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I wanted to get down to brass tacks and review the state of the affordable housing situation in California and the broader US – in numbers. The National Low-Income Housing Coalition (NLIHC) has published its 2022 edition of Out-of-Reach, its annual report documenting the gap between renters’ wages and the income needed to rent at fair-market rates, and I wanted to share some important findings.
As you might expect, the numbers are not improving. From the beginning of 2021 to the beginning of 2022, rents increased by 15% nationwide, or $179. This increase is 4.5 times higher than any yearly increase in the last four years. Unfortunately, the minimum wage is not keeping up. A worker earning the federal minimum wage of $7.25 must work 3.5 full-time jobs to afford a 2-bedroom apartment at the national average fair-market rate while saving 70% of their income for other necessities. In California, a worker earning the minimum wage of $15 must work 2.6 full-time jobs to afford a 2-bedroom rental home and 2.1 full-time jobs to afford a 1-bedroom rental home at California fair-market rates. This means that even a couple working full-time at minimum wage cannot afford a 1-bedroom rental home! Here in San Francisco, a full-time worker must work four full-time jobs (160 hours a week!) to afford a 2-bedroom in the city. The American dream is sounding more like an American fantasy.
How much of the working population can actually afford a 2-bedroom apartment at fair-market-rate in their city? It turns out that more than 40% of all workers in the US, excluding farm workers, work in industries that don’t pay enough to afford a one-bedroom apartment in their own city. 40% of our nation’s working population can’t afford a 1-bedroom apartment! And 60% can’t afford a 2-bedroom apartment.
A significant driver of the recent rent increases has been the surge in demand during the pandemic. Around 870k individuals entered the rental market during the pandemic, contributing to a very low 5.8% vacancy rate. Many of these newcomers were higher-income individuals who could afford to pay more than fair-market-rate for a rental unit but could not compete in the home-buying market. As a result, landlords drove up prices, knowing that many would-be renters would be willing to pay while pricing out low-income workers.
Another contributor to high rents has been the increased number of purchases of rental developments by investors. Investors purchased more than 80K homes in the last quarter of 2021 – the highest number of purchases for any quarter seen since 2000. When corporate investors take over rental property, it is common practice for them to increase rents, especially in units where rents were initially low. Corporate investors are also extremely quick to file evictions when households miss the monthly payment.
The supply of affordable housing needs to increase. Cities can accomplish this by building additional units allocated to affordable housing and ensuring that existing affordable housing remains attainable by lower-income workers. As supply and demand for expensive rental units trend upward, the lower-income face fewer housing options. And the ones who can hang on to housing often have little to no savings to make the rent in times of sudden financial hardship. So many renters are just one paycheck from homelessness. We need to establish rental assistance programs for those who need emergency assistance to save them from speedy evictions.
And let’s not forget that losing your home is a terrifying experience. Eviction causes intense mental anguish for the victims and their children. It is heartbreaking to realize that working one, two, three, or even four full-time jobs at minimum wage here in the Bay Area is not enough to spare you from that experience.
Within its 47 square miles, San Francisco is home to numerous thriving ethnic groups and cultural districts. While these neighborhoods host global tourists who come to enjoy the foods, arts, and culture, they have also persisted through generations as living, breathing communities where residents can feel at home with groups they identify with. For example, my friend’s parents lived and raised their family in Chinatown for 50 years and still can’t speak English. Before I became an advocate for affordable housing, San Francisco’s cultural diversity and the topic of gentrification were separate topics in my mind – I didn’t believe one had anything to do with the other.
The lack of affordable housing and the city’s prioritization of profit over people is erasing these communities. The irony is that while the cities rake in huge profits from tourism in these neighborhoods, they don’t provide support for these groups to survive. For example, tourists from all over the world come to enjoy the architecture, art, and cuisine of Japantown and spend money at Japanese-centric businesses, all while the city allocates its shopping districts for new Chipotles, Gaps, and Sephoras. How can Japantown make it if the city’s planners and policy-makers choose businesses that maximize profit rather than preserve the spirit of the residents? Also, these neighborhoods need more affordable housing so that families can move in and sustain the community over the long term. Instead, city planners and policy-makers allocate new housing developments for market-rate luxury units that the average family cannot afford. According to a recent report from the National Low Income Housing Coalition, an individual needs to earn four times the minimum wage to be able to house their family in a two-bedroom market-rate apartment in San Francisco.
