Local housing: A little reality

Much of the "expert commentary" is wrong. Here's what's really happened, and what's in store, for the local housing market

Reading the superficial year-end wrap-ups and “expert commentary” about the city’s housing situation in the local press this week is making my head hurt. So here is a basic primer about what is really going on, what is coming in 2017-18, and some initial thoughts on what to do about it.

Displacement has been the predictable impact of the housing crisis
Displacement has been the predictable impact of the housing crisis


a.    National economic recovery, especially enriching the Investment Class

As has been well documented by many, national (and global) economic growth since 2010 primarily has benefitted the professional class and those of great wealth. While employment numbers have improved steadily too, many are underemployed or in low-wage jobs, and the growth in real wages has been very modest. This has prevented strong growth in consumer spending, the foundation of the national economy, and so this economic recovery has been modest at best.

b.    Historically low interest and investment capital rates

As a direct result of this enrichment of the Investment Class, unprecedented enormous wealth has inevitably been funneled into institutions and investment funds of all kinds seeking to earn a return. But with only modest national economic growth, the opportunities to put those funds to productive domestic use are limited, and so investors must accept very low rates of return. This has resulted in historically low lending rates from banks and financial institutions, and historically low capital investment rates (the “cap rate”) from private equity sources of all kinds. For technical reasons (tax code, risk management, available but fixed supply, mature industry) buying/developing real estate is a leading field for such investment.

c.    Economic boom employment and population growth in San Francisco and the Bay Area

The Technology Sector has lead national (and global) economic growth since 2010. As the world’s premier technology epicenter, the Bay Area is experiencing an unprecedented economic boom as a result. The South Bay has seen the greatest growth, but a significant amount has spilled over to San Francisco and the Central Bay Area, especially the ‘soft’ tech of social media, creative media, web services, and bio-technology. This sudden large-scale job growth has directly lead to sudden large-scale population growth too, with the resulting sudden burst of high demand in the region’s housing markets.

d.    As always, prices go to “What the Market Will Bear”: (1) Housing
As a basic rule of Market Capitalism, whenever demand significantly outstrips supply, prices for a commodity will inevitably rise to the limit that buyers are able to pay. This is exactly what has happened to rents and home sales prices in the Bay Area due to the sudden burst of new Bay Area residents who are also generally very well paid, well over regional median incomes. Their higher-than-average buying power is setting prices and rents today, above what the rest of the middle class can afford. The unavoidable result is all the negative impacts now occurring: doubling up, evictions/displacement, under-the-table transactions, etc. The fact that rents and home prices have leveled off in the last year means this relentless market-adjustment process has been completed – for the time being.

e.    There are other new sources of housing “demand” that have a major impact too

Second homes, global investment buyers, corporate housing, suburban empty-nesters returning to the city, and home sharing (Airbnb) all impact the Central Bay housing market by removing cumulatively significant amounts of new and existing housing stock from the general market that is available for primary residences. This growing trend has made the overall housing market situation significantly worse since 2010.

f.    As a result of all these pro-development factors, the region’s housing development industry has increased its production work significantly – but its capacity has limits

In theory these all-time high rents/home prices combined with these historically low interest/equity rates make development of new housing exceptionally feasible financially for Bay Area residential developers, and so there should be, after some lag time, a commensurate boom in housing development. But there are internal constraints that limit what this Industry can produce unrelated to local zoning etc. First is the overall size and capacity of the industry itself. The number of regional developers still in business at the end of the Great Recession able to undertake larger projects was limited, and it has grown only gradually with the addition of new firms only gradually since 2010.

Second, the scale of their own internal business capitalization constrains the rapid project growth of many without unacceptable risk of over-leveraging. They do not have “deep pockets.” The new REIT capitalized developers who do have “deep pockets” can undertake large projects, but they generally seek to diversify projects geographically statewide/nationally to manage risk. And third, because of the importance of local experience and the uncertainty of how long the current local economic boom will last, it is very difficult for major developers from other metro areas/states to enter the Bay Area housing industry.

g.    As always, prices go to “What the Market Will Bear”: (2) Construction Costs

