Supply and Demand

Enrico Moretti tells it like it is:

Over the past two years, San Francisco County added 38,000 jobs, reaching its highest employment level ever. Yet only 4,500 new housing units were permitted. For all those new families knocking on San Francisco doors, new units are available for less than 12 percent of them. The numbers for Silicon Valley are even worse. This is why the rents skyrocket.

The problem is largely self-inflicted: the region has some of the country’s slowest, most political and cumbersome housing approval processes and most stringent land-use restrictions.

…One way to think about it is that the enormous increase in wealth generated by the tech boom is largely captured by homeowners in the urban core who bought before the boom.

…The second negative consequence of the region’s restrictive housing policies in the urban core is environmental degradation on the periphery. Good environmental stewardship suggests that we should build more in the urban core near transit and jobs and less on the fringes. Yet because of cities’ strict housing regulations, we build more on farmland on the region’s outskirts and less in the city center where demand is higher.

It’s economics 101 not rocket science but few people have an interest in denying the truths of rocket science.


Did Tabarrok watch the 60 Minutes segment last night on the sinking tower of San Francisco? The building, a luxury (units originally sold for tens of millions) high rise which is only 10 years old, has sunk some 17 inches and continues to sink. The explanation is that the builder (a) didn't take the foundation down to the hard rock and (b) used concrete rather than steel, the extra weight of the concrete (which is cheaper than steel) contributing to the sinking tower. The builder, who refused to be interviewed, said he complied with applicable regulations. Maybe San Francisco needs more not less regulation of its housing.

Regulations failed therefore we need more regulations. Typical.

You believe the solution is more lawsuits and more lawyers?

Uhhhhh.... ? There's not a conflict here.

Alex is talking about regulations on higher-capacity residences. You're talking about regulations on build quality. Alex might be just fine with regulations that say you should build buildings that are structurally sound.

Just to clarify -- Alex is talking about regulations that ban the construction of higher-capacity residences (like large apartment buildings).

How can a new high rise building be sinking and tilting if high rise buildings can not be build?

Note the builders have blamed other high rise buildings near the one tilting for causing the sinking and tilting, which must be fake buildings because buildings are prohibited from being built by regulation....

Specifically, the building built with foundations to bedrock over a transportation center is blamed for the other building tilting.

By the way, this building is north of the San Francisco Transbay development project that has added 2000 housing units in the past five years with several more residential blocks becoming available after all the transportation infrastructure is built, including a high speed rail terminal.

The builders/owners of the Millennium Project are blaming the subsidence on "dewatering" by the Transbay Project.

It's complicated. The builder may have chosen not to set the foundation on the hard rock, choosing instead to have what's called a "floating foundation" to make the building less susceptible to collapse in the event of an earthquake. Or maybe the builder chose a "floating foundation" because the builder wanted to use cheaper concrete construction and the concrete would be susceptible to cracking absent the give and take provided by a "floating foundation". Maybe a "floating foundation" is stupid and should not be allowed under any circumstances. Or maybe high rises shouldn't be allowed in an earthquake-prone area. I wouldn't want to be in one during an earthquake. As for the rich folks who bought the units in the sinking tower of San Francisco, they no doubt regret it. But not all is lost, as the lawyers have lined up for the lucre. Defendants will likely include the city for allowing the builder to construct the sinking tower, with its "floating foundation" and crumbling concrete. I suppose some might say the sinking tower confirms the need for less or no regulation, while others will demand more not less regulation. It's complicated.

Or maybe high rises shouldn’t be allowed in an earthquake-prone area. I wouldn’t want to be in one during an earthquake.

High rises are the safest type of building to be in during a quake. The wind load a tower has to deal with is higher than a typical earthquake load so they can handle quakes with no issues.

Yep, and the Titanic was unsinkable.

The Titanic was not thought to be unsinkable at the time. This was a myth that started later.

And we have lots of data points on how high rises perform in earthquakes, surely? I'm not an expert, but I don't think this is a hypothetical question.

I was in the 921 earthquake in Taichung, Taiwan.

High rises did very well there considering the strength of the quake.

The engineering required to make a building safer is not linearly more expensive as it gets taller. If anything, it's the old, small buildings that are trouble in a strong quake. as it makes little economic sense to go to all available measures.

If every building was inspected, and expected to do very well in case of a quake like in 1989, you'd not see a lot of 2-4 story new construction, but SF still has a whole lot of that. You don't need a huge skyscraper, but you'd at least hit 7-12 stories.

Now, all of this said, SF doing terrible things to their housing market give a fighting chance to second and third tier tech hubs. A San Francisco that aimed for the density f Manhattan's upper west side would not be good for the health of other US cities.

"If anything, it’s the old, small buildings that are trouble in a strong quake. as it makes little economic sense to go to all available measures."

Yes this. The largest set of fatalities in the 1994 Northridge quake in Los Angeles was in a low rise apartment building that pancaked. These buildings are called, amazingly enough, dingbats.

LA's high rises made it through the quake with no fatalities and for that matter no injuries that I'm aware of. Some of them did suffer more damage than had been expected, but there were no collapses or deaths.

So yes, height is distinctly less important than the design of the building, and the design of the building is correlated with its age. High rises are new, low rises may not be. Each major earthquake in California results in an upgrading of structural standards, but the older buildings are typically grandfathered so they are exempt -- and usually are not retrofitted nor strengthened.

There's also lots of other kinds of structural engineering that can make building less susceptible to earthquake damage.
The main idea is that you design the building t\so the normal modes of vibration are not the same as the vibration frequency of earthquakes.

+1, LA has big skyscrapers on the San Andreas fault,and they are safe. Also see this on foundations, as I don't think "floating" foundations are found in high-rises, though I concede settlement is an issue if you don't strike bedrock (in the Philippines, which has loose dark soil going down several meters, foundations also settle):

Bonus trivia: the San Andreas fault occurred during the Eocene epoch of the Paleogene Period in the Cenozoic Era, about 30M years ago. All educated people should have the geological time scale memorized to the epoch level, in according with the conventions of the International Commission on Stratigraphy, though I admit it's annoying since they sometimes change the boundary points by a few million years.

