For Halloween I’d like the Bay Area to dress up like a first world country. I’m writing this Friday evening and expect my power to be shut off tomorrow. So instead of my planned topic, I’m going to share some personal history and perspective from the past 7 years in the Bay Area.
In 2012, we moved to the Bay Area and rented a flat in the Castro. With its central location, proximity to Muni, array of bars and restaurants, and bursting energy it felt like a natural transition from our Long Island City life which we had left behind. We lived in the Castro for 2 years happily. Zak was born there, and we generally enjoyed the scene. Duboce and Dolores Park. The view from our place as the fog would halt above Mt. Sutro, splitting the sky into light and the dark which we donned Beowolf. At 14 months, Zak would stand by the window overlooking the intersection of Castro and Market. He was enamored with the vintage above-ground F train. I don’t think he noticed “SF Tommy Lee”, as we used to call him, and the rest of the men that would hang out naked in the sitting area by the iconic Twin Peaks bar.
Now if you have been to the Castro, you know it’s literally and metaphorically colorful. I remember when my mom visited during the Castro street fair weekend. She was truly amused by the sight of leather and chains and in a moment of such innocent amusement thought the rainbow flag was the flag of San Francisco. As newcomers we appreciated the city’s spirit of inclusiveness and individuality. So with Yinh’s family nearby and good jobs, we were ready to plant roots.
At this point, we had already browsed open houses for 2 years. In the first year, we looked no further than the city. I think we saw about 75 places. We considered an offer on 1 but never followed through. In the following year from 2013 to mid-2014, we saw about 20 places in Marin and spent one day looking at the peninsula before sticker shock at what we saw in-person had us about-face as fast as you can say “offer day”. Finally, we happened upon Lamorinda and decided on a fixer. Maybe the Castro rubbed off on us, because we were apparently now into masochism. Not the fun kind with whips and ice. This was the kind where you put your money into an incinerator and the safe word is “just get it done” until you run out of savings in a crescendo of desperate ecstasy. When you’re finished you give the movers a big tip and tell them to enjoy it, it’s all you had left anyway.
House hunting in SF is a rite of passage. Asking prices are more like suggestions that can be pulled at any moment. Writing letters to sellers to prove your worthiness beyond your ability to actually close. I hear the market is softening a touch these days. It would make sense if you think Uber, Lyft, and Slack were foreshocks and WeWork was the venture quake. The startup world could be sitting in a liquefaction zone. Even still, low unemployment rates and net population inflows (despite all the stories of who’s leaving the Bay area) have fueled intense demand for housing. But demand is only half the story. Given lag time in construction, we expect supply to respond more slowly but in SF it is especially glacial. And telling.
Bureaucrat Bonanza
A couple we are close with is building a house in Noe Valley for their family. This is kink.com level masochism. (I didn’t hyperlink that URL for a reason…side note: kink.com studio headquarters used to be at the Armory in the Mission. I’ve done the tour two times with visitors. The building and its history are amazing. Besides having been an actual weaponized fort it was a filming location for Empire Strikes Back and host to famous boxing matches. Kink re-outfitted it with dungeons, electric shock rooms, and a wrestling ring. The lube was stored in oil drums. The building is being converted to a SoHo House, so think about that when a member takes you).
Back to our masochistic friends. They submitted their plans for design review. These are the hearings where your neighbors can chime in and a public paper-pusher can run up your architect bill by demanding you decrease your window size by 1%. In the process, the city said something to the tune of “a hundred years ago a construction worker lived there who once worked on a landmark building so now this site is also considered a historic landmark”. Unfortunately, Ashton Kucher did not pop out to end this nightmare. They are reading this. I love you guys but I bet Zak will be driving us to the housewarming.
It’s no surprise supply is stranded in plain sight.
