Housing markets: The spectre haunting San Francisco
economist.com
economist.com
I am one of these SF oligarchs, and I benefit from high rents of
both types. Nevertheless, I have long called for an end to the
rent-seeking. To me, the problem started when the boomers of
old voted themselves two enormous market distortions over 30 years ago.
Proposition 13 was sold as a means of keeping granny in her home,
but it does not particularly benefit the elderly, the sick, or the
needy. It benefits land owning incumbents (like me) at the expense
of everyone else. Kill it. Start with the grotesque subsidy for
commercial property, and then phase out the residential subsidy.
Not to be outdone, SF renters voted themselves a rent control
ordinance. This also does not particularly benefit the elderly, the
sick, or the needy. Like Prop 13, it benefits one thing only -
incumbency. I know fairly wealthy 50-somethings who have rented
apartments for decades, and now pay a third or a quarter of market
rates thanks to rent control. They keep these now as pied-a-terres,
while they own comfortable homes in Marin or the wine country. For
each one of these old renters, there are ten smart ambitious young
people desperate to contribute new creativity and energy into the
community if they could just find a room. Only the wealthiest of
these can compete for the few remaining market rate units, and they
must pay plenty of both kinds of rent, to people like me.
This may be seem like daydreaming, but I hope Governor Brown and SF
can someday create a grand bargain. Kill Prop 13 AND rent control
with the stroke of a pen.
As for overall supply and demand, I would support a state law that creates
1 - an estimate of statewide population growth
2 - a requirement that every municipality periodically rezone to
accommodate a portion of that growth proportional to its current
size; or
3 - pay another municipality to take its share
This would create something like a reverse cap and trade system to
manage the supposed externalities of growth. This way, NIMBY cities
would have to pay growth-friendly cities, and NIMBY voters would have to
pay for their selfish rent-seeking behavior. Who knows? There might even
be less of it. [1]
The city would have to zone for the growth, or trade for credits. But zoning isn't the same as construction. It's hard to imagine an alternative without putting the city in the construction business, but it opens up loopholes. The existing system of "housing elements" http://www.hcd.ca.gov/hpd/hrc/plan/he/ seems broadly similar, and leads to some strange planning decisions.
> "...it wasn’t a proud day for the council because they’re basically saying it’s a scam and a shell game, but they’re voting for it."
I remember my conservative/blue collar father breathed a huge sigh of relief when prop 13 was passed. Before prop 13 property taxes were kicking older/retired/sick/middle income people out of their homes--yearly.
If you are lucky and can buy a home in the Bay Area--believe me forced retirement comes pretty quick.(This goes 10 fold for non-union workers). Getting old sucks! Having to get rid of a house you maintained for years because you can't afford the property taxes is criminal.
I was a child, but state and local taxes were completely out of control. Home owners listened to every angry word Howard Jarvis spewed out. Even as a child, I knew that angry man was right.
(To be completely honest; I still think property taxes are too high. All those bonds and temporary scare tactics add up. It's almost like people don't realize just because some politician's pet project looks good in the ballot box doesn't mean you don't need to pay for it? )
I know rents suck. I don't have any respect for people who make their living off renter either--yes, I think it a horrid way to make money! If I pissed off a Landlord, all that comes to mind is a image of Eddie Murphy behind bars on SNL--repeating, "I hate my landlord!"
That said, I don't think rents would go down if they got rid of prop 13. Why--because people are greedy bastards! Rah-rah Capitalism!
What? This only happens if you've made astronomical capital gains on it. Big deal, you're set for life -- just not in SF.
This is why CA has enormous debt and swaths of areas that have gone bankrupt. It's not sustainable.
Get rid of Prop 13 (or raise the limit) and rent control. I'd say cap it at 5% because if inflation is higher than that, well that's on the Federal Government more than local.
