When combined with the fact that supply has not kept up with demand - and that demand is rising due to the globalization of the financial economy - means that housing prices are not likely to decline anytime soon. JL
Abigail Sindzinski reports in Curbed:
Median home values adjusted for inflation nearly quadrupled over the 60-year period since the first housing census in 1940.Between 1950 and 2000, the number of families in U.S. metropolitan areas doubled, while households earning $140K or more increased eightfold. cities are more and more important—we're more productive when we live in cities.
In one narrative of the past versus present in major cities today, home buying was comparatively affordable. For certain strata, housing, like college tuition for a few children, was counted as an achievable goal. Now, New Yorkers, who have long lamented the high cost of housing, are joined in their complaints by Los Angelenos, Seattleites, and, perhaps most vocally, San Franciscans. Thanks to the changing structures of income and supply, the cost of housing in major cities has become the economic focal point of adulthood.
This fall, I perused open houses in my native Bay Area. I visited parts of West Oakland, the Oakland Hills, and Temescal, as well as $3 million duplexes in San Francisco. In Noe Valley, positioned in the southern area of San Francisco and readily accessible to the 101 and the Peninsula, I saw a Victorian that had undergone an extensive redesign and emerged with the angularity of a new Brooklyn condo amid historic San Francisco. It boasted heavily updated smart-tech amenities (Nest thermostats, a plug for your Tesla), a generously usable kitchen, and an enviable backyard. It sold for $500,000 over asking at $3.7 million in late October. Just the previous year, it had sold for $1.65 million.
In San Francisco, Los Angeles, New York, and elsewhere, home prices have changed dramatically throughout the latter part of the 20th century. As the Census Bureau explains of housing nationwide, "[m]edian home values adjusted for inflation nearly quadrupled over the 60-year period since the first housing census in 1940." Median home prices in Boston rose 153 percent, and in San Francisco 81 percent, between 1980 and 2000, according to research by economists Edward L. Glaeser, Joseph Gyourko, and Raven Saks.
Would-be buyers might compete with all-cash offers for homes that, in some places, sell for 50 or 70 percent over asking. Renting is so expensive that it corrodes income for residents at all economic levels, particularly low-income workers. We have entered an era in which a reasonable residential aspiration might run several million dollars, and a $5 million home is no longer that unusual.
On the most basic level, the economic principles of supply and demand account for these rising prices. Between 1950 and 2000, the number of families in U.S. metropolitan areas doubled, while households earning $140K or more increased eightfold, Joseph Gyourko, Christopher Mayer, and Todd Sinai explain in a 2006 National Bureau of Economic Research working paper. "In places that are desirable but have low rates of new housing construction," they write, "families with high incomes or strong preferences for that location outbid lower willingness-to-pay families for scarce housing, driving up the price of the underlying land."
But there are additional culprits. One of the most complex is new development. In San Francisco in particular, regulations surrounding new construction, in combination with the city's volume of rent-controlled units, have greatly affected the market.
In the past five years, the region has added 480,000 private-sector jobs and only around 50,000 housing units, according to San Francisco Planning Urban Research Association (SPUR) Senior Policy Advisor Sarah Karlinsky. At the same time, real estate is in ever-greater demand, as higher traffic makes public transit access a boon and residents purchase property for access to San Francisco's amenities. Proposition 13, passed in 1978, keeps property taxes at artificially low 1975 levels, thus greatly disincentivizing residential and commercial property owners from moving—if they buy again, they'll face steep property taxes on the new unit.
At a talk I attended on Oakland, developers explained that high construction costs and lack of investment funds for that side of the Bay in the wake of the recession hinder development. It's also "much easier politically to put up a 12-story building even in Silver Spring, Maryland than it is in Oakland," Karen Chapple, UC Berkeley planning professor and leader of the Urban Displacement Project, said of the region's notorious opposition to building for higher densities.
Stuart Gabriel, Director of UCLA's Ziman Center for Real Estate, explains that, as in San Francisco, new construction in Los Angeles is focused on wealthier areas of the city and priced in kind, which adds to an "egregious shortage of affordable housing." "You can just simply make much more money building for a luxury market," Chapple says.
L.A. has also maintained a so-called "suburb syndrome" when it comes to new construction, the December 2014 Anderson Forecast study suggests. That is, many established L.A. residents (those referred to with exasperated fondness, in L.A. and elsewhere, as NIMBYs) have not supported construction that would have kept pace with demand over the past 15 years. Only 7.4 percent of housing units in the Los Angeles region (which includes Orange County) were built in the 21st century, one of the lowest percentages found in the 35 areas the study tracks.
Demographics in these cities have also shifted. "One of the artifacts of the Great Recession was that the demographic component to housing demand fell through the floor," Gabriel explained of L.A. The U.S. typically enjoys the formation of 1.1 million new households each year—a number that fell to 600,000 to 800,000 during the recession.