For those who didn't see the 60 Minutes episode last night, many if not most of the buildings in SF are constructed on the loosely-packed rubble left from buildings that collapsed during earthquakes, which helps explain my "floating" foundation metaphor. Of course, to call it a "foundation" is to strip the term of its meaning. A libertarian such as Tabarrok no doubt believes that people should have the right to pay tens of millions for the privilege of living above an earthquake graveyard. I suppose I agree with him. Speaking of metaphors, here's a good one: Marissa Mayer living in the penthouse atop the Four Seasons Hotel in San Francisco.

>>Maybe San Francisco needs more not less regulation of its housing.

I think you meant "better regulation", not "more regulation".

Doesn't this kind of problem take care of itself without political intervention?

Tenements as a vision for SF's future - sounds like a Gibson novel, actually.

Or luxury apartments- the important thing is density. Since San Francisco is fantastically wealthy, luxury apartments are considerably more likely.

Depends, doesn't it? After all, cramming 500 people into 100 apartments can generate a fair amount of cash flow without having to bother with all the other regulations that someone like Prof. Tabarrok might object to. And I do mean cash flow - why bother with all those pesky tax regulations when you can rent on a cash basis to people who might also enjoy not attracting any regulatory attention.

There is a reason why slumlords tend to make out like bandits, especially when regulations are weak to non-existent.

Alex is clearly advocating changing particular regulations, not ignoring all regulations.

If SF had lots of high-density tenements it might recapture some of it's bohemian past.

I visited the tenement museum in NYC.

I was prepared to be SHOCKED. But actually, compared to Hong Kong or other densely packed Asian cities, it wasn't that bad.

Sure, not fun, but neither was being a farmer back then.

I also wonder if you don't already have tenement density in SF with say 5-6 people in an apartment.

"Tenements as a vision for SF’s future – sounds like a Gibson novel, actually."

The current option is to push lower class housing out into rural areas far from the city center. But hey, out of sight out of mind, right?

Or into illegal firetraps in Oakland.

When I visited the New York Tenement Museum (very interesting!), I was amused to see that the restored tenement apartments were comparable to, if not a little nicer than, the apartment I was renting in Berkeley at the time.

Even more amusing: I moved to that apartment after living in the old country for four years.

A few years ago, in Finland, a major politician suggested that new housing should not be permitted in expensive locations such as near the train stations because only rich people who are wealthy enough to live there benefit from that. Instead, according to him, new housing should be built in the periphery so that the poor people could afford it.

I saw the same thing happen in Denmark. So the poor ended up 1) concentrated in the bad ‘burbs, and 2) had longer commutes. (Though many had no work.) Ironically it is the poor that ought to be walking or riding their bikes to work.

Anyone interested in this problem should attend a Berkeley city council meeting, including Moretti. The people of Berkeley are paranoiac, chauvinistic, intolerant and have this weird culture whereby people constantly brag about their busybody-ism. The big word is "process." The more process, the better. Also, all debates take place on the level of a sort of vague, artistic intuition about how the word works: building new housing can't make housing cheaper, because new structures fetch a higher price than old structures, and their prices are a sort of phlogiston that seeps out into the rest of the community. To Berkeleyans, the housing crisis is not evidence of the failure of the restrictive policies pursued over the past fifty years; rather, it is evidence that they should not have allowed *any* new housing at all. They also talk, unironically, about the importance of protecting home values while also making housing affordable. The result is a system designed to make housing generally expensive while producing very small numbers of rent-controlled housing units as a sort of symbolic gesture. What is also funny is that many people in Berkeley agree with Bernie Sanders that college should be free so that more people can get an education, but they also complain about UC Berkeley's expanding enrollment.

People can go live in other cities, I am told there are many in America.

This is the smartest comment you've made here. There is no need or right for SF to make more room because people want to live there. The city is full, move on to the next one.

Thanks, I am a smart person. Good genes, very good genes, OK, very smart, very good, very smart, you know.

But how big are your hands? Mario or Super-Mario sized?

They are huge.

But not yuuuuuge?

I don't want to brag, but they are yuuuuuge and smart. Winner's hands. I am tough, smart, very good, very smart because I hire the best people and make the best deals.

San Francisco is half as dense as Brooklyn.

So what? America is one-fourth as dense as Red China. Maybe America should welcome hundreds of million of communists.

And Brooklyn's population increased by 1 million in a 20 year period in the early 20th century, building 5 story walkups. 100 years later surely we could add 100K to SF?

Children go hungry to bed in Africa. Maybe you should stop eating.

I don’t want to. The state shouldn’t outlaw home building. It’s clever to say if you don’t like a policy then move, but that’s neither patriotic nor humanitarian. I don’t want American cities to have bad policies catering to senile hippies. Is that so hard to understand?

"I don’t want American cities to have bad policies catering to senile hippies."

So all American cities must bow before you. Citites are the laboratory of democracy. Let a humdred cities bloom, let a hundred schools of urbanism contend.

It's not just senile hippies. I've listened to educated 30-somethings, with smart-people careers, complain about wanting to take advantage of a down local real estate market to upgrade but darn it, they couldn't get a fair price for their current house.

Outside of some truly negative uses such as heavy industry, why do you think you should have the right to tell me how I use my property? The city is not an HOA.

If you want to live in a suburban environment, you can move to the suburbs. There are many close by. But using government regulation to restrict home-building in a way that causes such a clear public policy failure in such an obvious and extremely regressive way is not a justifiable use of regulatory power.

It is not a policy failure in any meaningful way.

Sure it is. Poor zoning, permitting and tax policy have led to ever-rising commutes and 1/3 of CA renters paying more than half their salary in rent.

If policy wasn’t the problem Gavin Newsom would not have kicked off his campaign for governor by promising to build 3.5 million new housing units by 2035.