SF isn't making more land and they're also making it impossible to build up. Hell, my buddy looked into adding a deck onto his house. After doing research he figured it wasn't worth it (some people face years of delays getting neighbors to sign off on a deck on their own f'ing property).
Reading that, I can't help but think that the canonically best methods for how to "build and design cities" have been pretty well understood for decades [0], if not much longer [1]. We in America have just been doing it wrong on purpose for quite a while (perhaps in order to goose suburban construction and automobile sales?) So the problem isn't lack of knowledge-how, but rather one of political organization to wrest control of the built environment from the groups and organizations that presently control it.
[0] http://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_Ame... [1] https://news.ycombinator.com/item?id=8090190
Judging from the people driving up and down 101 with flags flying, the people wearing 49ers jerseys year-round in San Jose, the big BBQs hanging off the big trucks in the parking lot of games, and the truck commercials that litter televised football, the new car-centric location suits the football team nicely.
I'd be much more upset if the SF Giants decided to move out of the city!
[1] http://www.mercurynews.com/ci_23414780/49ers-new-stadium-cos... [2] http://www.bizjournals.com/sanjose/news/2015/03/11/tibco-sel...
Could be worse, the SJ Earthquake's stadium is adjacent to caltrain, but you have to take a crazy bus route to get there. You can see it, but you can't walk to it.
Jacobs led a reaction toward Modernist top-down planning practices and urban renewal, which eradicated vibrant and lively communities in places like her home neighborhood of West Village. She celebrated the chaos and the street ballet cultivated by a mix of building, business and resident types that organically layers in a complex ecosystem of behaviors over many, many decades. But today, many of the neighborhood she would have been proud to call home are exorbitantly expensive. What is West Village today, if not, another insanely expensive neighborhood gentrified many, many times over? What middle or lower-income family could call it home?
Likewise, the progressive left thought leadership here has taken Jacobs' ideas to such a protectionist extreme that it has exacerbated a pre-existing housing shortage over the past 40 years. Not more than a decade after her book was published, there were the Freeway and urban renewal resistance movements of the mid-1960s. They later evolved into a Skyscraper revolt of the 1970s and 1980s. In the late 1970s, the entire city passed strict rezoning laws to preserve existing residential densities and architectural styles.
There's a decent history here: http://www2.ucsc.edu/whorulesamerica/local/san_francisco.htm...
And I'm not sure it's fair to characterize SF's current malaise as the endpoint of Jacobs' ideas. IIRC nowhere her oeuvre is there an opposition to new construction---in fact, just the opposite. For instance, near the bottom of page 216 of the 1961 edition [0], she is pretty unequivocal that she is in favor of new construction, just not all at one time and place.
[0] https://books.google.com/books?id=P_bPTgOoBYkC&lpg=PP1&dq=de...
In my opinion, if the trans-bay (e.g. Oakland to San Mateo) and around-the-bay (Berkeley - SJ) public transport would be reasonable in terms of time, things could normalize easier. It could take some pressure of the rent market as more opportunities could be found in other places.
I really didn't feel like being on the hook for a $6,000/mo mortgage for the next 30 years. It'd still be a mediocre home at best and I'd never see my kids because I'd be out hustling trying to pay for it.
No thanks.
Keeping this in mind, SF proper has a natural and inherent economic rent. So there is only so much pressure more building could relieve in SF proper. That said, I don't think many people would have much issue with being able to afford a place in San Mateo, Mountain View or San Jose, even Fremont. The problem is the whole bay area is averse to build up. So the only current option for those not able to afford the housing, is to commute two hours each way --South from Gilroy, East from Livermore/Tracy, northeast Coco county, etc. or doubling, tripling up and sharing rent. But that's not an option for many families.
It'd be physically difficult to have more than 6 million people living in San Francisco, no matter what density we built. So there would be some limit, just not the current approximate 800 odd thousand. The solution is to have an integrated Bay Area plan to accommodate as many people as the area can support. We must also keep in mind the ecological impact of sustaining more people in a semi arid region so perhaps desalination plants to offset water demand. Most of all, a regional government capable of making hard decisions rather than one which gives in to boisterous interest groups (rent control, height & shade restrictions, prop 13, and the adversity to pubic transit.