In addition to these internal industry constraints, one very negative external constraint is the dramatic increase in all construction costs since 2010. Thanks to a simultaneous boom in commercial development and government/institutional projects as well as residential development during these years, the capacity of the Bay Area’s construction industry is completely exhausted. The Great Recession forced a sharp contraction in this industry too. General contractors and trade subcontractors have gradually expanded their capacity since 2010, but only to the extent that their financial capacity permits, and that there are experienced construction workers available in the greater Bay Area to do the work. As a result of the limited Construction Industry supply of trade subcontractors in particular, the construction costs of building new housing have more than doubled since 2010.

h.    As always, prices go to “What the Market Will Bear”: (3) Land Prices

The final “bottom line” constraint on new housing development is that property owners have proved the ultimate beneficiaries of the Bay Area’s housing market boom. After taking into account the key factors of rents/prices, interest/cap rates, and construction costs, the “residual land value” – what a developer is able to pay for a site and still make its desired profit – has on average almost tripled per buildable housing unit since 2010. Unless they own the land already or partner with the owner, developers must find a willing seller and have the cash needed just buy a site. Few have the cash sufficient to tie up more than a few sites at one time for the several years needed to start construction.

i.    Master-planned mega-projects have a huge extra problem: Infrastructure Costs

More than half of the already-approved housing units in the Central Bay Area, especially San Francisco, are part of master-planned mega-projects on public property – Hunter’s Point Shipyard/Candlestick, Treasure Island, and others. And more are planned – Pier 70, Mission Rock, and others. But before their housing can be built, these former industrial/military sites need hundreds of millions of dollars in all-new utility/transportation infrastructure, seismic stabilization, and hazmat remediation work, and will need extensive new parks and public amenities before they are finished. Since, unlike former redevelopment projects, all these projects will be internally self-financed from their own tax revenues, special property assessments, and land sales proceeds, they must be slowly developed in multiple phases over several decades as their internal financing sources gradually grow with completion of their initial phases to become available in sufficient amounts.

But most of their core infrastructure has to be financed and built first. The first such master-planned project, the Mission Bay Project that was approved in 1996 and began construction in 1998, is now nearing completion by 2020 – after 22 years – but it had the unique advantages of the newly-built city- funded master sewer system it needed, the city-built/funded Third Street Light Rail line it needed, and initial private ownership of most of the site. Plus it gained an extraordinary “anchor tenant” – the globally important new UCSF research campus, that significantly enhanced its land values. So it is going to take 20 to 30 years to complete these mega-projects and actually bring their tens of thousands of new market and affordable housing units on-line.

2.    NOW WHAT??

a.    No one knows how long current national economic growth will last

We are about to witness a full-scale experiment in radical Republican “Voodoo” economic theory. If one believes that tax cuts for the wealthy somehow trickle down to increased consumer spending, that de-regulation will avoid a repeat of past financial markets meltdowns, that cutting general government spending/employment by billions/millions somehow still puts more people to work by expanding the defense industry, that eliminating minimum wages, benefits, and health care for workers somehow boosts their spending power and the economy, and that raising interest rates by fiat will somehow spur investment spending, than one can be optimistic the current modest economic growth in the US will continue indefinitely. Just like it did in the 1920’s, until … Oh.

Otherwise though, after one last flurry of stock market-style hype, a definite cooling off of the national economy by 2018 once these new realities begin to take hold would be most likely, and worse is possible. If the Federal Reserve Bank continues to increase interest rates by fiat in 2017, that would by an additional negative factor, but presumably the Fed would reverse course quickly if a downturn looms.

b.    No one knows how long this Bay Area Boom will last

We are about to learn if history repeats itself. If one believes the Bay Area’s “unicorn” tech start-ups can go on indefinitely losing money, like Uber, or just not making any money, like Twitter, without eventual massive downsizing, or can be bought up by industry giants, like Linkedin, without eventually relocating elsewhere, or that a Trump Administration international trade war might not backfire on export-oriented Silicon Valley, or the tech industry is somehow immune to negative national economic conditions, than one can be optimistic the current economic boom in the Bay Area will continue indefinitely. Just like it did in 2001 … Oh.