In addition to Kevin Burke's local impacts, I would add Moretti and Hsieh's estimation of ~10% lower US GDP from building constraints in just SF and NYC alone.

Looks like they've now applied their model to the entire US in a recent paper:

They estimate that building constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

I would rather die than allow red bandits to trash my neighbourhood and San Franciscans have all right to protect their city from aggression.

"Keep your government hands off my R-1 zoning!"

Exactly. You can pry my zoning laws from my cold, dead hands.

Funny, but these same Californians think they can tell people how to run their country. Remember illegal immigration? The laws were never changed even under all Democrat rule in the first term of Obama. Yet SF wants to be a sanctuary city. If they can defy government rules in the name of their notion of the good, we can be busybodies and tell them to build more housing even if it lowers their house values.

Sauce for the goose,...

I challenge you to go ahead with it.

Yes, but then they move to my city and do the same thing.

"They also talk, unironically, about the importance of protecting home values while also making housing affordable. The result is a system designed to make housing generally expensive while producing very small numbers of rent-controlled housing units as a sort of symbolic gesture."

This sounds a lot like my county.

It's funny. Ann Arbor seems about as proggy as Berkeley (Clinton over Trump 83-12) and yet there's a pro-development, pro-density wing of the local Democratic party that holds sway over the crunchy, preservationists, and a whole raft of apartment towers have been approved and built in the last decade or so with more planned or under construction. Many (though not all) are student-oriented, but housing supply is housing supply. Anyway, it's at least one example that shows dark-blue cities don't have to tie development up in knots and slow it to a crawl.

I can't claim this difference is predictable, but it's also not that surprising. Berkeley's leftwing politics is just coming from a very different cultural source.

I dunno. Ann Arbor was the birthplace of the SDS / Weather Underground, original stomping grounds of Bill Ayers and Diane Oughton (who so fortuitously blew herself up in Greenwich Village). About as far left as you could get. The city has grown and gentrified quite a lot in recent decades, but certainly no more so than Berkeley.

I liked a comment I read the other day the the entire state of California was built on magical thinking. From 'we're all going to get rich in the gold rush', to 'we're all going to be movie stars', leads directly to new age spirituality, manifesting, and a total unwillingness to acknowlege basic economic realities. California's population was born and raised to believe that believing hard enough would make anything you want come true.

Would you include 'we're all gonna get rich creating apps and AI and VR' as the latest stage?

“Anyone can be a porn star!”

"California’s population was born and raised to believe that believing hard enough would make anything you want come true"

AND that's why California's GDP is #6 among countries in the world - that magical California belief thinking...

"AND that’s why California’s GDP is #6 among countries in the world"

No, population combined with an above average American per Capita GDP is what makes them #6 among countries.

California's GDP per capita is 11th among states. Does that strike you as population that was "born and raised to believe that believing hard enough would make anything you want come true (?)"

My point being, in case it's not patently obvious yet, it that Hazel is full of baloney.

California only ranks 11 (or 12) in per capita GDP if you ignore cost of living. If you factor in cost of living, California falls to 37. Of course, ignoring cost of living is classic magical thinking.

Would you include ‘we’re all gonna get rich creating apps and AI and VR’ as the latest stage?

Definitely. The time to get rich was 20 years ago. We're well into raking around in the weeds for magic diamonds at this point.

I think it is cultural. Nowhere in the midwest or south has a very restrictive entitlement system as the coasts do. I am from the midwest and from what I can tell, Californians do not have any sort of idea of "live and let live." This can be tricky to see, because Californians are socially liberal. But what I've learned living here for a while is that it's not only that they think, say, smoking marijuana is *okay*; they actually believe it's *good* for you. So a lot of their permissiveness is just they think different things are good for people: divorce, abortion, polyamory, mushrooms, etc. When they think things are bad---be it guns or architecture or whatever---they regulate them much more stringently than you'd typically see in Michigan, and they do so not from welfare arguments but always from some sort of conspiracy theorizing or culture war arguments. They are the most conspicuously pious people in the United States, to a degree that would embarrass your typical southern baptist.

The Ann Arbor phenomenon is quite new. When I lived there, I frequently heard about various development freezes across the city that prevented new apartment construction.

Hard to say it's categorically a California thing. San Jose has a lot of new construction, and Google is redeveloping a downtown neighborhood into office space for 25k employees.

I don't believe it is true that Berkeley only produces a small number of rent controlled units. It certainly can't keep up with demand but thousands of units have been produced in Berkeley in recent years and they have tried micro-units.

SF, Oakland and Berkeley don't produce enough housing but the bigger issue is the Silicon Valley

In addition to the issues mentioned the area has a difficult geography as well

p. 8 of this. The city produces about 5-30 affordable units every year, in a city with lots of inclusionary zoning requirements, affordable housing fees, and tons of rich people.

There is no geographic constraint on the number of units in Berkeley. People could build more densely very easily. If geography made new housing impossible, then why are there so many articles in the newspaper about neighbors protesting new housing?

Zig is exactly right. Berkeley voted a few years ago (by ~2:1, if memory serves) for a downtown plan that allowed a substantial amount of new apartment construction, then by 3:1 two years later against a proposition that would have reversed the earlier one. (Ironically, the later measure was pushed by the current mayor and one of the new city council members, both of whom call themselves progressives, so go figure.) A bunch of new apartment buildings have appeared downtown recently, so Berkeley is hardly at the forefront of NIMBYism. You need to distinguish between the idle gray-hairs with, um, interesting economic theories, for whom the high point of the month is when they get their 2 minutes to speak at the city council meeting, and the rest of the community which really is genuinely in favor of addressing the housing crunch - which is quite dire for the 40,000 students at the university.

Meanwhile, many South Bay communities have continued to block new development while massive new HQs for Apple, Google and Facebook are or have been built.

Oddly, the Moretti piece quoted in the post didn't mention the recent state legislation designed to radically reduce the ability of NIMBYs to block new housing.