The problem is the whole bay area is averse to build up.
The following comment is also from the Economist piece and sheds light on the kind of jaundiced eyes - I don't know what else one would call it - that long time SF residents view outsiders with. This sentiment is something I highly identify with and is rarely talked about, when the issue of SF housing is hotly debated.
The author is a Kansas City native who has moved to SF to wait tables :
2) San Francisco can be elitist and exclusionary towards outsiders. Some
San Francisco residents look any non-Brooklyn part of the country with dismissal
and/or disdain, creating a distinct form of self-defeating snobbery.
I also felt this elitism when I would look at all the row houses in the Richmond
and Sunset and how few where being torn down to build more efficient apartment
buildings. The message was, and is,- we have ours and we don't care about your
struggles.
I also felt this excluding elitism when I would learn about legacy apartment
dwellers who live in great locations and pay a fraction of the market price
because of government controls. The government kept rental prices artificially
low for established renters and rental prices artificially high for outsiders
looking to move in and rent.
The casual snobbery, the lack of new construction, and a preference for
established renters made the city feel unwelcoming to outsiders. Which is ironic,
because most people I met in San Francisco were born and raised elsewhere.
What i can't parse is that these are the same people who say they are for more immigrant rights --whatever one thinks of immigrant rights, I can't square their desire to tell you how genuine a San Franciscan they are and the proof is in their being nth generation. So a 6th gen SFer has more status than a 5th gen SFer and so on.
SF is the only place I've seen where people feel compelled to tell you their gen as if it were status in and of itself somehow.
I'm somewhat liberal politically, but San Fran always felt like a different kind of 'progressive' than back home in relatively egalitarian, fairly moderate and generally well-run Oregon.
When I got to Padova, it felt like coming back to the real world. I'd go downtown and see young and old, wealthy and the not-so-well off. These days, thanks to immigration, it's also acquired some ethnic diversity: my daughter goes to a public school with children whose parents are quite varied.
The economy isn't great here though, and it really makes you wonder... Most of the planet would absolutely love to have the bay area's problems, as you can see by how many places try and ape it with their Silicon Alley, Prairie, Forest, Meadows, Fjord, Barren Wasteland, Cwm, Bog and so on.
I'm confused; are you saying this is in contrast with SF? The Bay Area generally is one of the most diverse places I've ever been; Oakland is often cited as the most diverse city in America.
I'm not sure that's a given. Building lots of luxury housing in SF might actually decrease rent in Oakland and other parts of the Bay Area but not have an appreciable effect on rent in SF proper, at least in the short term. In fact, you could even argue that because of network effects and gentrification, building more luxury housing in SF would actually increase rents locally, even as it decreased rents regionally.
And that actually could explain why it's rational for some low-income residents of SF to oppose (or impose conditions on) new construction in SF itself. Increasing the geographic segregation between rich and poor can impact tax revenue, crime, education, transit, and regional politics in ways that particularly hurt the poor.
That's what I'm actually unsure about. The article states it as a given without data or addressing regional effects. There are at least some well-to-do individuals who would purchase non-luxury housing in the North Bay, Berkeley, and the Peninsula rather than SF proper. You can obviously point to activity in places like the Mission and Bernal Heights, but at least some of the demand for unbuilt SF waterfront condos is going to go to the Oakland waterfront rather than something more inland. You can re-model your home, but you can't re-model your neighborhood.
Even if gentrification is a given though, the timing isn't. SF interest groups are pretty good at slowing things down (whether that's new development or a purchase and re-model). Presumably there's some difference in utility to the rich of buying luxury housing and buying non-luxury housing and remodeling it (otherwise there wouldn't be much demand for luxury housing). That's leverage the poor have in extracting some kind of negotiated benefit, like better public transit, education rights, re-distributive taxes, and so forth.
