By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Here’s the other side of central-bank engineered asset price inflation, or “healing the housing market,” as it’s called in a more politically correct manner:
San Francisco Unified school district, which employs about 3,300 teachers, has been hobbled by a teacher shortage. Despite intense efforts this year – including a signing bonus – to bring in 619 new teachers to fill the gaps left behind by those who’d retired or resigned, the district is short 38 teachers as of Monday, when the school year started. Others school districts in the Bay Area have similar problems.
For teachers, the math doesn’t work out. Average teacher pay for the 2014-15 school year was $65,000. And less after taxes. But the median annual rent was $42,000 for something close to a one-bedroom apartment. After taxes and utilities, there’s hardly any money left for anything else.
A teacher who has lived in the same rent-controlled apartment for umpteen years may still be OK. But teachers who need to find a place, such as new teachers or those who’ve been subject of a no-fault eviction, are having trouble finding anything they can afford in the city. So they pack up and leave in the middle of the school year, leaving classes without teachers. It has gotten so bad that the Board of Supervisors decided in April to ban no-fault evictions of teachers during the school year.
Yet renting, as expensive as it is in San Francisco, is the cheaper option. Teachers trying to buy a home in San Francisco are in even more trouble at current prices. And it’s not just teachers!
This aspect of Ben Bernanke’s and now Janet Yellen’s asset price inflation – and consumer price inflation for those who have to pay for housing – is what everyone here calls “The Housing Crisis.”
As if to drive home the point, so to speak, the California Association of Realtors just released its Housing Affordability Index (HAI) for the second quarter. It is based on the median house price (only houses, not condos), prevailing mortgage interest rate, household income, and a 20% down payment.
In San Francisco, the median house price – half sell for more, half sell for less – is $1.37 million. According to Paragon Real Estate, if condos were included, the median price would drop to $1.2 million.
The median household income in San Francisco is $84,160, including households with more than one earner. So a household of two teachers with $130,000 in household income is doing pretty well, comparatively speaking.
The monthly mortgage payment for the median house in San Francisco, after a 20% down payment and at the prevailing rock-bottom mortgage rates, is $6,740 per month, or $80,900 per year!
So what kind of minimum qualifying household income would be required for the mortgage of a median house, plus taxes and insurance? For the US on average, $47,200 per year. In San Francisco, $269,600 per year. It would require a household of four teacher salaries!
Only the top-earning 13% of households in San Francisco can afford to buy that median house!
Other Bay Area counties have similar out-of-whack affordability rates: In San Mateo County (part of Silicon Valley), only 14% can buy that median home; in Marin County (north of the Golden Gate) 18%; Santa Clara Country (where San Jose is) 19%; Alameda County (where Oakland is) 20%. And so on.
And this despite the historically low mortgage rates. If prevailing mortgage rates rose to 6%, practically no one could afford to buy.
Then there’s the issue of down payment that the CAR so elegantly glosses over: the 20% down payment of for that median house in San Francisco is $275,000!
How are people going to save $275,000 after taxes while living and renting in a city that is as pocket-cleaning expensive as San Francisco? Saving $275,000 on a median household income of $84,160 while paying $42,000 a year in rent, plus taxes, utilities, food, transportation, clothes, parking tickets…..
Saving anything is going to be tough. But even if that household, using herculean discipline, can save 5% of its income a year (so $4,200 a year), it would take 65 years to save that down payment. Oh well. There goes the dream.
These are a scary numbers for the housing market! If only 13% can buy that median home – when in a healthier housing market, over 50% should be able to buy a median home – who the heck is going to buy the rest of the homes?
This puts a stranglehold on demand. To sustain these crazy home prices, San Francisco needs to bring in an endless flow of highly paid people, including absentee foreign investors, to replace the teachers and other middle-class households, the artists and shop keepers and office workers, and to push out city employees, nurses, and the like. That’s how the process has worked.
But that endless influx of highly paid people and investors is grinding to a halt. Some companies are still hiring, but others are laying off, and highly paid workers are just switching jobs rather than pouring into the city in large numbers. That’s a sea change for this housing market.
