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Local housing: A little reality

January 5, 2017


By John Elberling :
48hills – excerpt

Reading the superficial year-end wrap-ups and “expert commentary” about the city’s housing situation in the local press this week is making my head hurt. So here is a basic primer about what is really going on, what is coming in 2017-18, and some initial thoughts on what to do about it.

1.    WHAT HAS HAPPENED SINCE THE GREAT RECESSION

a.    National economic recovery, especially enriching the Investment Class
As has been well documented by many, national (and global) economic growth since 2010 primarily has benefitted the professional class and those of great wealth...

b.    Historically low interest and investment capital rates…
This has resulted in historically low lending rates from banks and financial institutions, and historically low capital investment rates (the “cap rate”) from private equity sources of all kinds...

c.    Economic boom employment and population growth in San Francisco and the Bay Area
This sudden large-scale job growth has directly lead to sudden large-scale population growth too, with the resulting sudden burst of high demand in the region’s housing markets…

d.    As always, prices go to “What the Market Will Bear”: (1) Housing
The fact that rents and home prices have leveled off in the last year means this relentless market-adjustment process has been completed – for the time being...

e.    There are other new sources of housing “demand” that have a major impact too…
This growing trend has made the overall housing market situation significantly worse since 2010…

f.    As a result of all these pro-development factors, the region’s housing development industry has increased its production work significantly – but its capacity has limits
But there are internal constraints that limit what this Industry can produce unrelated to local zoning etc.

g.    As always, prices go to “What the Market Will Bear”: (2) Construction Costs…
As a result of the limited Construction Industry supply of trade subcontractors in particular, the construction costs of building new housing have more than doubled since 2010...

h.    As always, prices go to “What the Market Will Bear”: (3) Land Prices
The final “bottom line” constraint on new housing development is that property owners have proved the ultimate beneficiaries of the Bay Area’s housing market boom…

i.    Master-planned mega-projects have a huge extra problem: Infrastructure Costs..
So it is going to take 20 to 30 years to complete these mega-projects and actually bring their tens of thousands of new market and affordable housing units on-line…

2.    NOW WHAT??

a.    No one knows how long current national economic growth will last
b.    No one knows how long this Bay Area Boom will last…
c.    The impact of Republican tax cuts on housing development…
d.    What Local Policy can’t do about housing development…
(more)

 

 

 

 

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