Blocking luxury housing from being built is bad for poor and rich alike. So I suppose the poor could use it as leverage, in the same way a bank robber could use a suicide vest as leverage, but is this really a good idea? :)
You can argue a lot of things.
But the relationship between supply, demand and prices is very thoroughly studied. Facts are known!
I have never heard of such an effect happening in the real world, but then again I'm no expert. If anyone can provide a reference to an example, I am willing to be enlightened.
To pick one particular example, Facebook's construction of 394 apartments next to its campus is actually driving up home prices in that part of Menlo Park because the apartments are nowhere near sufficient to meet the demands of Facebook employees but are accompanied by new commercial developments that make the surrounding property more attractive to other Facebook employees.
That's all you needed to say. Supply and demand works.
But I think the data can be interpreted in several ways.
If home prices are rising while apartments are being constructed, that doesn't have mean the price increase is caused by the construction.
For one thing, these units won't exist until 2016¹, so supply hasn't actually increased. It could also be that the area needs 1000 units to offset the increased demand. Or, as you imply, that the higher level of services make the area more attractive, rather than the added units themselves.
I would like to see actual studies by real economists to change my thoughts on this.
¹ http://www.mercurynews.com/business/ci_27717752/facebook-flo...
There are numerous known exceptions to simplistic supply/demand arguments, including Giffen goods, Veblen status, lack of insight on either side, information arbitrage, and so on.
It's not impossible some of them apply to city housing markets.
What annoys me about arguments about housing is that housing is clearly a systems problem, not a one-or-two-variable optimisation problem.
Availability and rental prices depend on a complex network of interacting drivers, not all of which are purely economic, and some of which aren't even local.
Supply and demand storytelling doesn't even begin to come close to providing a useful model of that network.
Yeah, that's why I asked for real world examples.
But I still haven't seen any. If this actually happens, there should be real world examples that people would bring up in these arguments, right?
> Supply and demand storytelling doesn't even begin to come close to providing a useful model of that network.
I don't want to be rude, but isn't this just this standard anti science handwaving? "The world is far more complex than western civilization can grasp, therefore my gut feel must be the real truth!"
I mean, it's fine to say a model isn't perfect, but unless you have a better one to replace it with, or at least a clear example of something wrong, you're not really helping.
To me the SF housing market conforms perfectly with the supply and demand model: With a huge rise in demand, and supply being kept almost constant, it predicts the kind of strong price rises we've seen last few years.
> It's not impossible some of them apply to city housing markets.
If you think there is such effects you should make the case, rather than hint that they might exist.
> Supply and demand storytelling doesn't even begin to come close to providing a useful model of that network.
I think 95% of economists would take issue with that statement
If we had good transit and we had a regional govt capable of planning and building to accommodate a growing population, that the affordable housing would be in the east bay south bag or peninsula does not matter much to families. Only very few people care to have the 'cachet' of saying "oooooh, no, I live in SF, not dreadful san jose". Most people in the bay area just want an affordable place to live with good transit. Typically only rich folk care about the SF cachet --also nth generation natives, but I dont care much for them.
So the problem is that yes SF is stubborn about housing buy other cities in the bay area are no try far behind in this attitude and they all contribute to this issue.
We could triple the population of SF if we simply increased the density to that of Pune, a city with a small town feel that fits 2.5M people into 700km^2. (I.e., it's not remotely like Manhattan.) Pune has also experienced a tech boom and huge population growth, yet has not suffered from real estate issues the way SF does.
The secret? Our underpopulated areas look like this: https://pbs.twimg.com/media/B8cMeVTIMAEMyzk.jpg:large
I have been listening to Econtalk episodes on urban growth[1][2] and apparently cities in the developing world experiencing quick expansion get completely clogged with traffic. The transaction costs are too high for developments to come to some agreement on providing city-wide transport. Some places don't have a proper sewage system, or rely on diesel power because they could not build an efficient power plant.