It comes at a time when a historic building boom is throwing thousands of high-end condos and apartments on the market every year, for years to come.
A housing market where only 13% can afford the median home, and only a minuscule number of people can afford the thousands of high-end homes coming on the market every year, will sooner or later buckle under its own lopsidedness. We’re already seeing the signs of that, as even San Francisco’s infamously soaring rents have hit the wall of reality. Read… Big Unwind Begins in San Francisco, Miami, New York, Houston: Rents in “Primary Markets” Sunk by Apartment & Condo Glut
I’m surprised Wolf didn’t mention a letter that’s been in the news recently: https://shift.newco.co/letter-of-resignation-from-the-palo-alto-planning-and-transportation-commission-f7b6facd94f5.
It’s true that Palo Alto is expensive even for the south bay, but we’re at the point where even highly paid professionals can’t afford it.
I have an ex-GF living down in San Francisco, Japantown area, and she is paying something like $3750/mo for a 2-bedroom apt, last I heard. And that rate, I think, was only locked in due to a long lease. And, of course, she has to have a roommate (sometimes 2, depending on when her friends cycle through town on vacation) to afford it. Well, honestly, she can’t *really* afford it, but since she is a homebody most of the time she doesn’t spend much on toys, going out on the town, or sundries.
Amusingly, she is my ex because she wanted me to move down there and get a job in Tech, buy a house, and help with her business(es) – but it didn’t take more then a cursory examination of real estate prices, and rental rates, for me in 2013 to say heck no…why don’t you come up here to WA state where a mortgage of 1/4 the same size will get a nice 3 bedroom house and 20 acres of green beautiful land out in the sticks, ‘On The Banks of the Muddy Wishkah’. Nope, says she, its the city life for me…
She does have a ‘gourmet burger’ restaurant open for the last 2 years, and is looking into a health/massage/salon thing too. Getting by via the skin of her teeth, charging big BIG $$ to the idle rich tech workers for them burgs – so hopefully she can keep making a go of it.
But at those mortgage/rental rates, if/when the prices get too high even for her…well, I have plenty of space on my current property to put up a 30′ diameter luxury yurt if she ever needs it. Maybe not an ‘ex’ forever…
Maybe she’ll be an EX-business person and become your mate!
The housing crisis in SF is caused primarily by NIMBYs who fight tooth and nail for their property values under the guise of protecting neighborhood character, e.g. By opposing high-rise housing. That predates Bernanke et al by at least two decades.
Greed is driving the housing crisis. Unadulterated and in your face greed.
Not just greed. It’s an excess of windfall cash via stock options. That money has to go into an investment, and there is no other investment succeeding these days like property. High rents = cash on cash return.
The high end of earners has stymied the low end of those “living” and working to service not only their own life, but the high earners as well. I live in an expensive enclave in Silicon Valley and grew up here, but sadly, encountered no IPO cash.
I am 4th generation to SF-Silicon VAlley and now 62 – ready to retire by most account. I was grandfathered in via my Dad’s townhome (our 2nd subsequent home), which we bought from him at market rate, with a prop 60 tax reduction, but no sales commission – in 2001. Our first home was a mobile home. I was 45ish and newly married. It took that long to get started back then, with a gift/inheritance from husband’s grandparents of about $50k. Not much has changed. I would certainly move away if I were young and faced with this again.
oh the people whose families have lived there for generations, and just want to stay there. let them eat high rises.
now i see; from the linked kate downing letter above–
“if you’d like to look into the belly of the beast, read the comments on our local paper: Palo Alto Online. The loudest voices in the community feel that the desire to create more affordable housing is spoiled entitlement. Until renters, younger people, and people of more modest means organize, this problem will continue throughout the Bay Area.”
Run a search on that comments page for ‘zoned’, or ‘zoning’, and you’ll see a comment that less than 5% of Palo Alto is zoned multifamily. IF [and only IF] that is accurate, then the housing problem will grow exponentially — although it’s easier to blame NIMBYs and bureaucrats than examine the underlying, terrible economic assumptions driving the mess. Because blaming NIMBYs is far more emotionally satisfying than having to admit that your economic assumptions are flawed, bogus, and leading to social decay.