Millennials—the demographic scapegoat of our time and my cohort—will likely delay homeownership even longer than previous generations. Those residents age 35 to 50—the Gen Xers—are a larger driver for homeownership at present. "Things were starting to look pretty shaky in 2005, which is 10 years ago, which is right as those folks were coming into their home-owning years. So either they got in," Director of the Urban Institute's Metropolitan Housing and Communities Policy Center Rolf Pendall explained, "or they delayed." The economic rebound now facilitates new households, but it also adds to the already competitive market.
Graph via the Furman Center.
New York, always a crown jewel in the real estate world, has somewhat different housing demographics. In the "State of New York City Housing and Neighborhoods in 2014," a sweeping report by NYU's Furman Center, a dozen co-authors look at trends in that city since the 1970s, when close to one million people left. Even as population has increased since then, the density experience has remained much the same, and it is greatly distinct from its west coast counterparts: "In 2010, the population density experienced by the typical resident was more than twice that of the second densest city, San Francisco." Between July 2012 and July 2013, New York's population increased by 61,000, surpassing 8.4 million in total.
In New York, housing stock increased by over five percent during the first decade of this century, according to the Furman Center report. Construction came in at over 25,000 new housing units authorized each year between 2005 and 2008. New building permits were concentrated along the waterfront from Williamsburg to Long Island City, in downtown Brooklyn, and in parts of Manhattan, where one-bedroom rentals typically run upwards of $3,000 a month. At the same time as these new units were built, the number of residents per unit went down—as in Los Angeles, the types of housing being constructed did not meet demand.
Construction has often focused on the luxury market. Home prices in Brooklyn and Manhattan passed pre-recession levels, so that a duplex in brownstone Brooklyn is now priced easily in the low millions. In 2014, "single-family homes saw prices increase by 6.0 percent, and prices for two- to four-unit houses increased by 11.4 percent," the report details. A brownstone in Brooklyn's Bed-Stuy neighborhood bought for roughly a quarter million dollars in 2002 is now valued at easily over a million.
Price increases, of course, exist alongside changes in employment and salaries. In San Francisco, rising prices have gone hand-in-hand with the tech boom. Zillow recently issued a report linking Apple's 2007 release of the first generation iPhone to the heightened employment market in Cupertino, Apple's hometown, and the precipitous cost of homes there—with a median of nearly $1.3 million now up from just above $600,000 in 2003. The report shows median home prices in nearby San Francisco at slightly over $400,000 in the early aughts compared to $757,000 by 2013.
It isn't only a boom in tech. Egon Terplan, Regional Planning Director for SPUR, points out that "tech" companies also employ designers, project managers, and the like. The Bay Area is also host to the growing health and biotech industries, employing nurses at places like Kaiser who might earn over $95,000 a year, or medical researchers in the rapidly-changed Mission Bay. And while banking may have moved out of San Francisco in the 1980s and early 1990s, it left behind its high-end investors.
It is hard to argue against reasonably strong compensation. Companies vying for competitive talent in technology, science, and the like need to offer competitive salaries, seductive signing bonuses, or equity shares that will prevent poaching. But rising inequality has hit the coastal regions of California especially hard. A Brookings Institution report issued in 2015 outlines the degree to which San Francisco "stands apart from the pack in just how rich its richest households were in 2013. They earned at least $423,000, more than $100,000 clear of their counterparts in San Jose."
Graph via "Impacts of the Widening Divide".
In "Impacts of the Widening Divide: Why Is L.A.'s Homeownership Rate So Low?" released last year by UCLA's Luskin School of Public Affairs, co-authors Paul Ong, Rosalie Ray, and Silvia Jimenez explain of Los Angeles, the largest metropolitan area in the country, "While Los Angeles's median home value of $410,500 is fourth, the median income of the [metropolitan statistical area] ($58,569) falls 17th, while the median income of the county (at $54,244) is 27th. The comparable ratios for San Francisco and New York are $572,900/$76,767 and $396,000/$65,253, respectively.
Like its west coast counterparts, New York notoriously maintains a higher level of income inequality than at any other point in the past two decades. In Brooklyn and more prominently in Manhattan, high-income households increased, mostly in those areas that are most expensive. In Park Slope in 2000, for instance, 39 percent of households earned over $100,000 a year. By 2013, that number was closer to 48 percent, according to the Furman Center report. Neighborhoods where median household income increased between 2000 and the early 2010s include Chelsea, the Financial District, and parts of Downtown Brooklyn, Fort Greene, Clinton Hill, and northern Brooklyn. Elsewhere in Manhattan, it remained largely the same, while it fell, in many areas of the Bronx in particular, by 15 percent or more.
If the booming tech industry sits on one side of the housing inequality equation, the hollowing out of middle class and blue-collar jobs weighs down the other. In the L.A. Basin, Stuart Gabriel points to employment losses in the auto and aerospace industries over the past 30 to 40 years. (The areas in L.A. that have seen recent job growth—education, healthcare services, retail, and hospitality—are not traditionally high-wage fields, UCLA economist William Yu explains.)
The changing wage structure colludes with the tight supply-demand ratio and recent recession. "The combination of supply constraint," Gabriel told me, "and rebounding demand makes only one escape valve—and that escape valve is higher house prices that mean housing is rationed to the highest bidder."