[1] http://www.econtalk.org/archives/2015/01/alex_tabarrok_o.htm...
[2] http://www.econtalk.org/archives/2015/03/paul_romer_on_u.htm...
-It being underground means it's not in the way of everything and, more importantly, vice versa - it can go as fast as you want.
-It being carriage based means there's no coordination with other drivers. No queue dynamics, crossings or whatever. Transport happens in constant time, independent of the amount of passengers (within reasonable bounds).
[1] http://web.mta.info/nyct/service/CourtesyCounts.htm#STEPASID...
Washington D.C. (within the city) is a bit like a second tier European city, still quite good within the city, but D.C. has a huge metro area and it's spotty in the outer bits. There's lots of different jurisdictions that don't always integrate their bus systems well and building out the metro system has been slow going.
Portland has an excellent integrated system.
Chicago, Seattle, Boston, have decent, but limited systems.
However, even in places with almost no effective rail system, like Orlando, there's usually a comprehensive public bus system. They just run slowly, but they're relatively cheap, transfers are usually free and will get you close to where you want to go. Most public transport in L.A., for example, consists of the bus system.
You don't actually need to provide city-wide transport. All you really need is demand for it - entrepreneurial types are pretty good at figuring out where it's needed. You do, however, need to avoid passing (or at least enforcing) laws against it.
(Here is a little bit on private sector mass transit in the US: http://projects.newyorker.com/story/nyc-dollar-vans/ Jersey City also had these, and they were vastly superior to public buses.)
Edit: as a result, your comparison to Pune is significantly inaccurate. Indeed, Pune is only some 25% more dense than San Francisco, not three times as you suggest. This is easiest to check by looking at the "population density" figure on Wikipedia, but it's consistent with doing the relevant calculations yourself. (I checked.)
Nevertheless, I do stand by the claim that Pune has handled population and economic growth well by building more housing, and is likely to continue doing so.
I was in Manhattan right after Sandy, when the trains were still not running, and it looked like a ghost town with just the 1.6 million residents there.
The problem with construction booms in East and South Bay is that the transportation infrastructure in SFBA is barely keeping up with the population as-is, and however asymptotically it approaches "adequate" today, it is also one of the country's most poorly managed systems: it's underinvested, hemmed in by a dysfunctional political system, freighted with union, tenure, and retirement problems, and poorly maintained.
Density would be too high, we must preserve cultural heritage, green space laws, restrictions on building heights, builds designated as heritage sites, and on and on and on.
If you build up or down you can accommodate a larger number of people. The key word here is "build". This activity is prevented by an amazing number of rules, regulations, and laws, all of which have nice sounding names but the end result is the same.
Zoning boards and those involved in creating political districts all need to be managed by as neutral groups as possible. All work needs to be as public as possible as well. Preventing someone from building more housing is not really different than the government condemning the land and taking it.
Renters and owners alike bristle at the possibility of their neighborhood changing its look and feel. They use words like gentrification, manhattanizatioon,; they also support restrictions on building as ridiculous as the ones which state that the shadow from new buildings shall not block the sun on a public park between specific hours. So its couched as nature friendly, in the meantime it is strictly anti building. People want to eat their cakes and have them too.
Expensive, yes. Profitable, I would think so. Sign me up to live there when it's built. I'd love to work for a similar salary and save a good 30% of it per year (while still leaving healthy profit margins for the investors).
Note to downvoters: You do realize that the US government essentially provided this sort of start to Silicon Valley right, and that after that there were a couple now-billionaire real estate investors who provided a lot of the office space?
You cannot simply build some of those things. Culture and good schools take decades to build.
Re: Olin College, I don't often hear it as often as Stanford probably because of the relative size of the marketing budget, but the software engineers who come out of Olin College are probably not paid so significantly less that a 30-40% reduction in rent wouldn't compensate.