Layer on the activities of hot offshore money swooping in to buy up ‘real assets’ [ie, real estate and ‘real property’], and you put that cluster of zoning and housing issues on steroids [see also: Bernanke, Yellen, ZIRP].
IOW, both the Planning Commissioner’s letter of resignation, as well as the online comments, are abundant supporting evidence for Wolf Richter’s point about the lack of affordable housing, even for two-income professionals.
This post is about housing shortages; more fundamentally, but what it reveals about idiotic economic policies that treat capital as the overweening source of all wealth creation is simply brilliant.
This post illustrates a glaring example of how neoliberalism has privileged capital over labor to such an extent that if we don’t rethink economics, we risk social breakdown.
When ‘capital’ (i.e. real property, mortgages, deeds, titles, stock options) is privileged above labor (i.e., programmers, teachers, firefighters, transportation engineers, city planners) then it drives a Sorcerer’s Apprentice Scenario, where capital [ie. housing, property] continue to increase in value exponentially over each subsequent period [ie. day, month, year], far outstripping the pace at which even highly educated, highly paid labor can keep up.
Canary: meet coal mine.
The dynamics of what happens when capital is exalted over labor are more extreme in SF, but are happening up and down the West Coast, from Vancouver BC down to California.
yeah, air bnb and the like doesn’t help. whether it’s zoned multifamily or not, ordinary people can’t live in houses there, much less rent.
The term you really see a lot in those comments is “pack and stack.” As in, they believe high density housing is incompatible with Palo Alto values.
The reality is that, zoned or not, we are getting packing and stacking. The HBO sitcom Silicon Valley is set in basically a version of this: Erlich Bachman’s “incubator” is a single-family house divided into a number of SROs and illegal work spaces. In my neighborhood in San Francisco, single-family houses are being renovated, divided, and rented to 5, 6, 7 different adults. Parking at night here is… frustrating.
So, whether we like it or not, we are getting increasing density. What we get to influence is how it happens. Personally, I would prefer intentionality. Build more housing near transit corridors, making high speed transit more financially viable, and reducing per capita resource consumption.
No point building high speed transit. Self-driving cars are right around the corner!
This is only one small element. Certainly, the number of restrictions within existing built up areas (driven by existing property owners), but this applies in many parts of the US, especially on the coasts. There are plenty of areas around SF where housing development can and does occur – and indeed is occurring (at a rate of around 50,000 units per annum).
However, housing booms like these are always driven more by finance than a shortage of houses. There has never in history been a property boom which ended because there were too many houses built (or because supply matched demand). The driver is always too much cash in the system. Issues like zoning ordinances or a lack of developable land are only minor variables. An example would be the Irish property boom, which during the 1990’s was supposedly because of a supply and demand mismatch. But by 2002 the rate of building had gone way beyond ‘demand’ in the form of population growth or household formation. The boom kept going for another 5 years until the easy money ran out. Much the same has occurred in China, where they have a huge surplus of empty homes in many areas, but as long as the cash is flowing, prices are still going up. Likewise in Australia, where there is almost endless available land for housing, and generally weak planning laws (except for limited areas, such as historic districts in Sydney), but they have an epic bubble underway. Canada too.
But of course the notion of it all being the fault of ‘Nimbys’ and over strict regulation is the old cry of bankers and economists whenever property values rise too fast.
Oh Bullshit. I grew up in in San Francisco over the last fifty years and have seen wave after wave of speculators who proposed high rise blocks and were fortunately turned down–until recently. It is the very neighborhood character of two and three story buildings from the 1900s and the nearby shopping streets such as Noe, Columbus, Haight, Mission, that attract people to the city. Those are the buildings that would be torn down to build your highrises.