San Francisco’s city planners, officials, and policy-makers must understand that their decisions to prioritize profit over people are cannibalizing the city. They cannot keep boasting of San Francisco’s rich diversity, inviting the world to enjoy Chinatown’s New Year’s Parade or the annual Pride Festival while making decisions that essentially erase the communities behind them.
Given the high rates of homelessness on the streets and the urgent calls for more affordable housing, I was surprised to see the recent news in the San Francisco Chronicle that San Francisco has 305 below-market-rate apartments sitting empty despite having ~20K applicants for those spaces. Affordable housing is available, so why isn’t it being occupied?!
However, we should start by mentioning that the overall San Francisco rental market HAS become more affordable. Rents have come down ~12% since pre-pandemic times, meaning that more individuals who were previously shut out of the rental market can now get housing. However, that doesn’t change the situation for the individuals who still cannot afford the rents. Such individuals need to rely on programs like San Francisco’s below-market-rate housing program to attain housing for their families.
San Francisco requires housing developers to reserve between 15-21% of units at below-market-rate (BMR) for individuals and families earning less than 55% of the area median income. This program is a lifeline for many low-income families and is a model for cities around the Bay Area, but getting occupants into these units is inefficient and getting worse in the current rental market. In the past, the Mayor’s Office of Housing and Community Development (MOHCD) reviewed around five applications before they filled a unit. Now, they review ~31 applications per vacancy as more people drop out of the program to get a better deal elsewhere. It is good news that more applicants can now rent elsewhere but highlights the gross inefficiencies in the review process as the MOHCD wastes time looking at out-of-date applications. A possible solution may be to enforce a penalty for applicants who don’t notify the MOHCD that they have dropped out of the pool, such as prohibiting them from re-applying for the next one or two years.
Reviewing 31 applications instead of the typical five makes an already-long review process six times longer. The review procedure for a BMR unit is much more involved and time-consuming than a simple rental application. The MOHCD office needs to verify the income of every occupant in the new unit to ascertain that they meet the income criteria. The long wait time is not just a burden for the new renters having to wait for housing but also for the building owners who may need the rental income to pay off debts.
Our inability to promptly fill all available BMR units highlights another obstacle in our quest for affordable housing – a slow-moving bureaucracy. In fact, the MOHCD has been compared to PG&E as one of the most inefficient organizations to work with. It is unfortunate that so many units are sitting empty while thousands of families are in such need. Unless the MOHCD figures out how to streamline the process to get families into these affordable units, it just looks like they don’t care.
In recent months, we have seen significant job gains in the Bay Area and unemployment falling to a low 3.4%, comparable to pre-pandemic days. But just as we were looking forward to financial relief for those who lost their jobs and livelihoods during the pandemic, we face another roadblock to affordable housing – inflation.
Inflation has reached 8%, a 40-year high. Inflation cuts into earnings for all workers but has dire consequences for low and middle-income earners. A family that could barely pay for food and housing may no longer be able to meet its basic needs and is thrown back into poverty. Those who don’t have the luxury to work at home may find that the increasing gas prices have left less for food and housing. But inflation is not just about higher gas prices or going to the store and finding that your milk and bananas are a couple of dollars more than you expected – inflation also makes things a lot worse for those seeking affordable housing.
We have heard of the stories of skyrocketing home prices during the pandemic, especially in places like Tampa, Florida, and Austin, Texas, which saw yearly appreciation of 43% and 40%, respectively. Though rising interest rates have reduced the numbers of those seeking homes, sellers still don’t have many incentives to lower prices because one house still receives many offers due to lack of supply. The scarcity of housing also drives up the rental costs, with rents increasing nationally by 15.2% on average. 48 out of 50 states saw overall rental increases, with increases as high as 35% in Austin, Texas, and 39% in Portland, Oregon. These increases would be acceptable if incomes grew at the same rate, but lower-income workers’ paychecks have not even remotely kept pace. As a result, affordable housing has become even more out-of-reach. A popular option for thrifty home buyers had been to purchase a fixer-upper, a cheaper home that needs work. But even this is becoming a less attractive choice as inflation increases costs for materials, and supply chain issues make materials challenging to attain.