Re: $Billions... Or a couple thousand software engineers organized to invest together.
Re: "You simply cannot build some of those things." Challenge accepted! Er, well, but I'm short about a billion dollars in order to attempt it. Know anybody who can help with that?
It's much, much easier said than done. It's still the work of decades and absurd amounts of money. Every freaking city of notable size in America has tried to dump money into getting their own local startup ecosystem going, and most of them have gone a lot of nowhere.
Stanford engineering: $74,467[1]
Olin: $78,074[2]
[1]http://www.nerdwallet.com/nerdscholar/grad_surveys/top-salar... [2]http://www.olin.edu/content/results/
https://hn.algolia.com/?query=hsieh%20vegas&sort=byDate&pref...
There's no university but the Downtown Project has everything else you want.
As for your edit: "the US government essentially provided this sort of start to Silicon Valley"
No. Re-read your first paragraph. The US government provided none of that. Watch Steve Blank again: https://www.youtube.com/watch?v=ZTC_RxWN_xo
Pittsburgh is even cheaper and has Carnegie Mellon - not part of the Ivy League, but better than most Ivy League universities for Computer Science.
http://www.theguardian.com/business/2014/dec/04/property-inv...
My point was that foreign investment can help solve the problem, which supplements the post that I was replying to.
Also, I'm not sure what the point of your link was. London's housing market has little in common with SF's; housing-wise London's market is most like Manhattan. Wealthy foreigners frequently acquire London flats without the intention to live in them beyond a few weeks or days each year and primarily use the real estate as a way to store their wealth. London allows, and even encourages, uber-expensive housing developments that displace impoverished communities precisely to attract this type of foreign wealth. In DTLA, foreign investment under the EB-5 Visa program has been used to increase the supply of housing and non-industrial commercial usage in a space that historically had limited amounts of both.
On the other hand, if San Francisco zoning mostly deflects away non-techies who add to San Francisco congestion without adding much to its tech-centre synergies, then San Francisco's regulations may be reinforcing its status as technological leader.
That leaves technology as the saving grace. Maybe we invent really good holodecks, which make it much less critical to actually be in San Francisco. Maybe we invent teleportation, laws of physics be damned. Maybe we simply come up with better ways to build and design cities, which minimise the real or perceived downsides to residents of new building.
https://news.ycombinator.com/item?id=7602740
Article is from 2014
When I moved out there I considered buying a 3 story home out by Ocean Beach. Then to afford it renting out 2 of the 3 floors. After doing some risk analysis (researching the legal aspects) there was no way I could do that and expect to not get burned in a multitude of ways.
So it creates this really shady market for illegal rentals (you have to drive around to find them) and an adversarial way of living in this supposed liberal utopia.
Not my cup of tea, but I have many friends that love living in the city.
The East Bay, etc. of course was worse to impossible.
I could never understand this, given the otherwise progressive nature of the whole area.
Et tu, The Economist?
That seems wrong. How much someone is willing to pay to live in San Fransisco isn't a measure of their "eagerness", but also a function of wealth. Marginal people in San Fransisco are also poor people who love the city, and are barely able to live there because they spend such a high proportion of their income on costs of living. Relative to their household income, they spend _more_ than someone not marginal to live in the city, but that wouldn't be reflected by their migration patterns. They're not less eager, just less rich.
The GP make simple and correct point - those with more money can wind-up choosing to buy something they "don't want that much" while those with less money overall money forgone things they very much want since they also need to eat.
Not saying current rent control policies and development policies in S.F. are optimal (in the colloquial sense, economic sense or utilitarian sense), or that more housing in general should not be encouraged somehow. But the option of having zero rent control and letting the invisible hand of the market shove tens of thousands of people into the streets seems like a pretty bad solution, in addition to being a particularly callous one.
At which point, even people who would find themselves priced out of SF in today's market would already have moved to the city if they wanted to.