stupid heads

I agree with you that the supply and demand dynamic will be the ultimate driver, but we have spike over this curve right now. Another driver in 2001-2003 was the Dot-Bomb bust, which led people to leave as the jobs were drying up. In 2008, high tech is bouncing back and Web 2.0 has arrived to "rescue" the web-based job supply. Jobs at least appear to more plentiful in Silicon Valley now as opposed to then. This means that many with narrow specializations are not going to make the same money, or have the same promise of IPO stock option wealth, if they leave.

However, in the blue collar sector, you might be right. The people renting those "average 2 bedroom apartments" may decide to brave the Minneapolis snows in order to find a lower cost alternative to the Bay Area. If this does happen, then rents will be forced down.

There's only supply and demand. As price goes higher demand will decrease. Period. Incomes aren't going up, especially with a recession, despite inflation, and eventually demand will decrease. People will leave as they realize that this really isn't the best place in the world, despite what some people say. It especially isn't the best place in the world when you're living in a shack of an apartment and can't afford the amenities that make this place a decent spot to live. ESPECIALLY when a lot of people around here are "from somewhere else" and realize that there really ARE other places to live.

Exhibit 1: 2001-2003. How many people left then? How much did rents go down? 15% in SF, 8% in Oakland, more in certain parts of the Peninsula. That was with 250,000 jobs (and people) evaporating. Bust won't be as focused here as last time (tech isn't the bubble source), but it'll happen as California unemployment remains structurally higher than the rest of the country, again due to higher costs (higher costs reduce labor demand, so unemployment will be higher here).

Wow, this has gone from rental prices to hepatitis drugs...........

For a "weak" post, it sure has engendered a lot of interest.

And I disagree that simple supply and demand economics are at work here in the Bay Area - there are some very clear opportunists at work. I see this by simply reviewing rental prices and knowing what they were this time last year. Some supply and demand dynamic is certainly in play, but I would wager that the percentage increases in prices outstrip the increase in demand. Of course, I haven't done any statistically significant data analysis, but I will search for a source. Someone probably has.

PS. I was trying to pay attention to a bland talk on the development of various hepatitis drugs.

Here's an alternative quote:

Harvard economist Raven Saks in a 2005 paper:

"To identify metropolitan areas where the supply of housing is constrained, I assemble evidence on housing supply regulations from a variety of sources. In places with relatively few barriers to construction, an increase in housing demand leads to a large number of new housing units and only a moderate increase in housing prices. In contrast, for an equal demand shock, places with more regulation experience a 17 percent smaller expansion of the housing stock and almost double the increase in housing prices."

Here's another Harvard link:

http://www.economics.harvard.e...

Just one money quote:
"this 'zoning tax' represents about 50% of the cost of a house in New York City and in several other high cost areas."

Hey I'm stuck in Montreal. I blame google canada.

David,

Please don't take this as a personal attack, but that website you sent me to is almost comical. It appears to be a lobbyist group that publishes unsupported articles.

The figures you quote are in the article, but the sources for this data are "A recent study by the California Building Industry Association, and "A new report by the Oregon-based Thoreau Institute." Where are the names of these reports/studies and publication dates? What were the methods used to gather this data? Even as an editor of my law school's Law Review, I would require all of my authors to cite the publication name, date and pages of their sources.

When I click on the link for "research" I am redirected to a list of similar articles by the same author. Citing yourself as a source of research is only acceptable when you have actually gathered data! Even then, it should only done be once or twice in the same publication.

David, I am rather disappointed in this source because I have read your other posts which all seem to be insightful and spot on. I would assume you were reading more well researched literature. Bad day I guess.

If anyone needs a good laugh, please read another one of this group's articles: http://www.reason.org/commenta...

No disrespect to David intended.

Did you notice the rental on craigslist? There are 1 Bdr apts. for 3,000$ It's out of control and well above any reasonable price. It seems like that the rental is a direct reflection of land lord jacking up prices to cover their risky mortgage payments or simply to take advantage of that. To afford that sort of proces one has to minimally make 100K a year and rent that after taxes and expenses will likely come close to 30% of ones earnings. It's time to stop this gridlock.

Trust me, I vote. As you might have gathered though, my politics has consistently put me in the minority in every place I've lived.

As for regulations, here's a link to get you started.

http://www.reason.org/commenta...

For example, regulation alone added over $850,000 to the cost of a median-priced home ($1.1 million in 2005) in San Francisco last year, totaling $591 billion across the San Fran and Oakland metro areas. Similarly, growth management tacked on $316,000 to the cost of the median home in Los Angeles ($463,000 in 2005), and the aggregate costs across the entire metro area total almost $700 billion, the highest of any major U.S. metro area.

Looking at the state as a whole, regulation increased housing costs in all California metropolitan areas by a staggering $2.7 trillion, which accounts for almost half of the nationwide total of $5.5 trillion. Nearly $2.5 trillion of these costs are attributable to growth management regulations in the state's coastal metro areas—like the Bay Area, Los Angeles, and San Diego—alone.

