their property, but it requires certain spatial and access accommodations. Selling an ADU as a condo offers more flexibility: you can keep the shared driveway, split the yard however you like, and move on with your life—no need to hire a surveyor.

And with housing affordability now affecting even tech workers in places like San Jose, local governments are looking for ways to keep their talent rooted in the community. "We can’t have our best and brightest moving away just because they can’t afford to live here," Perez says. “This is about creating long-term solutions, not quick fixes.”

The ATM in Your Backyard

Back to Joyce Higashi, who’s enjoying her extra income but is also keeping an eye on the future. Selling her ADU would offer a financial cushion she never expected when she first started renting it out. "It’s easy," she says with a laugh. "I call it the ATM in my backyard."

And she’s not alone. In San Jose and other cities across California, homeowners and buyers alike are realizing that the path to housing affordability might just be through the garden gate.

Bottom line: As more cities opt into the new state law, selling backyard cottages could become a major driver of housing affordability in California. Homeowners win, buyers win, and no one needs to build another mansion.

HEADLINES

Texas-Sized Apartment Boom: In the third quarter of 2024, Texas dominated the U.S. apartment market, accounting for approximately 15% of the more than 160,000 new units delivered nationwide. Austin led the country with over 9,800 units completed, followed closely by Dallas with about 8,500 units. The South region, including Texas and other markets like Atlanta, Charlotte, and Raleigh/Durham, significantly outpaced other regions in new apartment deliveries, with over 40,900 units compared to 14,300 in the West and 11,185 in the Northeast. The Midwest region saw comparatively modest growth, with Minneapolis leading at just over 2,000 new apartments (RealPage)

Bubble Trouble in Miami: According to the UBS Global Real Estate Bubble Index 2024, Miami tops the list of cities with the highest real estate bubble risk, experiencing a nearly 50% increase in real housing prices since late 2019. The analysis, which considers factors such as price-to-income ratio and mortgage-to-GDP ratio changes across 25 major cities, reveals that while bubble risks have eased in some global metropolises due to high interest rates and tough financing conditions, Miami's luxury market and booming stock market continue to fuel potential instability. Tokyo ranks second in bubble risk, while other cities like London, Hong Kong, and New York have seen their risks decline as real home values drop. (VC)

Contractor Roulette: A recent survey by Clever Real Estate reveals that one-third of homeowners would consider hiring a contractor with a questionable reputation to save money on home repairs and renovations. Experts warn against this practice, emphasizing the importance of vetting contractors thoroughly, especially after natural disasters when fraud risk increases. To avoid potential pitfalls, homeowners are advised to check reviews, references, and credentials and watch for warning signs such as excessive upfront payments or deals that seem too good to be true. (CNBC)

BY THE NUMBERS

4%: A CBRE Econometric Advisors analysis reveals that changes in the 10-year Treasury yield significantly impact real estate capitalization rates, with varying sensitivities across asset types. Industrial assets show the least sensitivity, while retail assets are the most affected. CBRE forecasts a soft landing for the U.S. economy as the Federal Reserve begins to cut interest rates. Treasury yields are expected to average below 4% for the rest of 2024 and decrease further in 2025. This scenario will likely put downward pressure on cap rates, with industrial and multifamily rates expected to stabilize at 4.5%, office at 5%, and retail at 4.6% in the long term. The study emphasizes the importance of considering broader macro drivers and individual asset selection for investors in the current economic cycle. (CBRE)

84%: Recent strong economic data, including robust job growth and moderating inflation, have led experts to reassess the Federal Reserve's anticipated interest rate cuts. While a 25 basis point reduction in November is still likely, with an 84% probability according to interest-rate futures, some economists argue that the Fed may have already cut rates too aggressively. The Fed aims for a soft landing, reducing inflation without causing an economic downturn, but faces challenges in balancing its dual mandate of low inflation and strong job growth. As the economic landscape evolves, the Fed's decision-making process remains scrutinized, with experts divided on the necessity and extent of future rate cuts. (The Street)

A Quarter: According to a Redfin survey, nearly a quarter of prospective first-time homebuyers are holding off on purchasing until after the 2024 U.S. election. With uncertainty swirling around housing policies from both Kamala Harris and Donald Trump, plus economic jitters and timing concerns, buyers are opting to wait and see who wins before committing. Personal finances and potential rate cuts also play a role, but nothing says “I’ll wait” like an impending political showdown. (Redfin)