The solution to the housing plight is and has always been to increase the supply of affordable housing. As we have explored in a previous post, the Association of Bay Area Governments (ABAG) has assigned Bay Area cities the task of building 441,000 new homes and apartments between 2023-2031. Chances are slim they will be able to meet this goal, with a quarter of the cities protesting their quotas for various reasons. Such an enormous task will naturally receive opposition; there is limited space for the many who need affordable housing in the Bay Area. But the mandate is an essential step toward something we have waited a long time for – action.
The Association of Bay Area Governments (ABAG) has assigned Bay Area cities the task of building 441,000 new homes and apartments between 2023-2031 to meet the region’s dire need for housing. But chances are slim they will be able to meet this goal. More than a quarter of Bay Area cities are protesting the state’s proposed guidelines, and 27 towns, cities, and counties have filed appeals against the ABAG to reduce their quotas. These appeals are concentrated among the wealthiest communities – 11 of the 18 cities with the highest median household income are requesting the largest quota reductions. These include Saratoga, Los Altos, Los Altos Hill, Palo Alto, and the East Bay cities Alameda, Lafayette, Pleasant Hill, and Marin County.
It is easy to point fingers and accuse those cities of refusing to sacrifice some comforts to make room for others. But some cities have valid arguments. For example, Santa Clara County has argued that their limited infrastructure, including water and sewage, cannot sustain the many units they are being asked to build. They have agreements with cities to acquire land to develop in less dense areas and have claimed that regional planners ignored this fact in their analyses. Other towns like Mill Valley and Dublin have argued that they already put in considerable effort to plan for future growth, only to find that their housing allotment is overwhelmingly more than they can sustain.
California’s goal is simple – to provide enough housing to support every household that wants to live here. If 441,000 families need accommodation, they need to build 441,000 units no matter where in the Bay Area they are. If a city refuses to contribute its share of housing, then another nearby municipality will need to build that much more. Dublin, in particular, feels that it has received the brunt of other city’s unwillingness to yield. Dublin has grown by over 50% and has approved twice more homes than requested in the past ten years. But with the housing allotment asking for another 3,700 homes and dwindling available space, city administrators feel they have not received their due credit for their earlier efforts and think they are being penalized. It is easy to understand their point – the housing mandates don’t feel fair for those that have made efforts to accommodate the requests.
The Bay Area’s largest cities – San Jose, San Francisco, and Oakland – have accepted their development targets and are working to construct more high-rise apartment complexes. These cities have large homeless populations and have had the opportunity to witness the consequences of the housing shortage every day.
Every city is looking out for the interest of its citizens – that is healthy and expected. But in the end, if some cities are unwilling to yield and we can’t build the infrastructure needed to keep talented workers in the Bay Area, then we all lose.
Our CEO Kiai Kim recently showed me an article about a mansion in New Jersey that was initially listed at $39 million but sold at just $4.6 million eight years later – an 88% discount! From 2013 to 2021, the price dropped from $39 million to $25 million and went through more than five rounds of re-adjustments to the current price of $4.6 million. I thought to myself, “Why even wait that long? How can a homeowner have the patience to deal with the upkeep for eight years? And what a massive waste of space to leave a huge house like that empty?”
In San Francisco’s ritzy Cow Hollow neighborhood, a luxury Italian-style mansion sold earlier this year after sitting idle on the market since 2008. The initial asking price was $29.5 million and sold for $17.5 million. The price drop wasn’t as drastic, but the fact that the owner was willing to let the house sit empty for 13 years is just another example of sellers’ unwillingness to compromise.
The issues of the super-rich are far removed from those of us working-class folks, but I think in these extreme cases, we can also see to some extent what perpetuates the high Bay Area housing prices – the desire to make the highest profit even if it takes years and years to sell. And in the case of the New Jersey mansion (and probably many other homes owned by the uber-wealthy), the house was not even occupied. When sellers are unwilling to budge on the high sale price, it means houses remain unaffordable for that much longer.
The strategy of waiting years hoping that a desirable offer will appear doesn’t always pan out. The New Jersey mansion had earlier been offered a price higher than the final selling price but had refused it, later to realize that they wouldn’t get an offer that high again. Unfortunately, these lessons aren’t apparent until the end – sometimes many years later.