It's a Bay Area problem. Why would someone in New Mexico care? There's phone, fax, postal and internet service, after all. Isn't London housing more expensive than towns in County Durham?

Because Californians sell out and move to northern New Mexico, driving up housing prices there.

That is almost Berkeley-like in its genius.

Money is bad, when Californians have it. It is worse when they want to spread it, to sellers in other states.

My thought exactly. I would not favor them bringing the same voting patterns that made them flee their old home though.

DBN, you are crazier/dumber than those freaks in Berkeley.

It’s a problem in many coastal housing markets, not just the Bay Area, which leads to lower real wages in the aggregate. Housing rents are eating labors share of income, and regulations are distorting factor markets. It is in America’s best interest to get richer, to develop technology via clustering, to make it so more people can afford to have children. This shouldn’t be hard.

Yes - if it was just one or two neighborhoods, maybe that's okay. But it is a consistent and general problem and probably the single biggest policy lever that could improve standard of living in the United States. It is worth looking at state level policy to improve the situation.

Moretti co-authored a paper that estimated that US GDP was ~10% lower due to building restrictions in just SF and NYC alone. That's foregone wealth that could have been used to pay for social security (or tax cuts!) for the country as a whole.

Looks like they applied their model to the entire US in a recent paper:

Find that building constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

California and the State of NY generate about 4 trillion of economic activity per year.

10% of US GDP is over 1.8 trillion or nearly half of total California and the State of NY economic activity.

No way that building restrictions alone in two cities would increase GDP by nearly that amount.

One way to think about it is that the enormous increase in wealth generated by the tech boom is largely captured by homeowners in the urban core who bought before the boom.

Yes the engineers are serfs who spend their youth working round the clock and maintain only an average lifestyle due to high housing costs.

Then in middle age they get tossed out of the industry and then Vivek Wadhwa applauds together with the rest of managerial class.

Why do you think is so difficult for the employers to move to the periphery? They are not suffering political obstructionism there, they could move, and attract better or cheaper people where the cost of housing is lower. District economies, like the presence of universities and other companies would still be there.
It happens in all industries, banks in Wall Street, professional service firms in prestigious city-centers, etc. Why do you think it works like that? Owners’ vanity, paid by a bit of rent position? Or is the employees that give location a higher value than the cost of housing or commuting? Or the district economies do not really work for distances higher than, say, 30 miles?

It is difficult for employers to move to the periphery because they then have access to a much smaller labor pool. If you put your company in Walnut Creek, your 45 min commuting radius (i.e. primary labor pool) is just a portion of the East Bay. If you're in downtown San Francisco, on the other hand, you have access to a vastly larger pool of workers (San Francisco, the peninsula, and ironically even more of the East Bay than for WC) due to being at the center of the transportation network.

Hopefully, we'll soon see the demise of that situation. There's no reason why a company's entire work force should be clustered in one central location when practically the entirety of their communications are electronic. Some real estate genius will eventually talk a company into forgetting about building a giant headquarters complex and leasing cheaper locations around a major city. Failing shopping centers look like a good possibility. Commutes will be shorter and easier, employee morale higher, rents cheaper, flexibility enhanced, profits greater. After the first one does it others will follow the lead.

But isn't that what everyone though would happen in the 90s with the advent of the internet/high-quality telecommunications? That there would be no reason to need to be in these high-cost cities, or even in cities at all any more? If anything, the trend appears to be in the opposite direction. It's tough for me to imagine that's all just due to collective idiocy. There seems to be real value in a central location.

Technotopians always undervalue the fundamental social aspects of humans. More gets done when people actually bump into each other randomly, it's a real thing. If you are in tech you need to live and work in an area where many others are also in tech, if only to cross pollinate ideas or have an ecosystem for job hopping, starting up companies, etc. We are humans, we are social animals. I realize some on this site are a little atypical in that respect and have a hard time understanding this, but it's the case for well over 95% of humans even techies.

The internet was only just taking off in the mid 90s when almost nobody had broadband. Some must have been thinking of a far more powerful internet and realistic telepresence that will arrive in the early 2020s and significantly weaken centralized offices.

Think of it another way. In a globalized world the profit of anything that can be globalized goes to zero. If you can just as easily do your job in the midwest, someone in China can just as easily do it.

Only those profit centers that require in person social interaction can maintain outsized profits.

"Technotopians always undervalue the fundamental social aspects of humans. More gets done when people actually bump into each other randomly"

For this, the high rents may actually be a feature not a bug. If the strides of human progress and depend on the random fortuitous interactions of the talented, gifted and motivated, it would make sense to filter out those without these strengths who might just be getting in the way.

So the high rents might be functioning like a "cover charge" or membership dues for a club that functions best by maximizing the likelihood of interactions of its select gifted clientele by excluding the masses who don't add the same value.

In 1785 every communication involved personal contact between two humans, either two speaking to one another or a third delivering the message. Now only a small percentage of business communication operates this way. (Substantially more in the case of the federal government in DC.) People buy incredibly expensive race horses, real estate and art works by telephone bids, for instance. If someone in China can do my job as well as I can, and vice-versa, how about making me Secretary of the Treasury?

"But isn’t that what everyone though would happen in the 90s with the advent of the internet/high-quality telecommunications? That there would be no reason to need to be in these high-cost cities, or even in cities at all any more? "

So, China is abandoning the future of industry based on home based production of food, clothing, and transportation capital assets, etc.???

Economists seem to forget what Adam Smith studied in his moral philosophy leading to his comments creating economics as a field of study: mostly home production transitioning to central production. As if the essentials of life: food, shelter, clothing, energy are no longer essential to life.

Silicon Valley disagrees.

The biggest firms rely on constant stream of well-educated young people. Those people don't want to move out until they have found partners.

They can move if they want to. When Manhattan real estate got too expensive the shipping industry pretty much all moved out. Container carriers to NJ and the bulk operators to Stamford. Same clustering for the most part, just in different area codes and still close to the original location.