Otherwise though, 2017 looks likely to be a year of local wait-and-see with Tech Industry expansion in a holding pattern, until the national economy’s prognosis clarifies by 2018. But worse is possible.

c.    The impact of Republican tax cuts on housing development

The combined impacts of radical Republican cuts to the capital gains tax, the corporate tax rate, and income tax rates would have some foreseeable consequences, besides Making the Rich Richer. Long-time land owners would have an incentive to sell development sites in 2017 while prices are still high thanks to a big cut in the capital gains tax they would pay. At the same time cuts in corporate taxes will boost stock prices in the near term (this is already happening in anticipation), attracting fluid equity investment away from real estate. Lower income tax rates also will reduce the tax-driven attractiveness of real estate investment. (In particular, anticipation of lower corporate tax rates have already impacted the Low Income Housing Tax Credit market, suddenly cutting offered equity investment rates by almost half.) Overall, the impacts would be disadvantageous for residential property ownership and new housing development. Property values/prices should adjust downward eventually to offset these multiple impacts, but that typically requires a full business cycle – a recession – to complete. And if the Fed continues to increase interest rates by fiat in 2017 that would by an additional very negative factor for new housing development, forcing both financing/mortgage interest rates and equity investment cap rates to move up significantly.

d.    What Local Policy can’t do about housing development

•    The city and region cannot avoid the consequences of a national economic downturn or higher Fed-set interest rates.

•    The city cannot reverse the negative impacts of radical Republican tax cuts on housing development. In theory the State of California might to a partial extent, but that is highly unlikely.

•    The city cannot expand the internal capacity of the local housing development and construction industries.

•    The city cannot stop Market Capitalism from charging “what the market will bear” for anything and everything it can.

•    The city cannot stop people from wanting to live here. In fact, a wave of new “domestic refugees” may come to the Bay Area to escape a coming national wave of social repression and economic desperation.

e.    What Local Policy can do about non-government-subsidized housing development and the City’s general housing market, especially its affordable housing
•    The city can continue to apply existing policies that achieve the Prop K 33% affordable housing goal through community-approved up-zonings, public-private partnerships for development of city-owned property, and negotiated development agreements for large private sites. (The upcoming Central Soma Plan will be the next such opportunity).

•     The city can use its regulatory/taxing powers to prevent or financially disincentive diversion of new and existing housing to uses other than primary residencies (restrictions/fees on home sharing, second homes, corporate housing, investment buying).

•    The city can recapture a significant proportion of the much increased land values since 2010 by requiring more inclusionary affordable housing in future new development (as Prop C in fact has done on an interim basis), including “equalizing” the increased land values resulting from the State “density bonus” law.

•    The city can use its regulatory powers to financially dis-incentivize “upmarket” conversions of its de facto affordable residential hotels by mandating full code upgrades, including ADA, for such changes.

•    The city can close loopholes in the Rent Stabilization Ordinance that might allow existing rent-controlled units to be replaced by non-rent-controlled units in new projects.

•    The city can establish a $1+ billion Infrastructure Finance Bank to fund the extraordinary infrastructure costs of the several master-planned mega projects, and cut their 30-year development of tens of thousands of housing units – at least 33% affordable – in half, to just 15 years.


  1. by friction i mean procedural delays. my line to developers has always been “we can spend the next three years fighting over what you’ll basically end up doing it anyway, or you can do it and save yourself the time, energy, & money of the fight.” i’d rather bake the bennies in the process and dispense with the fight, rather than prioritize process in order to get those bennies on the back end. i realize the fight is fun, but it can also be wasteful.

  2. By the way, what I’m talking about is pretty simple: treat people with basic human respect. It doesn’t at all say anything good that you find that a problem, and dressing it up in edgy alt-right buzzwords don’t change that.

  3. You’re right. Making fun of people for something beyond their control definitely makes them a better person.

  4. You reference a need for ‘PC’ based speech. I reject that notion. It’s led us to a crop of butt-hurt youth, who would benefit from thicker skin.

  5. I don’t support it. I’m referring to you using “off your meds” as an insult.

    If you had a mental illness, and were actually off your meds, you might be terrified, overwhelmingly sad, frighteningly out of control, or just really disoriented.

    Now picture someone making fun of you for it.

    Not so nice now.

