Tuesday, December 3, 2013

Housing Affordability at the Breaking Point - Part 1: Home Is Where the Supply Is

Black Friday at WalMart? Zombie Apocalypse? Nope, just a San Francisco open house.
(Source: www.creepmachine.com)

In most areas with out-of-control housing prices, it is due in large part to the supply of housing being far lower than the demand for housing. My county is tens of thousands of units short of what is needed today, not to mention the homes that we will need to build to accommodate future needs. 

Only official deed-restricted Below Market Rate units feel satisfying to some housing advocates, but BMR strategies alone will never fix the problem in areas with such severe market imbalances. 

This must-read article from the New Yorker shows how alarmingly desperate people are to get into any little scrap of housing that they can get their hands on, and how fierce the competition can be. When one Cragislist ad for a small bedroom for $900 per month gets 45 desperate responses, you cannot expect rents to stabilize. The price will keep going up until 44 people give up, and whoever can bear to pay the most will win out.

What if there were so many apartments available that the Craigslist ad only generated three responses? What if it took a week to hear from anybody? What would that do to prices?

Something tells me that this stuff is cheap...
(Source: www.businessinsider.com)
A savvy resident of the Bernal Heights neighborhood put it this way, in response to complaints that the neighborhood character was being tarnished by wealthier newcomers:
"SF has a serious dearth of housing, and until there’s a lot more infill of one form or another, there’s going to be someone offering you a lot of cash when it comes time to sell your place. (By the way, there’s no rule that says you have to accept the highest, all-cash offer, but people seem to forget that when it comes to accept an offer.)"  
I read an interesting article in The Atlantic Cities last month about housing in New York City. In it, the Planning Director of New York expressed exasperation that despite building about 30,000 homes per year for the past few years, prices hadn't dropped. She explained it thusly to a conference crowd:
"I had believed that if we kept building in that manner and increasing our housing supply … that prices would go down. We had every year almost 30,000 permits for housing, and we built a tremendous amount of housing, including affordable housing, either through incentives or through government funds. And the price of housing didn’t go down at all."
I hate to be dismissive, but it isn't that complicated. 30,000 units sounds like a lot (and kudos to them for issuing that many building permits), but it just isn't enough. Over the last several years, the US household growth rate has been about 1.3% per year. Growth of 30,000 units per year is only a growth rate of 0.9% per year for New York City (which has about 3.3 million housing units), much lower than the national average. And due to its strong economy, rich supply of amenities, and popular lifestyle, New York almost certainly needs much more than the national average, not less. Growing at the same rate as the national average would require more than 40,000 units per year. The real need is certainly far north of that. 

Gabriel Metcalf of the San Francisco Planning and Urban Research Association (SPUR) recently penned an excellent article highlighting the same problem as it is manifested in San Francisco. In it, he laments that all of his friends area leaving for Oakland, which has lower prices. San Francisco produces about 1,500 units per year, whereas if it was growing at the national rate it would need to produce nearly 5,000 per year. This means that every year the shortage grows by 3,500 (probably more, in reality) as more and more people try to find a way to access San Francisco's beauty, culture, history, recreational opportunities, walkable urban lifestyle, and excellent jobs.

When supply is that far below demand, it is absolutely impossible to keep prices reasonable. 
Has any desirable product ever been made affordable by constricting the supply? Ever?

Some housing advocates complain that the new units that are being produced are expensive. They cite this as if it is evidence that adding units doesn't help affordability. Of course shiny new homes in desirable areas are expensive. That doesn't mean that they aren't helping. In his excellent book "Unlocking Home," the Alan Durning puts it this way:
“Will new mini-studios at $850 per month help people who can afford only half that amount? Actually, they may. In the short run, new units free up older units, which helps to free up still older units, and so on down the economic ladder in a process that housing economists call “filtering.” In the long run, new housing turns into used housing. Just as people with less money drive older cars, they also live in older buildings. So new units occupied by baristas and graduate students today may become old units occupied by immigrant dishwashers in a couple of decades. Old-school rooming houses served both upwardly mobile young people and middle-aged working-class singles. The new generation of this housing can, too.”
When someone with a decent income badly needs or wants to live somewhere, and there aren't any nice new apartment buildings available, owners of old and poorly-equipped buildings can extract exorbitant rents out of them. There's no competition, so what are these prospective renters going to do? If they refuse to pay, they'll have to commute two hours each way from Tracy to their job in Santa Clara. There are probably 20 other people lined up behind them who are willing to pay the price in order to avoid that fate. 

With all of these bidders, do you really think the winner is going to get a low price?
(Source: www.mvaquatics.org) 

However, when the shiny new building opens up down the street, the game changes. Now, people have a choice. Sure, apartments in the new building will be pricy; it is clean, new, and well-equipped. If apartments in the new building are going for $3,000, what do you think prospective tenants are going to say to the owner of the old building when he tries to charge the same price? Reactions will vary, but they will all be something like this:

If tenants have options, prices on the older and less amenity-rich buildings will have to come down.

The mistake of assuming that expensive new housing units won't have a positive effect on overall affordability is quite common. In response to rising rents and expensive new construction in Germany's three biggest cities, the national government is tightening regulations there in hopes of driving developers to other markets. This is a major mix up of cause and effect. New construction is not to blame for rising prices. 

The reality is precisely the reverse. Shortages cause rising prices, which then attracts developers. Discouraging building in the face or shortages will only drive prices higher. In instances where housing has actually been overbuilt, prices have collapsed as a result (as seen recently in exurban locations, such as here and here). The phenomenon is at work in Detroit due not to overbulding, but due to a tragic loss of population. Prices have steadily plummeted as a result, to the point that you can now get homes for as little as $5,000. No BMR program can deliver that kind of affordability.

In his excellent book "The Rent is Too Damn High," Matthew Yglesias bluntly and succinctly drives home the point that we must build enough housing to meet the demand in order to fix the price problem:
“Specifically, we need to acknowledge that there are only two sustainable ways to reduce the price of housing. One is to lower demand by making a given place a worse place to live. Detroit features high crime, low-quality public services, and a bleak job market. The rent in Detroit is not high. And, equivalently, if you’d like to buy a place to live in Detroit, you can do so quite cheaply; the median sale in the city as of September 2011 was about $95,000 and dropping—that is, half the national average. The other way is to increase supply.”
Clearly, making expensive places less nice is not a viable strategy. We need to increase supply. Dramatically. Now.

This is Part 1 in a 6 part series.

     Introduction: Housing Affordability at the Breaking Point

     Part 1: Home Is Where The Supply Is

     Part 2: Fighting Gentrification (With Luxury Housing)

     Part 3: Housing Shortage or Urbanism Shortage?

     Part 4: Do We Need Affordable Housing or Affordable Living?

     Part 5: Removing Snobbery From Codes

     Part 6: How the Get the Right Types of Homes Built in the Right Places


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