Park Merced is a good example of existing highrises. Built on empty sandlots, the high rise cluster buildings and townhouses are identical to Park La Brea in Los Angeles. They were built by the Metropolitan Insurance Company in the 1960s. Absolutely sterile, boring and hideous, and far from anything but the ocean, fog and freeways. The few high rises in the real part of the city, such as along Jackson, on Russian Hill and a few other places enjoy incredible views but are within walking distance or real neighborhoods of old buildings, such as Polk Street or North Beach which create their value.
The high and mid rises that are now being built in large numbers are clustered in the old industrial and rail yard part of the city south of Market. It’s hilarious to see the real estate hucksters and their advertising whores at the San Francisco Chronicle talk about “Exciting new neighborhoods” of 50 story condominiums.
As Wolf says, these new condos are going to be investors’ pie in the sky when values fall. In the sweetest, most ironical of all possible situations, the new high rise Millennial Tower” where such investors as Tom Perkins owned the penthouse,
is sinking into the bay fill upon which it is floating and is leaning over. The developer didn’t bother driving the piles to bedrock hundreds of feet below. Fifty feet or so of sand is good enough. “friction footings”, maybe he was a banker before he was a builder?
Thanks. A North Beacher I am. You speak the trruth.
Another important point is that high rises do not necessarily equate to high density. The highest density cities in Europe such as Barcelona and Paris have few high rises (in fact, in both cities high rise developments are highly restricted). And both, not coincidentally, are famous for a very high urban quality of life. They achieve density through intelligent use of space and not surrendering space to highways and sprawl. Some Chinese cities, despite being almost all high rise, have surprisingly low densities, mostly because of the scale of the highway grid network and wasteful commercial districts.
The real problem with planning codes in San Francisco is that they frequently make it difficult to intelligently use existing buildings and space – for example by permitting the appropriate breakup of large old houses into apartments, etc. However, as I’ve written above, the overwhelming reason for the bubble in SF is to be found in the financial markets.
The real problem with massive high-rise development is that people need to travel to and from work at rush hour. Pack all those people into high-rises, and dump them all out onto the streets at one time – and one gets massive congestion. Doesn’t matter whether it’s cars or pedestrians – there simply isn’t room for everyone to travel at the same time.
That said, the Chinese capital flight-fueled housing prices in San Francisco will fall soon due to lack of demand – especially if a few of the high-rise condo buildings need to be torn down due to poor foundations:
Sand foundations? The kind that liquefy during earthquakes? Damn good thing SF isn’t at risk for earthquakes.
“The real problem with massive high-rise development is that people need to travel to and from work at rush hour. Pack all those people into high-rises, and dump them all out onto the streets at one time – and one gets massive congestion. ”
I know I’m being absolutely ridiculous now but back in primitive times, the ancient, ancient past of 100 odd years ago there was a thing that growing cities did to adjust to rapid growth/urbanisation–it was called “public transport”. “Public” because not only was it often funded by the public, it was designed to manage the transport needs of “the public”…the inconvenient 99%…
Well, we know better now, and anyway, there’s no money for such fripperies…
Thank you! I was hoping someone would point this out…
Little bit of an overshoot, there, wouldn’t you say, Bernanke? There’s an Alan Greenspan “I never could’ve imagined…” moment coming for you, old fool – and this time, a cell to go with it.
Hay Fiver remember this gem….
Greenspan’s Mea Culpa
By David Leonhardt October 23, 2008 1:15 pm
“Here’s a fascinating exchange between Alan Greenspan and Representative Henry A. Waxman from today’s hearing on Capitol Hill (as reported by Michael Grynbaum):
Referring to his free-market ideology, Mr. Greenspan added: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Mr. Waxman pressed the former Fed chair to clarify his words. “In other words, you found that your view of the world, your ideology, was not right, it was not working,” Mr. Waxman said.
“Absolutely, precisely,” Mr. Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
Over the last 30 years or so years, the world has been deeply influenced by a laissez-faire economic philosophy, which has shifted the world toward an embrace of markets. And markets certainly do many things very well. (Can you name a country that has prospered without relying to a great extent on an open, market-based economy? Or at least moving toward one?)
But it certainly seems as if this country, at least, went too far toward laissez-faire economics. I wonder whether we might now be at the beginning of a period in which we move back somewhat in the other direction. And I wonder if historians will someday look back at that exchange between Mr. Greenspan and Mr. Waxman as a sign that the change was coming.