  6. Never support unhinged, foaming at the mouth, all caps shouting. It’s like urinating on the sidewalk…

  7. Anyone who has tried to hire a contractor to do anything lately appreciates the lack of skilled labor. The government should consider slowing down on public projects while the market is hot and pick up when the private sector cools. This is a good time to invest in worker training programs and apprenticeships. We have a shortage of skilled welders, electricians and plumbers, elevator and heater repair specialists. These are all lucrative careers that require on the job training. Without these skills you will have no construction industry.

  8. It is a balancing act in a constantly changing environment. Any of these variable can and will change. Legislation needs to take that into account.

  9. I think John is trying to explain the system to people who want to learn how it works so they can figure out how to fix it. An analysis of the forces that effect the markets is a first step in effecting change.

  10. Polluting, egotistical, non-sense, didactic, myopic, political ambitions, old guard white man, corruption. Fine. Now, what’s wrong with what he’s saying?

  11. Prop M limits contruction to 850,000 sqft/yr. That’s half a Salesforce Tower. If the allocations are not used fully, which they haven’t been for most of these 30 years, they are rolled forward. So there are milliions of square feet saved up through prop. M. These are not restrictive policies. Not nearly enough.
    And, of course, you have to add office development elsewhere in the Bay Area, because people commute. If you keep building offices, high-earning people will keep coming, and bit by bit they will drive away anyone who doesn’t earn as much as them, whether their intentions are good or not.

  12. Yes, John Elberling is under investigation for funneling public money into the political campaigns of his choice. Unethical.

  13. Wow. Elby’s using public money to support political campaigns he favors. I hope there is a thorough investigation.

  14. yet citing budgets, profits, and the supposed costs getting passed on, is not a strong argument.

    I agree, this was a weak argument by Wunderman, but it’s not an argument that @MossyBuddha:disqus made. Developers do not generally pass on savings to home buyers. Instead, the mechanism by which cheaper and faster development leads to lower market-rate home prices is increased competition from the amount of increased supply. And as Elberling said in this article, the cash that developers need to pay interest on land while waiting for development entitlements and CEQA appeals is one limiting factor on the number of developers that can compete. Thus, approval delays affect the amount and price of housing.

  15. Care to explain your “old guard white man” comment? Is it really any better when the “old guard” at Chinatown Community Development Center do it?

  16. John E. has been polluting SF with his egotistical non-sense for far too long. He and many of the supposed affordable housing advocates have conflated supporting low income people with fighting all development. His old guard didactic and myopic policy solutions service his political ambitions but sadly leave behind very real strategies that help the most people with the limited public resources and policies in regards to providing the most public housing. in short – let’s get rid of the old guard white man explaining to everyone what is right, especially if they have a track record of corruption and being wrong.

  17. “(2) that increased friction in the approvals process raises the overall costs of development, and that ”

    Not so much in relation to the bottom line costs. I think there are reasons to streamline the process, yet citing budgets, profits, and the supposed costs getting passed on, is not a strong argument.

    The key word you used was friction, and I hate to think how you plan to alleviate the friction.

  18. it is indeed possible to say that he’s both generally correct of the forces at play while still strenuously avoiding acknowledging that
    (1) we’ve got a statewide housing shortage not just in san francisco. i’m sure he will agree that shortages of necessary things never work out well for people with lesser means.
    (2) that increased friction in the approvals process raises the overall costs of development, and that
    (3) setting the inclusionary level too high will lead property owners sitting on highly valued land with other money-making options besides building housing.

  19. Office space is already severely limited by Prop M, and has been for over 30 years. A major goal of Prop M was to keep housing and cost of living lower by constraining the supply of office space, which would attract new high-paying workers to the city without the infrastructure to support them. And, Prop M is not merely an office restriction measure, it requires developers to pay for the impact of their developments through transit, housing, and other fees. Prop M was and remains the strongest growth control measure in the nation (aside from controls in some small affluent towns that permit no or very little new construction at all).

    And, yet, 30 years after implementing these restrictive policies, here we are. While no one is advocating a free-for-all, it is clear that merely trying to restrict growth is not the answer.

  20. The city already does severely limits the construction of all new offices through Prop M (while still being very restrictive, but more permissive of construction of very small office spaces that tend to best suit small businesses and non-profits, which pay moderate wages).