David,

Not sure what you consider to be the "inner Bay Area," but much of the development in the South Bay and Peninsula occurred during or after the 1970's. I also thought this grow coincided with the birth of "Silicon Valley," but to be honest, I wasn't around yet in the 1970's so it's all local legend to me.

However, I do know that rent control was mostly repealed in 1996 (Civ. Code 1954.50-1954.535) and that in SF, rent control does not apply to dwellings built or converted post-1979(??). Even then, there are sunset provisions when vacancy exceeds a certain percentage. 5% I think. So maybe it is supply & demand after all? All remaining control laws limit rent increases during a renter's tenancy. There is no limitation on increases between tenants. In the Bay Area, these rent control laws are presently in effect Oakland, Berkeley and SF. Regardless, since rent control laws do not apply to new contruction, I don't think they are the main deterrents to developers.

With respect to housing sales, BMR units are intended to address the very issue that Brenda raises. Working class families suffer most from run-away living costs. While middle-class families will certainly have to bear these costs as well, the need is more pressing for working class families whom will expend a significantly larger portion of the income on housing and other necessities.

If the volume lies in the middle class, I think true businessmen will find a way to break into that market and sell to the middle class. Whether it's through increasing the # of units or through sheer persuasion of city officials, it'll get done.

But if you are still unhappy with the politics of housing regulation, you could throw your weight behind a politician(s) who reflects these views. I don't live in SF, but from what I read, BMR is really only being pushed by two suerpvisors who are up for re-election pretty soon. Just a thought...

Well, considering that the existing 880,000 units had been developed over the prior 100 years or so, then yep, it looks to me like development at least continued apace.

And this is just the increase, so it doesn't count units that were demolished and replaced.

So you'd argue that LA County was also "built out" prior to 1970? And yet somehow, KB Home made $9.5 billion in 2005 building homes in... LA County.

Those are puny numbers. 30% over 30 years?

But I don't need to convince you, the proof is in the market prices. You can argue about it, but clearly supply and demand diverged.

I'm not sure what regulations you're talking about, so I can't really comment on that. But saying the Bay Area was built out by 1970 is nonsense. There's been a huge amount of development here in the last 30 years. Have you been to Brentwood lately? That was cow pastures just 15 years ago.

Between the 1970 census and the 2000 census, the nine Bay Area counties added almost 927,000 housing units, increasing the housing stock by 57%. Even just taking the "Inner Bay," which I would call SF, Alameda, and San Mateo, you're looking at nearly 267,000 units, for a 30% increase. LA County's housing stock, by contrast, grew by 28%.

Maybe I don't understand what you mean by "built out," but those look like pretty big numbers to me.

Rents are going up in many areas because demand for rentals is growing faster than new rental units are coming on the market. Rents will go up, and home prices will fall, and it will eventually hit equilibrium.

As a landlord, I think this article/post was a bit weak. When lots of people wanted to buy, demand for rentals was lower and landlords had to cut rents. Now that demand is rising, rents also rise. That's supply and demand; it's not landlords "taking advantage" and "draining the pockets" of those who shouldn't have bought in the first place.

BB_Smurf. If all rules were removed (or a lion's share of them), developers would cater to the middle class, because that's where the volume is. Right now, they cater to the wealthy because they have to offset all the below-market units the politicians force them to have. This is a huge part of the "hollowing out" of the middle class in this and other heavily-regulated areas, like NYC.

This area (inner Bay Area) was plenty built out before the 1970's, it was only in the 1970's that prices here really began to diverge from the national norm. What happened in the '70's? All those regulations really started creeping in. Same with NYC.

It has certainly been fun watching this string of controversy my post seems to have inspired! I don't agree that I am "ruining" this blog by writing about something I have little experience with! I first experienced the high rentals when I moved out here in 1984 from Chicago, fresh out of college, on a young engineer's income. It was extremely tough to make ends meet.

I also want to say that I agree that your rental outgo should be NO MORE than 30% of your income. This is especially true with todays rising gas prices, food prices, etc. And if two people work and one only makes $8/hr??? Most day care is at least $15-20/hr if a reputable institution is chosen.

Yesterday, my wife and I packed the kids in the car and took a leisurely midmorning drive to the coast. We wound up at a secluded beach just north of Davenport. It was a little under 90 degrees, no wind, azure water beneath the wildflower-laden bluffs. The kids played with starfish, hermit crabs, and anemones in the tidepools. My wife and son sat about five feet from a harbor seal sunning itself on the beach while my daughter and I swam in the surf. We packed up midafternoon and were home in time for dinner.

If it weren't expensive, every human being on the planet would live here. Paradise comes at a premium.

Define "affordable". Realistically, folks should not spend more than 30% on rent. Lets say you would like to have the 20% down on what might be the median home price of $500,000 soon; that would mean saving $100,000. Let's say 5 years is long enough to wait for your rescue from renting; that means saving $20,000 a year, right? On $52K?
How about medical expenses, retirement, school loans, child care, auto loan, gas, insurance, a dinner out now and then?
Rents ARE too high, we spend far too much on property here and it will destroy our health and retirement if sustained.

