We have a huge contingent of what I call vacancy truthers here in Berkeley and the rest of the Bay Area. Earlier this week a former candidate for city government was opining that new "gentrification tower" - actually tremendously expensive and not at all luxurious studio apartments in a 5 story building -- were all vacant! Look at all these available apartments!
But these truthers simply never understand the numbers. In the first place they always underestimate the number of occupied apartments in a building. In the specific case there are 170 apartments and 90 of them are already occupied. In the second place, they always underestimate normal vacancy rates. Zero is not a healthy vacancy rate. 10% is a healthy and normal vacancy rate in functioning markets. Finally, these people don't understand the process of leasing out a new building. It usually takes a full year to get to 90%. Again in the specific building I heard about, they only got their certificate of occupancy in September 2020, are already more than half occupied, and are leasing out at about 1 per day which is well ahead of the normal pace.
Meanwhile the empirical work consistently shows what anyone familiar with supply and demand would expect: more units lowers overall cost: https://www.slowboring.com/p/induced-demand.
The vacancy rate of permanent supportive housing units in San Francisco is 6%, which was higher than the vacancy rate of market rate housing. I guess that means there is no need to build more PSH? QED, suckers.
I said was. The vacancy rate in San Francisco and the Bay Area hovered around 5% during the recent cycle. 10% is the average vacancy rate of reasonable housing markets, mostly in Asia.
After spending so much time on this topic I always came to the same conclusion. Even when I made the most extreme assumptions it didn't change the answer. Just build more housing or stop building too much commercial real estate. That's it.
The truth is that Californians love expensive housing. They love having lots of jobs that attract people outside their city. They also love yelling at the people they desperately tried to attract. They love homeless people and want to support their drug problems. They never put themselves into the shoe of outsiders or even developers and care about nothing except their own selfish desires. That's what true greed looks like. It's in plain sight and until that greed is gone nothing will change.
I wouldn't say Californians love expensive housing. They love the speculative market which draws a good investment on their prior investment. Problem is it inevitably squeezes out all those people who cannot to pay market rate. Not for a house or an apartment. Where do they go? Suburbs nearest are already full, the periphery between aren't too far from being the next redeveloped arras. Some resort to commuting 2-3 hours each way since they can at least buy a cheaper home hours away and not infinitely pay rising rent. They do build "cheaper" houses in the exurbs so that helps some but the vacancies are filled by all others chasing the California lifestyle even if only temporary.
One point to add is that it's pretty expensive to build in California. Even to fix an old house could incur 20-25% more due to retrofitting for earthquakes. Getting land and whatever property isn't cheap on top of doing anything further to it. I'm in the field and started wanting to do affordable housing but the pace at which it all moves is pushing me towards other paths. Say 3-5 years for 1,200 new units to get through various agencies and built on time, most of which are not meant to be affordable units. Can people put their struggles on pause in hopes of being lucky this round? Much as may be said to signal virtue, there is an obvious informal aversion living next to poor people.
What made me laugh was when the City of Los Angeles was building those homeless shelters and still charging city fees. Way of the system, ok, but why would the city need to charge itself permitting fees? I feel there's a huge indifference to put only a facade of trying but at least it produces a few units at an astronomical cost to taxpayers. The are already paying for an annual budget half-owned by the police. Relevant point because a lot of cops and city workers don' live in the city either. They take their income and their future pensions elsewhere and the residents paying for these services get so little of those tremendous salaries reinvested back in their own communities.
Greed will always be here. I don't see it changing either unfortunately.
The analysis is so obviously wrong, I can't imagine any of this is real.
It assumes that rich entities will buy property at high prices in a soon-to-be buyer's market. That they will not calculate ROI, will not predict market collapse and will easily loose money. The opposite, of course, is true. ROI will be meticulously calculated, bubble will not form. Development companies, unamused by weak demand will stop building long before there will be lots of unaffordable, unsellable housing. Which might be good: market forces at work.
The right way to understand Nathan, the author of the piece, is that - like many other rich kids of his class - they are disguising an aesthetic preference for cute old buildings with a material analysis which can justify that preference in light of their purported egalitarian values.
Yeah, as I recall we've seen this happen on the rare occasion cities built enough housing to cause the market to weaken. All the property companies stop building the moment it starts to happen because they know they're at risk of ending up with a load of housing they can only offload at a loss, and that can easily bankrupt them.
There is a flaw in your argument. If there is no demand for extremely expensive luxury apartments none of them will be built. The brain knot of luxury apartments making housing unaffordable doesn't even come into play because no luxury housing will be built.
Your analysis is wrong in assuming that when developers acquire permissions, demolish buildings, rent machinery and pour concrete, buyers still behave as if there is shortage of housing.
Nathan Robinson's analysis might be wrong too, but it is still more nuanced.
Bubble or no bubble, builders are going to build. If luxurious units drop in value after housing supply is no longer restricted, builders will go with thinner margins and build less expensive housing, rather than… what, just exit the business altogether?
If OP’s vision is correct, when luxurious high-density housing in SF becomes oversupplied it will drop in price. If your counter-argument is correct, in this scenario luxurious housing will never be built. I reckon other housing will, though, and it’ll likely be tall buildings with higher margins. Either way the answer seems clear: using speculative investment to argue against new housing is misguided.
I’m a YIMBY activist in my spare time. One criticism of my ideas I’ve seen is that building more housing in my city will attract more professionals to my city. Those people live in the new housing, not existing low income residents. I think this is because the shortage is so bad, and that these professionals would eventually displace residents no matter what.
At least in San Francisco, over 80% of residents in new buildings lived in the city before moving in. I haven’t heard a single induced demand argument which is actually borne out by reality.
