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There's the first important issue: California property tax laws are insane.
from https://en.wikipedia.org/wiki/1978_California_Proposition_13
So your property taxes can only increase by 2% a year from your date of purchase. As a result anyone who has owned a home for 10+ years is locked into property taxes far below what they'd pay if they'd move.
So there's a strong incentive to never sell. A retiree might think about selling their house and downsizing, but while they'd get a lump of cash their property taxes will be significantly higher for the rest of their lives. That affects calculations.
Other issues benefitting SF...
The weather is quite pleasant and unique. Many people are heat bugs and dislike it. But it rarely rains in the summer. The weather never gets muggy. It never really gets cold. Sort of year round light jacket weather. There's a big market for that, and there are only a handful of cities like that in the world.
Demographically it's 78.8% asian & non-hispanic white. That's extremely high for a rich costal city in the US.
Really the biggest downside to SF is the incompetent management of the drug addicted & mentally ill homeless population.
It's never going to be a party town, but it's going to be a desirable place for the wealthy and bookish to live for the foreseeable future.
And it actually has nice streets, mentally unstable hobos notwithstanding. That's where all that missing middle housing in the US has gone to. Drop a pin anywhere west of the mountain or in Pacific Heights and it will look like a real city: streets with houses instead of setbacks and/or parking lots. It just needs some more trees.
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Good summary. There are simply too many structural factors favouring SF in a way that e.g. Detroit never had. Moreover, it helps that firms like OpenAI are vocally supporting of the city even while they criticise the leadership.
One final point. Even many people who move don't move far. There was one VC who made a big splash on Twitter a few months ago about how he's moving out of SF due to spiralling crime. Where did he move? To Palo Alto. SF mostly rose as a cheaper alternative but the wider Bay Area isn't losing its luster as much as people think. Moreover, even alternatives like Seattle are seeing a rise in similar problems, but with substantially worse weather.
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San Francisco is actually experiencing mini renaissance within a broader decline, namely in AI. Think the neighborhood dubbed Cerebral Valley.
Maybe that has something to do with it. Those are the people buying those homes.
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There is a simple and relatively general reason why we expect housing costs to have increased relative to pre-pandemic levels. Remote working increases demand for housing everywhere because people who work from home require more square feet of living space for an equivalent quality of life. And the impact of increase in price on demand is greatest where supply is constrained - i.e. in blue-state NIMBY cities.
So we have three effects:
A general increase in house prices due to the demand effect of WFH. Positive everywhere, and relatively more positive for the Bay Area than elsewhere.
The relative attractiveness of different places changes due to WFH. There is a general flattening effect (within a metro area for people who sometimes need to network in person, globally for people who can be 100% remote) on the value of neighbourhoods, and there is also a shift in value away from places with a convenient commute to good jobs, and towards fun places. This is a small net negative for the Bay Area as a whole, but within the Bay Area it is a big positive for SF at the expense of Silicon Valley.
The specific problems with social decay in SF.
It doesn't surprise me that these are net-positive for SF house prices.
Why would you expect WFH creates a demand increase everywhere? Seems to me that if you need not commute, you will get some x% if the population moving to generic cheap jurisdiction which may decrease the demand in very expensive neighborhoods.
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So much has been said about housing prices. Scott even jumped into the fray recently. But I think there's something missing from every analysis. Here's my take, which I offer with low confidence, but at least it's not the same regurgitated shit:
Housing Prices are a Meme
Something changed around the year 2000. It wasn't an economic change. It was a mental change in how much people are willing to pay for a house. Before, people might have balked at paying 50% of their income on a house. Now they do it. And why not? With few exceptions, housing always goes up. Once you digest that, then there's almost no amount that's too much to pay.
Prices in San Francisco are not high. Compare San Francisco to Vancouver. Compare it to Hong Kong.
San Francisco is the richest city in the world. Yet, prices in San Francisco are not really too much different from much poorer cities like London, Vancouver, or Hong Kong. In San Francisco, a software engineer might spend 50% of his income on a house. In China, he would spend MORE THAN 100%, relying on the accumulated wealth of parents and grandparents.
Housing prices are a meme. Fortunately, this meme is less strong in the United States than it is in Europe, Canada, or China. But it's getting worse here. To break high housing prices, we need to break the meme. We need people to learn that housing prices go down. To do that, we need to create government programs that make housing a shitty investment, which is the opposite of what happens now.
If you want to see what happens when the meme finally gets broken, look at Japan. Housing has been a shitty investment in Japan for a long time now. People don't hoard houses hoping for appreciation like they do in other places. As a result, it's affordable. People have been trying to figure out what makes Japan different. This is it. This is the reason.
If we want lower prices, we need to break the meme. Everything else is just nibbling at the edges.