Feature, not a bug. Serves the interests of the most highly politically organized as ever down through history, namely the local landowners. Reminds me of the old saying about the Gold Rush - Only a few early miners and later large enterprises found much gold, but the people who really made their fortunes were mostly those who sold supplies to the miners. Corporations make some money by hiring more people in the Bay area, but the people who really make their fortunes seem to be mostly those who supply housing to the increased population density. This marketplace logic feels true, almost obviously so, but it would be nice to see some numbers on it.

Is San Francisco really the best place to concentrate a lot of people and commerce? Forget Econ 101. I'm thinking of my Principles of Geology class.It might be earth science trumps rockets science.

It's kind of a trap. The more expensive housing gets, the more people have to stretch to afford housing. Therefore, the more (rationally!) sensitive they are to price drops. Even more now that 2008 gave them a taste of what that would look like.

A politician can talk about "building affordable housing", meaning something subsidized for poor people, but they can't talk about lowering the price of existing housing. If they came out and said "we're going to permit housing until the price drops by 50%", they'd be run out on a rail.

But if housing keeps going up, eventually the community dies. It will become nothing but rich people and their kids (until they graduate, then they can't afford to live there either.) San Francisco already has the lowest percentage of children of any major U.S. city.

This process never should have been allowed to get started, but now that it has gone on for decades, what can stop it? Only a crash, as far as I can tell. Perhaps Silicon Valley will go the way of Detroit and lose its industry. As long as billions flow into that area, they are stuck with high costs, like it or not.

I know the Bay Area well, and I think this is a really good summary of the situation.

As you say, though, it takes an economic calamity like Detroit to actually kill an area, while successful areas tend to survive just fine. There aren't many cases in history when the rich died in situ with no-one to replace them, as opposed to moving out of cities for more space, privacy or clean air. Maybe SF should be seen as the small, very wealthy Manhattan-like core of a larger metropolitan area.

But, FWIW, the Detroit area didn't 'die' -- just the city itself. The city went from 1.8 million to under 700K over ~60 years. Over the same period, the overall area added another million. Really, the metro area outside the city gained 2 million (one million moving out of the central city, another million in net growth and in migration).

"Maybe SF should be seen as the small, very wealthy Manhattan-like core of a larger metropolitan area."

This. And Oakland is Brooklyn, Marin County is western Connecticut, South Bay is New Jersey, etc. You don't have to buy a house in SF proper to live and work there, most do not. They move to the burbs like any other city.

Not a bad comment per se, but as someone who has lived in both places the comparison does make me laugh.

Analogies are analogies. But this one is a stretch, even though I agree with the premise generally.

I have done so as well, and I realize the analogies are very loose. The main point is Millian is correct, SF is the 'Manhattan-y' hub of the Bay Area.

What is the best case scenario for housing reform? My guess is that deregulation opens the floodgates to catch up growth. The only scenario I can see this happening politically in California is with large commitments to affordable housing (maybe a density bonus?). The end point is that housing prices slow enough, wage growth picks up, and over time slightly less of the middle class is priced out? Does anybody think prices would go down?

Also don't forget that transportation half the problem too! It doesn't matter if your commute is 5 or 50 miles if both take an hour. Maybe HSR will make a Fresno - San Jose commute a viable option. Or maybe autonomous cars make commuting from the periphery a viable option. Or probably things stumble along the same trajectory.

best case scenario - Prop 13 reform causes a whole lot of homeowners to cash out for millions, the land turns over and single family homes get converted to duplexes/triplexes. By Right development makes it easy to streamline/get projects approved by local city councils.

We already have a density bonus and commitments to affordable housing, SB 35 which was passed this fall for example requires a percentage of units to be offered at BMR rates.

We have seen prices go down... SF built 5000 units last year and rents and owner move-in evictions both dropped. Not hard to imagine that same amount of building depressing prices across the state.

Don’t forget Bay Area climate and landscape. Even if there is a calamity, people will quickly fill the void. It’s not Detroit.

Came here to post the same. Lots of posts like these state the obvious (housing is expensive because the supply is constrained) but seem oblivious to the possibility that this is both obvious and extremely difficult to change. There are major incentive problems here that I have never seen a good proposal to address.

I'm pretty confident that only a significant drop in demand is going to fix things.

"It will become nothing but rich people and their kids"

I think that's the point.

Astute comment -- that "few people have an interest in denying the truths of rocket science."

Few people have interest in rocket science. As a student, my classes seldom reached double digits.

Part of the problem with internal mobility is Prop 13. If you are old, you do not move. Why. Because when you bought your house eons ago, your tax rate goes up only a few percent a year. However, if someone buys the property, the house gets revalued to market value. So, if you are old, you do not move.

Why don't Libertarians and Republicans talk about the lock in effect Prop 13 and its effect on housing mobility?

Here is further reading:

I've seen it mentioned dozens of times. Democrats don't talk against it much either. Given the demographics of the area, if Democrats DID talk about it, we'd hear it every day.

Then they should. And, in fact, some have.

It is so obvious.

Reading about supply and demand, and totally ignoring a constraint on sales, is just stupid. If you are going to discuss "regulation" you should discuss "tax regulation".

Shocking to me that Bill supports part of true house tax proposal.

Clearly the government should discourage families from throwing assets into undiversified housing stock as a form of savings.

Eliminate the mortgage deduction! Eliminate SALT deduction!

And housing costs will fall.

Both Gavin Newsom and Ted Chiang mentioned Prop 13 in their letters opening their campaigns for governor

There's more than one kind of democrat. There's plenty of left leaning people in the area, which have their own primary candidates, who wish for more construction. The YIMBYs. You'd find plenty of tech execs in there, who do not like the fact that prospective employees laugh at the idea of moving to SF without doubling or tripling their salaries somewhere else.

Whether they have any success or not is another matter: The trick here is that the moment someone sunks the hundreds of thousands it takes to put a down payment, they instantly become NIMBYs, as they are afraid that regulatory changes will wipe them out.