@ Michelle

The federal tax rate for 52k/year is 25%. (http://www.irs.gov/formspubs/a... For $4,333.00/month, the federal taxes alone are $1,169.91.

I realize it's a theory, but I disagree that with larger numbers, people should spend a larger % of their income on housing. If people are spending more % on rent/housing, then they are saving & investing less. When that becomes the norm, that's HUGE economic. Less $$ money invested means less growth.

The whole problem with most of these cost of living assessments and ratios for rent and mortgage is that they went out the window with the law of large numbers about 15 years ago and whenever somebody wants to sensationalize, they bring up these old ratios. The ratio of rent/mortgage to income used to be about 30% for good reason, people made $2500 per month and in order to pay taxes, food and transportation costs, any rent or mortgage over $833. (1/3 of $2500 gross) left you with a few hundred a month to live. Any sort of emergency like car trouble or healthcare problem and you were under. But if you make about 52K as this article states, that is $4333. per month-You can pay more than $1300 rent with that income, maybe as much as $2150 which is 50% of gross, leaving 2180 per month for taxes (probably around $700) and other expenses. You are fine. Not that I don't agree its expensive around here, it certainly is, but to claim somebody needs 52K to afford a $1300/mo apt is not correct.

Ben,

I'm pretty sure that's the salary before taxes and other withholdings.

Cuneyt,

I have to call BS on this one. You do know that you can find 2BRs in NYC for much less than 1.5M? Just do a search on CitiHabitats for 2BRs and you'll find many in that range. And if your search extends to the outer boros, there'll be plenty more.

You're probably comparing prices in the low end for SF and in the high end for NY, which I should point out, is not a very fair comparison. Having lived in both cities, you can definitely find 2BRs in a reasonable price range.

The only real gripe that I have is gas prices. In SF, it's approaching $4/gal, while right outside of Manhattan in Newark, it's just above $3/gal.

@Ben, failure to follow the 30% might be one of the reasons why rent is out-pacing earned wages. Brenda's point was that working-class people have to over-extend themselves just to afford to live in Santa Clara Valley. This works fine when you are gainfully employed, but these families face dire consequences when a wage earner is laid off or injured. Because these families were barely getting by before, they will have little or no savings to serve as a buffer for the lost/diminished income.

Forcing them to move out of the urban centers is simply not a good solution because we need their labor. As they commute from less costly centers, the demand for gas increases, driving up gas prices, not to mention the ecological consequences.

I do agree with David to the extent that more urban development is necessary. However, I will depart ways with respect to removal of all red tape and rent control. The slowing development might have been due to the diminished undeveloped space. Furthermore, if rent control & all red tape were removed, then developers would simply sell/rent to the highest bidder. Developers would only build "luxury" units which have a profit margin, thus only benfitting the upper class and possiblity leading to cyclical real estate crashes. The regulations are intended to reduce exposure to this effect while redistributing wealth.

ben, you said:

"Also don’t forget, multiple people can work — thereby not having a society to be white collar workers. So if 2 people work, finding $12/hr is realistic. If three people work, finding $8/hr is also realistic."

I sure hope none of those people you are thinking of have children that require childcare. If they do, then that $12 or $8 per hour has just been reduced to $1 or $2.

@ben: what do you mean "only 30%"? That's exactly the one-thirds rule of thumb on what you should spend on your housing. The other 70% is for taxes (because you calculate this all from gross income to begin with), food and necessities (clothing, medicine, etc.), transportation (even public transit requires tickets), discretionary spending (because buying everyone on credit is destroying us), and SAVINGS (because seriously, you have to save).

When it takes significantly more than 30% of one person's income to pay for the housing, it probably takes more than that one person's income to cover costs of living. Which means you need two incomes. And then you become twice as likely to have a disability or unemployment. Yada yada, etc, etc, critique of everything we're doing to ourselves financially now in America.

you want to reduce housing costs--reduce red tape for builders&developers and get rid of rent control and requirements for "below market" units. That's what kills middle class housing--leaving just housing for the rich and the poor. Econ 101. NYC was pretty built out even in the '20's, but city builders put up 30,000-50,000 units/year. After rent control was adopted in WWII and other restrictions, the supply only went up 8,000-12,000/units/year.

quickest way to ruin a blog like is to go off topic on posts where the author has no real expertise- just ill formed political opinions.

Exactly - considering that this is the bare minimum rent for most households within 90 miles of NYC, no real sympathy here. And, when you can get a 2 bedder in SF for 600k, while NYC would ask for 1.5M, even less sympathy!

Interesting, however it almost appears to be hype.

At $1293 a month, it appears to be only 30% of that family's income. I think they need to explain where the 70% is going. A ratio for taxes, food, gas, etc.

Also don't forget, multiple people can work -- thereby not having a society to be white collar workers. So if 2 people work, finding $12/hr is realistic. If three people work, finding $8/hr is also realistic.