Housing in Japan isn't affordable. Houses are small, probably roughly half of the sqft you'd get in most of the U.S. for the same dollars (my "huge" house in the countryside that shocked my co-workers was just over 1400sqft and it had 4BR, lol). The construction quality is shit, very poor insulation, crappy building materials that degrade significantly in the first 10-20 years. And all this for the low prices of 30,000,000 to 45,000,000 JPY if you want something new, or 25,000,000 to 35,000,000 if you want something used. And get ready to live in a 1000sqft "house" with maybe 1-2 meters of "land" surrounding your house, if that. (Yes, even in the countryside -- they build houses 1 meter apart even in the midst of massive open spaces.) AND! You get to pay for it with your Japanese salary, which PPP-adjusted is worth about half of an American salary.
As for why this is, the most plausible reasons seem to be that
Brain drain to the cities is extreme and WFH hasn't taken off nearly as much -- most people are still trying to cram themselves into Tokyo
Home construction is a racket -- There are a handful of massive national level builders that sit on top of a truly insane byzantine network of contractors, sub contractors, and sub sub sub contractors so that building even with shitty materials becomes horribly expensive due to the sheer number of parties taking their cut. This also makes QC'ing your house nearly impossible because there's no single "contractor" to hold accountable, it's buck-passing all the way down
Penalties for sitting on land are very low -- the attitude towards owning property here seems to be "sit on it and hope you win the lottery." I personally know people who own land in the countryside and who have zero plans for it -- it's just there, it's costing almost nothing, and maybe someday someone will want to buy it, who knows? And of course there's the famous inheritance/ownership problem, where a piece of land gets passed down to half a dozen grandchildren, only some of them cannot be located (and might even be purposely avoiding being located in order to dodge taxes) so nothing can ever be legally done with the land and it just sits in limbo forever.
Interesting! Maybe it's time to take the "Japanese housing is cheap" idea out to the river and drown it.
What do you think of the previous discussion where we talked about a (shitty but functional) rental in Osaka going for $150/month?
I haven't seen that discussion, but it sounds possible. Places like that are usually exactly what you'd expect, some combination of:
Extremely small
Filthy and/or damaged
Old
Structurally dangerous (predating latest earthquake safety laws)
In a natural disaster high risk zone (flood/tsunami/landslide)
Terrible location (far from public transit, or next to factories/noisy train station/graveyard/sewage plant etc)
Tainted by association (usually a suicide or high profile crime)
Shitty neighbors (almost by definition)
$150/month might still seem outrageously low given the above, but I again have to emphasize that these are usually basically pod "apartments" that would probably violate building codes in the U.S. for being so small.
150/month for 'old pod in natural disaster zone' is still amazing tbh (provided you get a day or two's warning for the disasters, and just move to other pods).
Are there any good reasons such building codes should exist? There'd be a bunch of new requirements for the specific constraints such small apartments ofc, building codes in general are useful, but as far as I can tell generally prohibiting them is pure deadweight loss
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Somebody explain to me how it can make sense. I mean ok, he spends his parent's wealth on paying for the house. Then he has kids. What his kids would be paying for the house with? Is the assumption his income at some point would jump so high that he would be able to accumulate wealth too? Is the plan is for the house price to appreciate so fast that he'd retire, sell it, move to Chinese equivalent of Sticks, IA and use the money to support the kids? Is the plan to never have kids and never retire? I thought Chinese model was supposed to be kids supporting parents? Not sure I understand how it works there.
Presumably it works because of the one child policy.
4 grandparents -> 2 parents -> 1 child.
The Asian model is that parents support their kids financially well into adulthood in exchange for obedience.
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Traditionally, the whole extended family would live in the same house, with all working-age members contributing to a shared pool of income and the elders making the financial decisions. Once enough wealth has been accumulated, the whole clan will move to a new house that would be better than one any individual member could afford on their own. As long as you have enough children and grandchildren bringing in money, your lot will improve over time.
This system is of course breaking down, as declining birthrates reduce the working-age population of any given family and as western individualism slowly dissolves the old social structures. The ultimate result will be as you imagine, with future generations unable to afford the homes they would like because the family accounts have been overdrawn and split up.
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Probably inheritance from when his parents die(after all, their house has also been appreciating) and multi-generational households combine through the power of ultra-low fertility rates.
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I think especially now that WFH is a major thing, that any high prices are about meme cities, not just meme prices. Being a resident of certain cities is pretty high status. California is high status, New York around NYC is high status. Nashville isn’t a meme city, though it’s a pretty nice place, St. Louis isn’t a meme city, nor are most midsize cities in the south. You can get a pretty nice house in North Carolina for what you’d pay for a small home in San Francisco. But NC isn’t cool.
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Isn’t it a bad investment in Japan because declining north rates mean there is less demand?
What started the decline was a very high base rate, IMO. Prices at the peak around 1990 were unsustainable. There was a popular saying at the time that the theoretical land value of the Imperial Palace in Tokyo was greater than the land value of the entire state of California.