A recent housing policy example
If you were to design a kleptocracy from scratch you’d build an obstacle course of arcane rules for citizens to navigate. You’d create discretionary chokepoints where rules could be enforced or not enforced. A bunch of bureaucrats in dire need of a Snickers bar capriciously ruling on vague policies sporting virtuous titles. Like the Community Opportunity to Purchase Act (COPA). This is a real act that went into effect last month. Here’s a description by tenant lawyer Joseph Tobener:
COPA would give the first right to purchase (this includes a first right to offer to purchase and a first right of refusal to match an existing offer) vacant lots or residential rental buildings with three or more units to nonprofit housing organizations. This means that when an owner of a multi-unit building puts it up for sale or has received an offer to purchase, nonprofit housing organizations that are pre-selected by the City would have a chance to bid on the building first or to match an existing offer.
Once the owner puts the building up for sale or has received an offer from a potential buyer, the owner would need to notify the Mayor’s Office of Housing. The pre-selected nonprofit housing organizations would then have thirty days to make an offer to purchase the building. To be pre-qualified, the nonprofits would need to show that they intend to create permanent affordable housing for low- and moderate-income residents.
If you made an offer to buy a property, and your bid was subordinate to an organization pre-approved by the city you’d probably be frustrated. If you are a hurried seller and find a buyer only to have the negotiation frozen by this city-backed interloper, you will also be frustrated. The city has actually granted a free option to a non-profit. Those familiar with institutional trading will recognize this as the ability to “break up a cross” that 2 parties have already committed to. It’s a kingmaker privilege. In the resulting equilibrium, any average Joe buyer is only getting filled when the designated non-profit has passed on the deal. In econspeak, adverse selection. Sure, the policy is well-intentioned but fails to appreciate multi-order effects that determine how it will play out in practice. Which is what actually matters.
Incompetence?
Hanlon’s razor would point to incompetence over planned kleptocracy. It’s tempting to say politicians don’t understand microeconomics. You couldn’t swing a cat in California without striking an innumerate politician. It’s also easy to trace inevitable unintended consequences back to a policy and its advocate. But anticipating every unintended consequence is hard (I know I’m being a bit charitable since its no secret policies like rent-control are notorious for restricting supply). Still, I am resistant to the full incompetence case. I’m usually impressed by the arguments presented in the manual you are given when voting for local politicians and propositions. The policies aren’t created as whimsically as they seem to be enforced and it takes a special brand of cynicism to think the opposing views aren’t at least considered.
So my fallback filter here is plain old incentives. The politicians understand the economics but their constituents don’t. The pols are in the vote-getting business. So with motivated reasoning, human being’s specialty, they pander to a populace which wants them to fix their problems. If your problem is the rent keeps going up, they run on the “the rent won’t be allowed to go up” platform. Comforting and simple. And effective. For getting votes. Of course, interfering with the invisible hand driving housing demand means boards and hearings and backroom deals. Developer and crony interests find that expediency fees and bribes allow them to do business in Gotham while landmine rules blockade more scrupulous competition. This classic market failure mode is called regulatory capture. Look for it in your industry and you’re sure to find some overpaid meatheads nearby.
What to do?
You just shake your head mostly. SF has become an adjective. As in, “the most San Francisco thing I’ve seen this week is…” The city’s reputation as a ‘failed state’ seems to be growing and this is in the midst of a 10-year bull market. As all tides must, this one will eventually go out. It’s hard to imagine taxes not going higher then. Or services getting worse. But in the meantime, there’s a lot we love about being here but rather than enumerate them it’s sufficient to say on balance it’s just worth it. If I could tie up my thoughts with a tidy bow I would but the nature of the bay area defies a coherent model and satisfying answers. If those things matter to you, I doubt you’ll like it here.
This twitter thread had me laughing aloud and is so SF.
This is worth sharing again for anyone interested in a very comprehensive analysis of the housing crisis from every angle. It’s my go-to reference on the topic. Reality is more complex than anyone pretending it’s just one thing at the root of the problem.