My earlier post on the testimony appears below:” – snip
Disheveled Marsupial…. too bad about that economic science thingy and the institutional grooming…. bunch of yes men to vested interests…
Disagree about the “laissez-faire” part, if we had a laissez-faire price of money these ridiculous bubbles would have safely popped long ago (or never been blown in the first place). So place the blame squarely where it belongs: neo-Keynsian central bankers like Bernanke and Yellen (and of course “The Maestro”). who somehow believe that money is “free”
Your personal disagreement is noted, but, it does not change the dominate economic template of neoliberalism from the mid 70s onward. Which IMO is inclusive of neoclassical and neo-Keynsian [IS-LM (neoclassical) with Taylor bolt on] – that’s not even getting into the whole Monetarist debacle.
I would also point out the delineations between AET and neoclassical would have a hard time getting a rolling paper between, bad maths and physics as a fig leaf in the latter aside.
Disheveled Marsupial…. wanna get stuck into Marginalism and how that flows through all the above….. eh… and not the “money is free” memes game.
Please don’t tar the name of Keynes with the neoliberal dreck: Keynes had his economic faults, many if you like, but nothing he stood for justified the crimogenic economy we suffer with now.
I for one refuse to believe that Greenspan did not know even elemental Marxist theory of how Capitalism ALWAYS tends to consolidation and monopoliy/oligopoly followed by bad behavior. I mean, how many times has it repeated over the centuries now in so many forms? He was just being disingenous. He just could not come up with any new BS to defend the ‘self correcting free markets’ apple sauce. Also, being the cunning hyena that he is, he judged the direction of the wind pretty well. To me, that hearing was more or less the point of his retirement from the Wall Street cheer leading squad. I have ALWAYS believed that the free market boosters, the GOPers, the Libertarians at some point of the maturation of their beliefs cotton on to the mother lode of their philosophies, i.e. big money can be made not merely by some brilliant idea and entrepreneurship based on cheap labor but perpetuating the flow of big money means becoming a monopoly. Doing that requires ZERO regulation or subversion of regulation by any means. Michael Porter has explained this in his HBR Blue Oceans strategy paper very well. It is now a recognized business practice to drive towards monopoly by acquisitions and mergers rather than merely constant innovation to stay number one.
did admitting he was wrong actually cost him anything? he cast it in terms of being a reasonable person who had been deceived (after all, any reasonable person would have been deceived!) by the model “working pretty well” for 40 years or so, based on “very considerable evidence”. it wasn’t like a joe mccarthy watershed moment, changing perceptions about him drastically (and i’m just going by what i’ve read about the personal and political cost of having duffy him, which may not be accurate).
that should be “having duffy stand up to him”.
Doesn’t the SF Air B’n’B brouhaha also factor into this?
“”So what kind of minimum qualifying household income would be required for the mortgage of a median house, plus taxes and insurance? For the US on average, $47,200 per year. In San Francisco, $269,600 per year. It would require a household of four teacher salaries!”””
Even these numbers seem to be stretching it.
And especially if one considers new home buyers. Say just graduating from college and weighing job prospects versus student debt.
These seem to be more reasonable guidelines
Yearly Income Estimates
Rules vary for how much house you should buy based on a your yearly income. Some lenders, for example, indicate that a home’s sale price should not exceed 2.5 times your annual salary. Following this example, if your annual salary is $75,000, you should avoid buying a home that costs more than $187,500. However, individual mortgage lenders set their own price-to-borrower yearly income rules.
Housing Expense Ratio
When considering a mortgage application, lenders look at your front-end ratio. Your front-end income ratio measures how much of your gross monthly income would go toward a mortgage payment. Mortgage lenders say that a mortgage payment should not exceed 28 percent of an applicant’s gross monthly income. To figure your mortgage front-end ratio, multiply your annual salary by 0.28 and divide it by 12 months.