This is from the NBER paper:

"As a result of Proposition 13, there are obvious distortions in the real estate marketplace. For example, in 2003 financier Warren Buffett announced that he pays property taxes of $14,410, or 2.9 percent, on his $500,000 home in Omaha, Nebraska, but pays only $2,264, or 0.056 percent, on his $4 million home in California. Although Buffet is known as an astute investor, the low property taxes on his California home are not attributable to his investment prowess, but rather to Proposition 13."

$2,264 for $4 million sounds like a 40-50 year old purchase. FWIW. Not like he just walked in to get that rate.

No, but prop 13 fixes the property tax rate at a max of 1%. Which means the tax on a $1M CA house is $10,000. And that's for a house that has just turned over. It's much less for long-term owners. In some places, the average owner has enough tenure that the effective rates are astonishingly low:

"But the Bay Area city of Palo Alto — with a 2015 median home price of $2.2 million — had an effective tax rate of 0.42 percent, the lowest in the state even after including special tax district assessments."

The low property tax rates established by Prop 13 are a big reason why CA house prices are so high -- if you aren't going to be paying much in property taxes, you can afford to bid up the purchase price. Mortgage and interest on a newly purchased $1M house with an $800K balance is ~$40K a year. Where I live, the cost for a million dollar house would be $15K higher (property taxes here are around 2.5%).

The exact details of Prop 13 may be off, but I am not sure the basic idea that your tax is (mostly) determined by your purchase price is so bad.

You see your deal going in, know your tax going forward. It seems fair.

Well, there's the fact that taxing land is the most efficient form of taxation. Also, I'm not sure what fair that I, a recent home purchaser, should pay so much more to the upkeep of the community than my next door neighbor who bought 10 years ago. The fact that they've experienced massive asset appreciation should not mean that they get a second windfall in the form of a reduced tax rate.

But putting that aside, since Prop 13 caps assessment increases at 2%, much of the time the amount of tax property owners decreases in real terms, especially since no "make up" increases are allowed if your property value does not increase by at least 2%.

The 20-30 year homeowner was paying for those schools and sidewalks all along (with higher value, pre-inflation dollars). It might take the new buyer a while to catch up, even at a higher rate.

But as you say, there is a rate of adjustment. Not even Prop 13 ignores market value or inflation, and how to adjust is the crux.

So your model is that how much you contribute should be determined by how long you've been in one place? That once you've put in some tax money for a while, then you're good, and the young/newcomers should pay for everything now? What about someone who changes jobs frequently and so moves every 5 years or so? They just always pay the newcomer rate? Or what about someone who gets divorced? Suddenly they're newcomers again?

I don't think that taxation model makes much sense or is very fair.

Everyone paying an equal rate seems better than determining rates based on parcel tenure.

Huh? It is not a model that the sum of your tax is the sum of your tax. And it isn't false that founding members of a community build the roads and schools. In a built community later entrants are paying maintenance.

Assuming you read the note below, you are demanding that old owners who built the community pay *more* than the rate of inflation, because new buyers push prices beyond the rate of inflation.

That has nothing to do with the actual cost of community services.

"And it isn’t false that founding members of a community build the roads and schools. In a built community later entrants are paying maintenance."

That comment reflects an ignorance about how public finance works. When schools or roads are built, they aren't payed for by taxing the hell out of the residents the year it's built. They are built through a municipal bond, payed back over a long period. The "founding members" can claim they "built" the community if they lived there constantly and paid taxes as adults for 30 years, most can't. Most lived there for less, or live in communities where the true "founding members" founded the community in the 1920s and are long dead. This question has been extensively litigated as communities have used that logic to outright tax newcomers at a higher rate than "founding members." These efforts have usually been ruled unconstitutional, they must be done in a roundabout way(like prop 13) to pass constitutional muster.

Those bonds are matched to the then current tax base.

I sure hope no municipality is saying "assuming these are all going to be $4 million homes, tennis courts on every corner!"

I think there is a stronger case for a straight inflation adjustment, rather than a market value adjustment.

It continues the deal, but tax payments do not decline in real terms.

How about a similar treatment of dividend taxes? You expect to receive X and pay Y in taxes, but if you get a lot more, your effective tax rate goes way down. The scenario always cited is a retiree who bought a house when it was affordable only to see it increase in value because everyone keeps bidding up the prices for it, and he's driven out because he can't pay the now much higher property taxes. Sad, sure, but that's capitalism for you. He'll walk away with a handsome profit, hardly the end of the world. Distorting the market just so that a group of hardly poor people can benefit(which also benefits a whole lot of millionaires who easily could pay the higher taxes) is stupid. Remember that for everyone who benefits from such a policy, someone else much pay higher taxes to compensate.

Dividends seem a closer match to rents, and I think they are taxed similarly.

True, there is no close match to property taxes as they were the sole significant form of wealth tax we have in America. The point is that the lucky are unfairly rewarded with lower tax rates.

They are never lowered. The argument is that they are not sufficiently raised.

Let me guess, as a Trump Fan you want lower inheritance tax for Don Jr., but higher tax on my mom?

"They are never lowered. The argument is that they are not sufficiently raised."

Oh come on. If I had to pay an income tax of 10% on an income of 100,000$ and then my income increases to 200,000$, but I still pay only 10,000$ in taxes, would you argue that my taxes were never lowered? It is technically true but misleading, as most people mean "tax rate" when they say "taxes."(And I made it clear that I was talking about tax rate.)

"Let me guess, as a Trump Fan you want lower inheritance tax for Don Jr., but higher tax on my mom?"

Actually no, I disagree with Trump on that issue. I'm more populist than Trump.

"The point is that the lucky are unfairly rewarded with lower tax rates."

Much fairer to force them out of their homes by raising taxes to a point they cannot afford and make them sell when they do not want to.

Real estate taxes are one of the the worst forms of tax. You are advocating paying much higher taxes on a mere paper increase in value.

I assume you also advocate a yearly tax on unsold stock at curent market values?

