Saturday, October 22, 2016

The Bay Area Housing Crisis

Does the Bay Area Have a Housing Crisis?

When people refer to the "Bay Area Housing Crisis," they're usually referring to 2 things:

  1. The cost of owning a home relative to median income for the area is so high that a large percentage of people can't afford a home.
  2. The cost of renting as a percentage of median income is high, making it difficult for people to save money.
Paragon RE, a residential real estate brokerage with a large presence in SF, has some interesting info on the topic in this post. All graphs I insert below are courtesy of Paragon RE's website.

This chart shows the household income needed to purchase a home in each of the respective cities. As you can see, an income well into 6 figures is needed to purchase a home in most Bay Area cities.

This chart shows what percentage of household can actually afford to buy a house. As you can see, less than 30% can afford a home in most Bay Area cities. The income requirements are obviously a major factor, but even more so is being able to come up with a 10-20% down payment on a $1M+ home.

Okay, so we see from the charts above that it's very difficult to buy a house in the Bay Area and not a lot of residents have the necessary financial strength. However, going back to the original question, does the Bay Area really have a housing crisis? Due to the reasons mentioned above, yes, but in other ways, no. I mean, the housing market is still as hot as ever and houses are still being listed and sold at record prices, sometimes with multiple bids above asking price. How is this possible? How can the Bay Area, on one hand, have an affordability crisis limiting the buyer pool, yet not see a slowdown in sale volume and price?

The Issue No One Wants to Discuss Regarding the Bay Area "Housing Crisis"

I was at an industry event this past week and everyone had their own opinion on why the housing crisis started and how we should fix it. Answers ranged from the lack of density at job centers, to unreasonable mortgage standards, particularly the down payment requirements. Certainly increasing density is a reasonable solution, but as a developer that is constantly hunting for development opportunities in major Bay Area urban centers, I can tell you it's very, very hard to find feasible development opportunities (both financially and practically) and then execute on them. Of course lowering mortgage standards is just ridiculous as it will just serve to increase buyer demand, raise housing prices further and make the Bay Area even more less affordable (didn't we try this a few years ago???). I guess this panelist wasn't familiar with the laws of supply and demand). There were other ideas mentioned as well that have merit, such as improving commute options from outlying communities, like Livermore.

One topic that was absent from the conversation on Bay Area affordability is something we've been conditioned not to talk about--immigration. The most obvious answer to why we have this insatiable demand for housing that doesn't seem to be slowing down anytime soon in the face of decreasing affordability is really quite simple: California continues to simultaneously rapidly increase its population and depress wage growth by allowing up to 65,000 H1B visa workers into the state each year, many of which will work at Bay Area tech companies, and allowing illegal immigrants to pour in. Both have the effect of boosting population growth that the housing supply can't keep up with, resulting in upward pressure on housing prices. Both also increase the supply of labor, which allows corporations to keep wages lower than they'd otherwise be able to. Just based on the equation "Housing Affordability = Cost to Own a Home / Median Wage" we can see that immigration is hurting affordability, both by keeping the median wage artificially low and increasing home prices.

So What?

The point of this post is that immigration is a primary driver of California's housing crisis and any meaningful discussion about how to fix the affordability crisis must include immigration. In the United States, discussion about immigration has devolved to the point where anyone who doesn't support unlimited immigration, from anywhere in the world, at any time is deemed a racist, redneck, bigot that likely has an incestuous relationship with his / her sibling. There's no middle ground. Unfortunately, the fact is housing supply has no chance of keeping up with our population growth due to immigration. Likewise, wages don't have a chance to grow because of immigration. If we actually want to fix these problems, we have to put limits on immigration.

We can't continue to call everyone that wants to curb immigration a racist. There are valid, reasonable arguments for why we should limit it, especially in a place like the Bay Area. It's time to stop with the rhetoric and come up with actual solutions. Mass immigration might have worked at certain times and places in the country, but that doesn't mean it needs to continue into perpetuity all over the United States.

No comments:

Post a Comment