Total Debt-to-Income Ratio
Your total debt-to-income ratio, sometimes called the back-end ratio, shows what percentage of your income goes toward all debt obligations, including the mortgage, credit cards and your car payment. Normally, your back-end ratio should not exceed 36 percent of gross monthly income. Your back-end ratio can be calculated by multiplying your annual salary by 0.36 and dividing it by 12 months.
I’m not sure they care much when they immediately sell your mortgage to a “big” servicer to be bundled.
Maybe we could give tax incentives for venture capitalists and rockstar coders to marry earnest teachers? It is interesting how you need to be wealthy at the outset if you want a middle class life in the chosen cities. Reminds me of the unpaid internships problem
I live in Alameda County, where the housing situation is just as bad. Having bought our home almost 20 years ago, when housing was still affordable, I know for certain this would not be possible for us if we were entering the market now (and we earn a lot of $$). For folks like me and my wife, having a house worth so much on paper is pointless, unless we want to cash out equity or sell and move to another part of the country. Upscaling is impossible, so we are locked into our home for better or worse.
And my wife is a principal and so I can also attest to the issue of staffing schools with teachers. They have nowhere affordable to live. Last year, in fact, we provided a spare room rent-free to a young teacher. She has since moved back home where she can afford to live.
I don’t see this thing abating anytime soon. In my neighborhood, developers buy older one-story homes, jack them up or build on top to add more floor space, and then turn around and sell them again. One such house, converted into a 3 bedroom, just sold for over $1.1M after being on the market for less than two weeks.
Ironically, one of the draws of my neighborhood is the high quality of the public schools. Makes you wonder how long this contradiction can hold. So far, it has.
An answer has always been out there.
Instead of goosing (real estate) asset inflation by the combination of California’s Proposition 13 “tax abatement” and capital gains tax exclusion on real estate sales (up to a limit)
make it actual tax abatement by:
When California made the decision on which pieces of tax “reform” in the Clinton-Republican Taxpayer Relief Act of 1997 to mimic or reject for the state income tax, it copied only cap gains cuts on real estate sales, the opposite of an anti-asset inflation regime. (A double whammy for youth getting hit on their tuition costs and starter homes, if any)
* (in the unlikely event there are none—the world must be ending)
P. S. Of course, hard to predict how much to give back—it’s like predicting oil prices as drillers react to price spikes or dives (etc.)
Meanwhile, living in Phoenix AZ, where we hear constant complaints about low teacher salaries including tales of teachers moving to California for higher paying teaching jobs….. rents are quite reasonable relative to salary. From Salaries.com: “How much does a Teacher Elementary School in Phoenix, AZ make? The median annual Teacher Elementary School salary in Phoenix, AZ is $53,871, as of July 29, 2016, with a range usually between $44,129-$63,896 not including bonus and benefit information and other factors that impact base pay.” Rent Jungle stats on average rents? “As of July 2016, average apartment rent within the city of of Phoenix, AZ is $1051. One bedroom apartments in Phoenix rent for $920 a month on average and two bedroom apartment rents average $1122.”
are teachers unionized there? Maybe there are better working conditions where they are. Pensions might be better as well when unionized (yes they are probably promises that are impossible to keep but …).
My son, who is a fairly highly paid engineer, was looking at a job in San Francisco – until he checked the local rents. Literally the company could not pay him enough to live there. So he found a job at a more affordable location.
What if housing costs go so high that nobody can afford to live in San Francisco? You would expect there to someday be a correction in housing prices. But on the other hand: imagine a deserted city with buildings that are simply speculative investments for the big financial companies… It sounds ridiculous, but look at what the big banks have been pulling off the last few years, anything’s possible…
Markets are funny beasts. The textbooks say that extremes eventually get corrected. Yes, but not always as people expect. A few decades ago coffee makers were engaged in a price war, and they used cheaper and crummier beans in their products. The quality of coffee became terrible. And you would think there would be a reaction, and people would gravitate to better and higher priced coffee, but for a long time they didn’t: they just stopped drinking coffee.
Kind of reminds me of Yogi Berra saying that nobody goes to a certain restaurant any more, because it’s too crowded…