The scenario always cited is a retiree who bought a house when it was affordable only to see it increase in value because everyone keeps bidding up the prices for it, and he’s driven out because he can’t pay the now much higher property taxes. Sad, sure, but that’s capitalism for you. He’ll walk away with a handsome profit, hardly the end of the world.

So the retiree gets that handsome profit; if it's big enough, he'll pay capital gains on it, and he won't be able to buy another house in a comparable area because all of them have gone up in price. So, if he sold his house in, say, Palos Verdes, he ends up moving way northeast to, say, Lancaster, where his quality of life goes to hell. (Trust me. I've been there.)

"So the retiree gets that handsome profit; if it’s big enough, he’ll pay capital gains on it, and he won’t be able to buy another house in a comparable area because all of them have gone up in price."

You don't pay capital gains on a primary household sale as long as you use the proceeds to buy another house. So, that's not really an issue.

"So the retiree gets that handsome profit; if it’s big enough, he’ll pay capital gains on it, and he won’t be able to buy another house in a comparable area because all of them have gone up in price"

The question you should be asking is why it went up in price. That should be the main issue you are trying to solve, the goal should not be to use unfair laws to hide the artificially inflated price of something from a subset of the market.

@JWatts: no longer true. You pay capital gains when you sell your primary residence on any gains above $250K ($500K for joint filers) no matter what you do with the proceeds.

Ah, I didn't realize they had capped it.

It's also the case that a major cause of the high housing prices in CA is that prop 13 fixed property tax rates at 1% of market value. A million dollar purchase price is a lot more viable if your annual tax bill is $10k rather than the ~$25k it would be where I live.

Here's a crazy thought, Alex -- maybe the residents of San Francisco, as well as the rest of the country, are entirely capable of arranging their immediate surroundings as they wish, without your stamp of approval.

Maybe they don't want another 38,000 apartments in their downtown. And maybe that is none of your business whatsoever.

That'd be fine as long as those same residents respected the fact that maybe Americans want less immigrants, or the removal of the state-tax deduction,etc. Last I checked the SF-types were very aggressive about pushing their own values onto others.

Yeah, it's crazy how hateful Bay Area natives are of new people moving in (just go to a SF Board of Supervisors or Berkeley City Council meeting) but then imagine themselves as great protectors and lovers of immigrants. What, exactly, do they think an immigrant is?

This is total nonsense

You think gadflies at SF city council meetings are a) representative of Bay Area natives b) are Bay Area natives

This site really needs an upvote button.

The voters of sf do not collectively own the property of SF. The city has been granted the privilege of regulating private property to serve the public interest, but if their regulation does not do so then it is okay to criticize it, especially when the regulation has terrible spillover effects across a whole area. It is not “their downtown.” It is just a collection of private parcels in the same city they live in. The city is not a major landowner; it is a government.

Sounds like they are managing it to their liking. They have no obligation to make room for others who want to move in.

It's funny to me how discussions about property rights in the form of zoning turn so many people into ardent Communists and kinda advocates of the hukou system.

"The people should get to determine the use and control of every piece of private property in the city. Others who want to live and work here, tough cookies, you can live in the provinces and commute in."

Funny how property rights turned into communism.

It is a tough issue though. Property owners moved into an area that had certain characteristics, with certain zoning. Change the zoning to accommodate something new and it's value taking from the current owners. Flip side of that is that if I own parcel A, I want to build anything I want on it. Where this loses is that you knew you couldn't build a high rise there when you bought it.

TMC, if the government grants me a monopoly to sell donuts in town A, then takes it away, is it stripping me of my property rights? In a sense. Still something that ought tot be done.

It's not just about people moving in. Blacks are now down to about 5% of SF's population. Yay diversity!

The Road to Hell is paved with Good intentions.

Why not? How would you respond to "I am managing my finances to my liking, I have no obligation to pay taxes?"

You entered a transaction and you have rights and obligations. New comers have no rights to be accommodated, and the property owners have no obligation to do so.

TMC, well I just see it differently. Our founders wanted a very limited federal government, but one explicit power they granted was the power to regulate interstate commerce, they also prohibited state governments from leveling tariffs on interstate commerce. Virginia was not allowed to say "New York importers have no right to be accommodated in our state." Property owners have the right to refuse to sell, sure, but they don't have the right to restrict the rights of other property owners for no other reason than to increase the value of their property.

TMC, what if the owners want to tear down a SF home and put up a 5 story walk-up, thereby doubling or tripling the value of their real estate? Why shouldn't they be able to do that? How is denying the owners the ability to develop their own private property not like communism. I mean, who wouldn't jump at a chance to turn an asset valued at $1 million into an asset valued at $2 million while only spending say, $500K? How is upzoning taking value from current owners when it increases the market value of their property?

I'm sympathetic to the argument that a land owner gets to do what he wants with his property, but not if they intrude on the rights of others. A 5 story walk up will certainly change the value of properties around it. The owner of the lot bought it knowing the restrictions to its use, so should not be surprised when they can't do whatever they like.

It's not like someone's changed the rules in the middle of the game for them.

"Property owners have the right to refuse to sell, sure, but they don’t have the right to restrict the rights of other property owners for no other reason than to increase the value of their property."

They do have the right to hold you to the restrictions that were on the land when you bought it in order to maintain their current property values. That's the situation here. If it were what your strawman was, I'd agree with you entirely.

TMC, when others build housing near them, they still have their house and the land it sits on. If they can use the force of law to protect the *value* of their asset, why shouldn't they be able to ban construction everywhere to maximize it's price?

When you go to maximize it you are trespassing on others rights normally. My issue is that owner one and owner two bought their lots under zoning rule A. Owner two wants to change the rules to enrich himself, to a degree at owner 1's expense. I see this as wrong.