For the one in this article: the cities with housing crises have extremely low vacancy rates. And the drop in rents during the pandemic has been most substantial in new buildings. If supply was totally inelastic due to money laundering, that would not be the case.
Land is priced at what the MAX a developer could make from developing the land.
Short of completely changing everything about property development from the financing (artificially low rates), taxes (regressive), and development (zones) - there is no solution.
If you could build more - someone would. You can't. And it's not like we can just change one thing. The entire market is forcing higher prices at every turn.
66% of the US is a homeowner, remember. Most people have an interest in NOT solving this problem.
1. Lots of industrial inputs are priced based on value they provide the consumer. That’s not what makes land special, and there are many mechanisms to have non-developers capture the value of land (cf. LVT, inclusionary zoning, impact fees).
2. Focus on developers is misplaced. There is no reason developers are structurally incapable of making their profits by building lots of units at low margins instead of a few units at high margins. The fact that 100% subsidized nonprofit developers deliver projects at nearly the same costs as for profit developers suggests that the drivers of costs are not developers themselves.
3. San Francisco is majority renter yet makes no local policy changes to alleviate the supply crisis. The incentives at play have a lot less to do with greedy developers than you describe.
4. Low interest rates can either manifest as lots of units offered at cost or high multiples on ownership vs rentals. Which one you get is a policy choice. I don’t know what you mean by “artificially low” and how that’s even relevant.
Greedy developers don't want to drive the value of their existing properties up, they want to build more properties because that is an easy way to double or triple their money.
Greedy owners of single family housing want to drive the value of their house up because they can't easily invest into a second home. A lot of them also love the idea of halting progress at all costs, even if it harms them or their children in the long run.
Housing developers aren't out there with 50-70% margins. Their net margins are usually well under 10%.
The only people doubling and tripling their money are Boomers who bought houses with 1-2 years of saving ordinary wages, spent 40 years shouting down new construction in their towns, and now are sitting on millions of dollars of unearned returns.
THe last time this actually happened, during the Great Bubble of the early 2000s, developers built as fast as they could sell, to anyone who could sign a a paper. It didn't matter if anyone intended to actually live in the buildings. Whole developments were built to stand empty. And when the bubble popped, indeed, prices crashed. Also, stock markets, banks, jobs, income. Foreclosures clogged the market. Corporate real-estate trusts hoovered up the excess housing to convert to rentals. They have not been exemplary landlords in the main. Have the poor benefited in any way from any of this? No, of course not.
> Have the poor benefited in any way from any of this?
Yeah, I lived in a sweet condo in downtown Seattle for a few hundreds bucks a month in rent during the early 00’s crash. Being a poor college student at the time, and I’d say the price collapse was awesome, esp compared to dorms or other dilapidated UW housing.
What's scary is we now have whole entire generations of Americans who have never personally witnessed a functioning housing market, and this is the kind of junk they believe.
This data at FRED is much easier to work with. As you should be able to see, there was nothing exceptionally high about new housing construction in the first part of the 2000s.
Today's new expensive home are tomorrow's old cheap homes.
Even without waiting for tomorrow when rich people move from an old ratty apartment to the new shiny one that old home becomes available for someone less fortunate.
I'm suspicious of a plan to help the poor that depends on rich people making a bubble pop. Somehow the rich always manage to put their losses onto the poor.
No the plan to help the poor is to build enough supply that there is housing for all who desire to live in a place. That aim is eminently possible, and to the extent some of those people need subsidies no matter what, becomes easier when you have a larger tax base.
The only realistic plan to help poor people afford healthcare in the United States will necessarily tackle the enormously high costs. The opposition isn’t narrowly “rich people” though but instead a wide range of above median income white collar industries.
I don’t think the idea is that there is a bubble or that there will be a pop. The OP is an argument against the theory that new units are speculative investments that lie empty. The suggestion is that if that were the case then there would eventually be enough supply that prices would fall for new or existing stock. That feels appealing to me. It also feels reasonable that converting existing buildings to have more units would be beneficial for a city’s poorer residents in general even if it’s bad for those who are evicted: the people moving into the newer more expensive units would only increase demand (and therefore price) for the other older units if new units weren’t available, pushing up prices for existing residents. I’m unconvinced by the idea that the rich will decide to move to a city based on whether or not there is a pencil tower.
A counter argument I find compelling is that if people are buying property as a way of laundering money or stashing cash overseas then they may not care so much about the quality of the investment and that this breaks some of the assumptions about market efficiency.
You're right, but for the wrong reasons. Aesthetics has always trumped economics when it comes to housing, and the speculators know this. The probability that this will change anytime soon is essentially zero. You're better off moving somewhere where they haven't fucked it up. I'd like to suggest Houston here, but there are still HOAs and similar stuff there.
It's not an argument in favor of creating a bubble and letting it pop. The argument is that even in the most extreme scenario that building more housing will lower the cost of housing in the long term. Even expensive housing will make the rest of the housing market affordable.
I am not familiar with Thomas Sowell and realistically I'm not going to read his book to figure out why you cite him here. Could you at least give a hint?
The article outlines the conceited maps of man; the overarching conceit being: the territory can be conformed to some arbitrary map.
Not unlike the counterintuitive way I am telling you the truth, a positive thing, and getting modded down for it in this thread in the most punk-tacular fashion.
But these truthers simply never understand the numbers. In the first place they always underestimate the number of occupied apartments in a building. In the specific case there are 170 apartments and 90 of them are already occupied. In the second place, they always underestimate normal vacancy rates. Zero is not a healthy vacancy rate. 10% is a healthy and normal vacancy rate in functioning markets. Finally, these people don't understand the process of leasing out a new building. It usually takes a full year to get to 90%. Again in the specific building I heard about, they only got their certificate of occupancy in September 2020, are already more than half occupied, and are leasing out at about 1 per day which is well ahead of the normal pace.