Now that's it's been a bad investment for 30 years, people don't speculate the same way they do here.
The real population decline in Japan hasn't even gotten started yet! Japan has about the same population today as it did in 1990. The current population of 123.5 million is only down slightly from the peak of 128 million reached in 2009, but the pace will accelerate from here.
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It's a bad investment in Japan because their zoning system makes it very easy to build new houses. Indeed building new houses is a cultural norm, and houses are considered temporary occupiers of land rather than permanent features. Buy an old house? Chances are you'll knock it down and replace it.
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4. Many home owners analysis the social collapse as a scam. The way that the scam is theorized to work is this: First engineer social decline. This reduces the price of office blocks. Second, buy a $300million office block for $60million. Third, reverse course on social decline. Fourth, patience, it takes a while for your "$60million" office block to be worth $300million again. Fifth, sell, and walk away with $240million profit.
The home owners don't want to be victims of this scam. They don't want to sell cheap at the bottom of the market, only to see prices recover as part of some-one else's plan. Perhaps too many people are in on the scam and they are propping up the housing market. Perhaps they are not in on the scam, they have merely noticed the avarice and evil of American political economy and feel confident in guessing what is going on. Perhaps it isn't even a scam, it is just that with American political economy being so avaricious and evil, people assume that its a scam. The realization, that social dynamics are playing out with no-one in charge and exercising agency, has yet to dawn.
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People need homes, they don't need office space. Some businesses moving online or to cheaper areas does not eliminate demand for housing. These are related but not that well correlated. Although VC is down in SF, it is not out:
https://sfstandard.com/research-data/san-francisco-top-vc-venture-capital-deals-investors-firms-2022/
Demand for housing is much more stable compared to supply and demand for commercial real estate. Layoffs can create huge, sudden vacancies.
I'm only loosely familar with commercial real estate lending (I did residential lending) but a major difference is that commercial lenders typically require market LTV maintenance whis means ~ margin calls. If your property tanks by 50% in current market value, your bank is going to call you & demand cash.
Now, they won't intentionally drive a performing loan account into bankruptcy. Banks are worse at liquidating siezed collateral than the original owner, and in any case really just want the loan payments. But if you have a generally solvent business, or you have lots of personal assets & gave personal guarantees (and most small businesses have to) they will absolutely make you shoulder the volatility risk and take your savings to pay down the loan to a % they are comfortable with. You can take the equity back out if & when the proprty appreciates again.
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This story is a great example of no one ever updating, or even questioning the narrative.
Ah, yes, the blame for the drug problem doesn't lie with the users; it's split between the cartels and "overprescription" (doctors and drug companies). Leave aside that if you dig down, you find opiate abusers may start with prescription drugs but it's usually not their prescription, we get this later:
Glass pipes are used to smoke crack or crystal meth. Who is overprescribing those? Are we going to blame stimulant abuse on ADHD overprescription? (probably yes, but it'll still be nonsense)
No consideration that reversing such overdoses may be part of the problem, much like being a medic in a gang war. The story of course only mentions examples where this is unambiguously a good thing -- a baby and a dog accidentally getting a dose -- but somehow I feel certain that a lot of those 1,300 were not in that category.
Ah, yes, this is all about race.
...and that's a good thing, apparently???
Right, because the problem is "inequality". Not the absolute level of the homeless drug addicts, just that some people have a LOT more than them.
Technically this statement is referring to the past, but it betrays the author's belief as well -- that the rich in SF are rich because the poor are poor. This was probably false in Robert Louis Stevenson's day; it's certainly false now.
As long as the problems are maldiagnosed, solutions will not be forthcoming.
This worldview treats the oppressed as lacking in agency and an oppressed person is someone who has it worse than others.
It therefore makes sense to talk about drug problems as a result of someone other than the users because the users lack agency.
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Residential in San Francisco has constraints that don't apply to commercial.
Due to Prop 13, most San Francisco homeowners aren't techbros, they are elderly immigrants that bought thirty or forty years ago. If they sell, they lose their preferential tax treatment and have to move out of the ethnic enclave. Little Russian and Chinese grandmas in the Sunset aren't going anywhere, and that constrains supply.
Building residential also comes with significant political issues. Since housing is so tight, landlords and developers are seen as the enemy. The moment a developer proposes a residential unit, every single non-profit with a veto starts making demands for affordable units, protesting against gentrification, etc. Commercial doesn't have the same impact, which is why it's easier to build the Salesforce Tower than a four-plex.
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It could also be that some people are locked into the market. Interest rates are high so people aren’t selling. They can’t afford to buy a new home even at a lower principal amount.
I’m curious whether there is an easy way to check the volume of home sales in San Fran. If the volume is very low, it might indicate the lock in effect.
California Ass'n of Realtors publishes price and volume stats monthly.
https://www.car.org/en/marketdata/data/countysalesactivity
April volumes are down about 35 to 40% in all regions and statewide.
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