Gabriel also pointed to the significant toll the 2008 financial crisis had, especially on parts of Eastern and South Los Angeles. While Los Angeles has benefitted from California's post-recession employment growth, it is still behind the Bay Area. "The region's [home] ownership rate is even lower than the 54 percent rate in the Bay Area (San Francisco and San Jose), where housing prices are much higher," Ong, Ray, and Jimenez detail. Gabriel suggested that the increased focus on expanding the L.A. Metro—a long-awaited infrastructure project not unlike New York City's Second Avenue subway—will further enable L.A. workers to commute from areas like East Pasadena to downtown and avoid the latter's expense.
Because Los Angeles county is so large, pockets of the city have experienced enormous growth: the popularity of the west side of Los Angeles, which includes Silicon Beach's outposts of Yahoo and Google, has deeply affected the Venice and Santa Monica areas of waterfront L.A. (one analysis places Venice's median house price at $1.72 million), while downtown, Silver Lake, Echo Park, and Boyle Heights have shifted toward white-collar workers, with housing prices soaring. "The market is distorted by the large buying power of a wealthy minority, and not enough supply made available at prices that are affordable to those with stagnant incomes," Ong, Ray, and Jimenez write.
Chapple, writing with co-author Miriam Zuk on now-expensive parts of Oakland, sees the same trend. "The industrial jobs that much of the African American community had relied on began to disappear as the nation shifted toward a service-oriented economy." In some parts of Oakland, home ownership among African Americans began to decline before the recession, and property flipping has exacerbated the trend.
Middle and high-income buyers, Chapple's report shows, are often inclined to seek stylized homes (the brownstones of the Bay). "The presence of these architectural types within the housing stock—craftsmans, Victorians, and pre-war bungalows—may itself be an indicator of risk for gentrification" she and Zuk write of the contentious changes happening in some of the historically African American and redlined parts of Oakland. Though middle-income would-be homeowners have some access to aid for purchasing first homes—like the S.F. Inclusionary Housing Program for Below Market Rate (BMR) Housing—many properties are simply priced beyond reach. Thirty-five percent of residents in the greater Bay Area live on no more than $18 an hour, or, assuming a 40-hour work week, a maximum of roughly $37,000 a year.
The advent of the "non-primary" housing unit—an apartment or home purchased as an investment rather than a residence, often by a foreign buyer—is perhaps the most talked-about factor in the mix that created the era of the $5 million home. Both Yu and Gabriel pointed to significant foreign money coming into real estate in Los Angeles and along the Southern Coast, specifically in places like Orange County. Absentee owners' purchases have also been a contentious aspect of New York's luxury real estate market.
For the global top one or five percent, investing in another home is fairly wise, explained Pendall. Right now, it's hard to make money on your money. Likewise, he told me by phone, Baby Boomers earning $1,000,000 or more a year might find holding another home in any of these cities a good use of funds as their children become self sufficient and their expenses decrease. "They have the investment value in mind."
Not all of these buyers are ultra-rich. In L.A., Gabriel said, such properties are often put to actual use and bought by individuals at varying economic levels. Yu explained that Chinese buyers exist at both ultra-rich and also upper-middle class points. Even for the latter, a $500,000 to a million dollar house "is a bargain compared to Beijing." And not all of the "non-primary" units sit empty. While data on the subject is lacking, a 2014 SPUR report suggests that in San Francisco non-primary investments were often occupied, and accounted for some 2.4 percent of the market concentrated in Pacific Heights, the Marina, and nearby neighborhoods.
Economists have begun to turn their attention to the potential effects of such significant changes in the housing market. In 2015, Richard Florida parsed a paper by economists Enrico Moretti and Chang-Tai Hsieh that puts a price tag on the impact of housing costs on the GDP. By phone, Professor Moretti said that shifts in these markets are "deeper and broader" than we tend to assume.
As handfuls of millennials, Gen-Xers, and their current and future progeny move to major cities, and the companies that are willing to employ them continue to set up shop and expand in San Francisco, Washington D.C., and the like, residents often choose to stay for the unique experience city living offers. Superstar cities and their offshoots can provide considerable opportunities as these generations work, marry, and raise children in a changed economy.
While assembling the paperwork for an apartment some years ago, I discovered that my real estate agent had worked for my then-employer with my then-colleagues, before leaving for this new (and presumably improved) career. She also happened to live across the street from the apartment I was about to rent. It was the kind of coincidence that happens in large cities, where the person sitting next to you on a flight turns out to be your butcher. It was also the kind of coincidence that reminds you of the value of connections borne of living and investing in your community.
Many of us choose to move and stay in these cities despite their cost—the unique affect our location has on our lives is tangible. "You can't forget there's only one New York City, there's only one L.A., there's only one San Francisco." Rolf Pendall said when I asked him about the future, "We're going to grow by around 100 million people by 2065," and "cities are more and more important—we're more productive when we live in cities." That growth and productivity is one of America's distinguishing features, "the key to our prosperity." Not every facet of housing is quantifiable. Often, simply being a part of one's city, and its community, is its own reward.
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