    As for licensing businesses based on salary, there is no legal authority for the city to do this. Yes, the city can implement policies to attract more “working-class” jobs, though in today’s economy, such jobs tend to be low-paying retail jobs that do not provide a high enough salary to live on, especially in the Bay Area. That said, the city does have long-standing policies to protect and encourage the construction of PDR (manufacturing and development space), which tends to attract better paying “moderate wage” jobs. Also, the city offers tax credits and other incentives for companies to hire economically disadvantaged workers.

  21. “Limiting high-end offices won’t do it.”—why not? If there are not enough 6-figure earners around to set housing prices, these prices will go down. If there are not places to employ people at 6-figure salaries, they will go elsewhere, or be satisifed with moderate salaries.

    The “homeless come here because it’s so cushy” theory is a myth. It’s not and they don’t.

    “You can’t stop people from wanting to live here” wasn’t what I was saying. I was quoting Elberling, and I disagree with him on that point.

  22. Standard vampire rationalizations and excuses for sucking blood. Shelter is a human right. Shelter slavery is no better than chattel slavery. NO ONE EVER HAS THE “RIGHT” TO OWN ANYONE ELSE’S HOME. PERIOD. Some day this will be understood just as well as most of us now understand that owning other people’s bodies is a crime, not a “right.” EMANCIPATE AMERICA’S SHELTER SLAVES NOW. Use public credit to enable EVERYONE to buy our own housing without paying tolls to bankers, real estate investors, and sundry other predatory scum. Pass laws to make it mandatory that vampires sell to dwellers at cost of replacement. GUT the land market. Read Henry George, idiots. Tim Redman should be ashamed for publishing this filthy creep’s bloodsucking lies.

  23. Those earning $120k are the only ones who can afford to come here; certainly not those earning a more modest amt. Limiting high-end offices won’t do it.

    And even 10 yrs ago, you had to make >$60k to rent an apt. And even the homeless come here, though they certainly don’t make much (they do have other subsidies, and low expectations). In fact, its often said they want to come here cuz its easier than being homeless somewhere else.

    ‘You can’t stop people from wanting to live here”. So even removing the incentives isn’t enuf. We need stronger disincentives for all new residents! (Except refugees, right?)

  24. Please. Do everyone a favor and just skip anything this fabricated “Metro Observer” group posts. Zero credibility and it’s just self-serving SFYIMBY folks pretending to be relevant.

  25. Inclusionary housing requirements are something that the author, John Elberling, is very passionate about. He spent $125,000 to pass June 2016 Proposition C, allegedly after taking equity out of publicly-funded housing owned by his nonprofit TODCO (see Sonja Trauss’s complaint and sfbamo’s reporting for details). He is also a dominant member of the SF Controller’s Inclusionary Housing Technical Advisory Committee, where he speaks in favor of increasing inclusionary housing mandates over time in order to push land prices down so that nonprofits can purchase the land more easily.

  26. “The city cannot stop people from wanting to live here.”—People come here because they are offered six-figure salaries, which in turn drive up housing prices. The city can limit high-end paying companies by limiting construction of high-end office buildings, and by preferentially licensing businesses which pay moderate salaries, which otherwise are being pushed away.

  27. Inclusionary housing built by the State would be a good idea. The State can and should address housing for all citizens.

  28. Good analysis but I am not sure about the proposed policies. For example, the inclusionary housing policy slows development.

  29. “stipped or rhetoric”? Then why does he preface every mention of interest rate hikes with “by fiat”. AFAIK, the Fed doesn’t raise rates any other way.

    Yelen has kept rates low, supposedly until employment improves (which it has, unevenly). The Economy has improved (again, unevenly) somewhat and while inflation has been happening in a number of sectors (like housing, and not like energy), I don’t see a better move.

    It is interesting to see speculation about what the coming political (thus economic) changes will support. But frankly, hardly mentioning that we are in Year Seven of an ‘economic recovery’ and that its shelf-life is thus short, is a major faux-pas.

  30. This is a sober analysis, stripped of rhetoric, of the market forces that determine housing policy. It is also a recognition that, although there are many things local decision-makers can do (if they have the political will) to blunt the effects of those market forces, “The city cannot stop Market Capitalism from charging ‘what the market will bear’ for anything and everything it can.” Although Eberling does not say it, his article makes clear that fundamental solutions to our housing problems require a fundamental restructuring of our economic paradigms.

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