Quick Take
Santa Cruz County homeowners embraced backyard cottages after state and local reforms made accessory dwelling units, or ADUs, far easier to build, but that boom is already fading. Rising construction costs, high interest rates and other economic headwinds have sharply slowed new ADU projects, making it harder for the county to meet its housing goals.
When Anderson Shepard and Elizabeth Whiteley built a backyard cottage at their Live Oak home in 2024, they joined a wave of Santa Cruz County homeowners taking advantage of easier rules for accessory dwelling units.
The couple had wanted to build the unit years earlier to help pay their mortgage by generating rental income, but abandoned the idea after running into high costs and a daunting permit process.
“We gave up once we started looking into the permit process,” Whiteley said.
When they revisited the project after the pandemic, state and local housing reforms had made it much easier to move forward.
“It was pretty clear that something had changed,” Whiteley said.
Around 48% of permits to build accessory dwelling units, or ADUs, were issued in the county’s unincorporated areas between 2021 and 2024, according to a Lookout analysis of annual housing progress reports from 2010 through 2025.
Around half of Santa Cruz County lives in unincorporated areas, including Aptos, Soquel and the Santa Cruz Mountains. Live Oak, where Shepard and Whiteley live, has seen the lion’s share of ADUs, accounting for nearly a third of permits, followed by Aptos at around 14%.
The couple’s 550-square-foot ADU, with one bedroom, a bathroom and a kitchen, first housed Shepard’s parents before his father passed away. The small home, which cost around $325,000 to build, often houses Shepard’s mother or friends, but the couple is considering renting it out when it isn’t in use. If rented, the law requires ADUs to be contracted for at least 30 days.
“When we decide to rent it and provide that additional bed into the Santa Cruz inventory, we will have to make some sacrifices in sharing our space,” Shepard said. “It’s different than just cut and dry, here’s a new apartment.”
But now, Santa Cruz County’s granny flat surge has slowed, which could complicate housing goals.
Building permits for ADUs fell by more than half in 2025 from 2024 in the county’s unincorporated areas, according to Lookout’s analysis.
“It’s not helpful to meeting our goals,” said Stephanie Hansen, assistant director at the county’s planning division. She said economic conditions, such as high interest rates, construction costs and insurance, are likely weakening ADU demand.
“Things really do have to come down before we can see that trend turned around,” she said.
ADUs are seen as part of the answer to a housing crisis that has made rent prices in Santa Cruz the least affordable in the nation. The county expects ADUs to make up around half of new single-family housing units, Hansen said.
“It’s one tool of many,” Hansen said. “We’ve done so many things to support ADUs because they are viewed by electeds and the community as a no-fuss way to build density.”
California requires the county to plan for 4,634 new housing units between 2023 and 2031, including ADUs, multifamily units and single-family homes. The county has permitted around 6% of those units as of the end of 2025. The state requires new housing units under the so-called Regional Housing Needs Allocation, a requirement Sacramento strengthened in 2018 to tackle the state’s housing shortage.
Hansen said even the runup to 2024, the first year 100 ADUs got permitted, fell short of what the county would like.
“We really do need to see more,” she said. “Even that wasn’t nearly enough to get us there.”
ADUs are helpful in creating denser housing and adding rentals to the market. Yet they can’t easily satisfy the state’s requirements for affordable housing.
Hansen said the county estimates that roughly half of ADUs will fall into lower-income tiers, but she said more multifamily developments, such as apartments, are needed to make significant progress on that front.
“If we’re going to stand a chance of making those [Regional Housing Needs Allocation] numbers and more importantly increase the supply of units, especially affordable units, then we’re going to start having to build some bigger projects,” she said. “ADUs are not going to save our housing supply woes.”
Still, a slowdown in ADU construction means the county can’t lean as heavily on homeowners to chip away at the housing shortage.
It’s unclear if there’s one main reason that ADU permits fell sharply in 2025. Local builders say there are various potential reasons for the slowdown, including an exhaustion of pent-up demand, high borrowing rates, construction costs and tariffs.
In 2025, President Donald Trump’s tariffs, which are taxes on imported goods, hit construction materials, including steel, drywall and Canadian lumber. The effective tariffs on construction materials reached nearly 28% by mid-2025, according to Oxford Economics.
“The immediate impact on us from the tariffs was the withdrawal of interest in doing any project at all,” said Eric Lamascus, owner of Elite Construction, which started an ADU division in 2020 to meet demand. “The phones stopped ringing overnight.”
The investment case to build an ADU to rent out has also weakened. Before tariffs, prices were already skyrocketing: California’s construction costs, including labor, increased around 38% from 2020 to 2024, according to the California Department of General Services. Local builders say ADU costs now range from $500 to $1,000 a square foot.
“It’s rarely about income generation now,” said Marc Susskind, owner of MS Builders. Instead, he said ADU projects have increasingly focused on housing family members.
Interest rates are another drag on construction, said Taylor Darling, co-owner of Santa Cruz Green Builders. “Nobody that has a 2.5 or 3% interest rate on their mortgage is going to want to touch that interest rate and refinance to be able to pull money out to build an ADU,” he said. Mortgage interest rates ranged from 5.79% to 6.48% in early June, according to Freddie Mac.
And ADUs can be prohibitively expensive in much of the county due to pricey septic upgrades, which can cost $50,000 or more, Darling said. A large share of the county’s unincorporated population is on septic, meaning they aren’t connected to a sewer system and treat their own wastewater on site, including homes in the Santa Cruz Mountains and parts of Aptos and Soquel.
Under rules starting in 2023, the Santa Cruz County Board of Supervisors required septic evaluations on ADUs, which can lead to expensive upgrades if a sanitation system doesn’t have enough capacity. The decision followed updated California regulations on septic systems.
Darling said a homeowner recently canceled an ADU project because septic upgrades would have cost up to $100,000.
“As soon as that came to light, the ADU was just over,” he said.
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