At the risk of stating the obvious, California has a serious housing crisis. When he took the reins, California Governor Gavin Newsom assumed a tremendous burden: A 3.5 million home shortage that needs to be solved post-haste. The timeline is 2025, but major metropolitan enclaves only plan to construct 2.8 million new housing units in that timeframe.
The problem with the construction initiatives is not necessarily the number – it’s the location of these new developments. Unfortunately, many of the new housing projects are located in rural areas, far away from the cities and the jobs. This information was unearthed in a recently filed report by UCLA Lewis Center for Regional Policy Studies. There are several workarounds, but they require out-of-the-box thinking such as re-zoning.
Initiatives that would increase population density near transit centers where many of the jobs are will help to alleviate the housing crisis. These types of housing units encompass many different options such as cluster homes, duplexes and triplexes, 4/5 story midrise tenements and so forth. Such is the exigency of solving the housing crisis in California that almost every tech titan from Apple to Google to Facebook, and well beyond is looking at viable solutions to alleviate the housing shortage.
Rentals have reached sky-high levels, and mass migration out of cities like San Francisco and the Bay Area is causing the ecosystem to collapse in on itself. This is exacerbated by a growing homeless problem. More importantly, only a small number of the planned new homes ever get built, thanks to bureaucracy, poor location, and lack of developers. This has created a new reality: high-demand areas limit housing development and low-demand areas are characterized by anemic growth of new housing.
The Price Elasticity of Supply in The California Housing Market
In high-demand areas across California, any proposed changes to building and zoning are often met with staunch resistance from local homeowners. The Bay Area is largely a suburban enclave and single-family developments are not permitted in areas like San Jose, particularly near commercial epicenters and major transportation networks. Constituents in and around these areas are resistant to change; they don’t want to have mass construction with high-rise buildings or multi-unit apartments in residential areas.
Plus, there are other aspects to consider, notably the rising costs of building, resurgent employment in Silicon Valley, Proposition 13 and taxes, and the availability of land. The California market supply of housing is severely constrained, yet if all units were produced over 20 years, there would be a 21.7% reduction in home prices in California. Currently, the price elasticity of supply is 0.47 (percentage change in supply divided by the percentage change in price) in California which compares unfavorably with the rest of the country.
Trends with Housing prices in the Bay Area
It comes as no surprise that the Santa Clara Valley has been synonymous with ridiculous increases in housing prices in recent years. Much of the momentum for housing price increases is attributed to the boom in Silicon Valley employment. In recent decades, the rising prices in Santa Clara Valley have spilled over into greater San Francisco and Oakland California. Real estate developers are faced with difficult choices when catering to the market: high-end earners or middle-income earners?
While many developers prefer to maximize profits by focusing their energy on the top end of the spectrum, there are some developers that are moving in the opposite direction. One fine example is the Danny Haber revolutionary project across Oakland, with luxury housing developments being offered at cut-rate prices. These include developments at 960 Howard Street, 316 12 Street, 1919 Market Street, and 674 23rd Street.
Haber, as the CEO and co-founder of oWOW – a company specializing in these projects – attributes the vertically integrated nature of the company and its use of a flexible walls system (Magic Walls) as the reasons why these work/lifestyle MacroUnits are so popular, and affordable. Of course, these cost-effective alternatives are starting to have an effect on the market. We have seen a shift in Bay Area home prices recently.
Some areas are characterized by rising prices, but others (declines in median home prices) are evident in Santa Clara County. Several regions have been met with drops as steep as 15% over 1 year. This is particularly notable where 3-bedroom homes can sell for well over $1 million. The slump in housing prices in the Bay Area should not be perceived as a recessionary precursor; on the contrary, it’s a correction that is long overdue.
Making their Investments Count: Apple, Microsoft, Google, Cisco, and Facebook Go All-In
It’s not so much that the big tech companies are not paying their employees enough money to live in and around the San Francisco Bay Area; it’s more a function of techies simply not wanting to pay so much money to live in sub-standard housing in heavily congested areas. The increases in home prices have outstripped the desire of people to live in those areas. For example, Lending Tree provided data suggesting that of the 370,000 (give or take) housing units that were available, 209,000 are valued over $1 million. In San Francisco, some 40% of homes valued at over $1 million. The property market is a multi-pronged creature, with many cues coming from the stock market, interest rates, and the uncertainty of the impeachment saga and the upcoming election.
People are more concerned about refinancing their properties than they are in buying new properties. Nonetheless, the governor will be heartened by the commitment of leading tech giants like Apple, Google, and Facebook which are now pouring billions of dollars into new housing developments in Northwest California. For example, Microsoft, and Cisco have pledged $500 million apiece, Google is investing $1 billion, Facebook has pledged to invest $1 billion, and Apple Inc has jumped on the bandwagon with a massive $2.5 billion housing development fund. Viewed in perspective, there is hope for the California housing crisis but it’s going to take lots of time and lots of political will.