What would you say if San Francisco banned guns or legislated speech or tried to enact free speech? You'd probably say it was a violation of their citizens' rights, even if it was "to their liking." I think that regulating property so tightly that no one but millionaires can afford to live in anything but public housing is also a serious violation of rights. This is not a market outcome: if people were free to build they would build lots of micro-apartments and such as to drive down the price of housing. SF itself is not that large, but if rights to build were respected across the bay area we'd have the same pace of development we in the early 20th centruy, or in Houston today, and prices would fall quickly. It would be crowded and worse for some current residents, but I say too bad: this is simply the cost of freedom, along the lines of the dangers of having gun ownership or free speech.

*overturn free speech.

Sure, and maybe the steel company doesn't want other companies making steel, the question is why should they get to decide that? And sure, it's democracy if the steel company lobbies politicians to cripple its competition just as it's democracy for the city council to restrict building permits, doesn't make it a good idea. We have a situation where its economical for talent in the tech industry to clump into a few locations: tech workers must go where the jobs are and tech companies must go where the workers are. The result is the clumping of these industries in a few areas, which gives those in those areas who did nothing to create the wealth of the industry an ability to rent-seek from the industry. Why should this be tolerated?

there are a whole lot of renters in SF who are fed up with huge yearly rent increases. In 2016 we added 5,000 new units and saw rents decrease. seems reasonable to believe that building more will lower rents.

Funny how their business involves property that is not their own.

I often wonder why this type of thing is even worth discussing as a general topic in economics as if it's some problem or misunderstood outcome. Isn't the very first economic question to be asked here "Is the market behaving as the theory suggests?" If so then the next, and to some extent non-economic question, "What s the preference/utililty function being maximized and if so is the market behavior consistent with that rationale?"

Regulations are not market behavior.

I think this is the economists' blind spot. If market actors can avail themselves of regulation to drive up asset prices, they will, and do. And absent the State, they'll figure out other barriers to entry. Unless you're out in the frontier the State is omnipresent.

Incidentally, Oakland is just twelve miles across the Bay with the same coastline and, I assume, pleasant climate. Why does everybody have to be jammed on to the peninsula?

Yeah, and this is one area where libertarians have a similar blind spot. They tend to love local control and "experimentation," but it often leads to this kind of rent-seeking, a thousand different tribes trying to benefit themselves by screwing over the other 99% of the population that lives outside their locality and has no right to elect their officials, but who are certainly effected given the nature of the economy. At the same time, they have a justifiable hostility to federal control, a compromise position should be to support high state powers but no special "rights" for county or municipal government. It's the United States after all, not the United Municipalities.

It depends on if the states are home rule states or dillon states. Lets just say that there are states where the state legislature can determine what kind of zoning occurs in a specific city, if they so wish.

No libertarian I know has any love for local government. The point of devolving power to a more local level is that it makes it easier to vote with one's feet.

Sue Hestor, a woman who goes to SF planning commission hearings in her free time just to oppose random permits. She does it professionally as well, but it is hardly necessary to pay her to do what she loves since.

Property owners & rentiers don't need lobbyists when they have volunteer citizen activists like this one who fights to block your potential competition.

Who said SF is hostile turf to capitalist pigs?

No, this doesn't accord with any reason. It can't possibly be the case that "the enormous increase in wealth generated by the tech boom is largely captured by homeowners". If it were, the APFAMGO 4 would be cheap companies instead of democracy-threatening trusts.

HA. C'mon man, don't compare actual sciences to your social science, it just makes you look bad.

Eh, economics is not physics, but it's not sociology either. It makes testable predictions, and in this area I think the analogy is justified.

Basically SF NIMBYS are redlining. Is there any difference than what they are doing vs white nationalists in Charlottesville?

What they do benefits the ultra rich. Rich people keep browns out through price. Poors used to have to have all sorts of housing covenants that are now illegal.

Blacks have gone from 13.4% of SF in 1970 to 6.1% in 2010.

Sky high real estate is the price of getting the demographics you want.

If SF is so interested in getting rid of poor people why do they legislate to keep 20k SRO units some immediately adjacent to downtown in some very potentially valuable real estate

who wants what demographics?

It does have the benefit of redistributing a portion of that wealth to homeowners. Yes they are older and wealthier on average than renters, but still less wealthy than winners and this helps growth and is why these areas are the fastest growing. Reversal of this would increase opportunities for those starting out, but diminish them over time.

The way to think about this is the cost of housing becomes embedded in wage rates, so as housing flattens, wage increases flatten, and wages become similar to non urban areas. There is a primary effect from larger local volumes and greater efficiency, as long as increased congestion doesn't degrade this, and a secondary effect from higher densities and increased specialization but those flow to the few. Overcoming increased congestion requires increased investment, which existing residents don't wish to pay for and making new residents pay is the system we have, so this would shift/share the burden from new residents to old.

"Yes they are older and wealthier on average than renters, but still less wealthy than winners"


....and the problem is?

Real estate is expensive in London, Singapore, Paris or Zurich. Is any of those places in problems because "families knocking the door" can't find a place to live?

The problem with the Bay Area is really much more than San Francisco. The suburbs, Oakland and San Jose are extremely expensive as well. Traffic congestion is awful, transportation infrastructure inadequate and there are geographic challenges.


There is no buildable land withing 50 miles of SF. Mountains, ocean, bay, superfund sites and freeways surround the city. Build on farmland my ass, it's 3 hours from here. Recent development is mostly multi use, which means tearing down office and retail and building street level (often empty) retail with 2 bedroom 5k/ mo condos above.

Tear down existing structures, rebuild denser and taller. The actual construction is simple, its the zoning approval that is hard to get.


I can't believe how low density places like mountain view are

There is all sorts of farm land and other protected areas adjacent or nearly so to San Francisco in San Mateo County and Marin/Sonoma. There is a lot of protected land in the East Bay as well. I believe in fact the Bay Area has more land protected from development than any metro in the US.

Ironically, it seems like SF has struck on the least coercive mechanism to restrict immigration. Just make it impossible for immigrants to find anywhere to live, and there's no need for borders.

35% of people in SF foreign born in most recent census. The suburbs immediately to the south have a high foreign born population.

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