Last spring, I spent an hour or so in a charming little town in South Carolina, sitting in a large rocking chair on the sidewalk that had been kindly provided by the local realtor. I was killing time while my wife and her friend browsed antique stores. At one point, the realtor came out to say hello. I took the opportunity to quiz her about the local market. What does a 3 bedroom, two bath house cost in your town? Her answer was $300,000, new construction. How about rent for a 2 bedroom, one bath apartment? In a decent neighborhood, $800. Contrast that with the median price of a dingbat house in San Francisco in excess of $1,000,000 and rent for a new 2 bedroom of $5,000/month. What’s the difference? Are lumber and drywall cheaper in Carolina? No. Is labor cheaper? Yes, but only a little bit; skilled workers make pretty good money most anywhere these days.
The answer lies at the core of my favorite social science law–supply and demand. Social science isn’t physical science. It is virtually impossible to conduct a controlled experiment, which can be properly replicated, about the behavior of human beings. Any serious attempt to do so would involve morally outrageous behavior control. But the law of supply and demand has been verified by a vast multitude of natural experiments.
If demand is not met with an equal amount of supply, the price of any commodity or service goes up. In coastal California, and many other urban areas in coastal America, the demand for moderately priced housing vastly exceeds the supply. Why? My answer is that direct action by government entities, and government’s enabling of NIMBYs (Not In My Backyard) and BANNANAs (Build Absolutely Nothing Near Anything Never Again) constricts supply. I am a developer. For both economic and moral reasons, I’d love to build moderately priced housing. If the projected net rent on a project is 8 percent of cost, I’ll break ground tomorrow on rentals. If I can sell for my cost plus 15%, I’ll build houses or condos. But those numbers are not within shouting distance of market conditions today, and have not been for a long time in many large cities and affluent suburbs.
The usual excuse given for lack of supply is that land is scarce in dense urban areas. Horsebleep!! Give me two hours in a car and I will show you hundreds of acres of vacant or underutilized land in San Francisco, and thousands of acres of vacant land south of the City. So what holds up construction? You don’t have the time or attention span for the whole list, but I’ll give you a sampling.
Government’s first solution was public housing. Think Cabrini Green. That set up a battle between local housing authorities and drug gangs for control of management. No contest. Public housing is now being torn down.
Next came rent control. That was supposed to protect poor people from rent increases. Landlords were prevented from raising rents except, in some cases, by a portion of the CPI. Construction of new rentals ceased immediately. Even developers foolish enough to want to build couldn’t get a loan. So, new construction was exempted, and vacancy was decontrolled (meaning that rents could revert to market rate when tenants moved out). Speculators descend on the arbitrage between in-place and market rents, using all sorts of creative and coercive efforts to move tenants out. When the unit is vacant, there appears a line of people wanting to rent. Does the owner rent to a working class family at a moderate rent? Hell no! Jam the rent for all it is worth, because you will have to live with that number indefinitely, and rent to the prospect with the largest balance sheet and best credit rating.
We’ve got the “no connections available” racket in many jurisdictions, especially affluent suburbs. The city says we can’t issue a building permit because our water or sewer system doesn’t have any capacity for new hookups. They leave the second sentence unspoken: We are very careful to avoid spending one thin dime to upgrade the infrastructure.
The huge club is the EIR (Environmental Impact Report). Sold as a benign device, whereby a credentialed and blessed consultant selected by planners and paid for by developers produces a study that allows politicians voting on a project to have a considered view of the environmental impacts and alternatives. Big projects must produce an EIR (at a cost of low to mid six figures and months of delay) and get it certified by all relevant agencies. Smaller projects get a waiver called a negative declaration. Environmental lawyers routinely sue to void the waivers (demanding that an EIR be prepared) or assert that a certified EIR is invalid because it failed to discuss some alternative (building the project on Mars instead of earth). If the developer wins, the judgment can be appealed without posting bond. If the enviros win, the developer must post bond to appeal, and pay the legal fees for both sides. If the developer wins, another suit can be filed asserting a different problem. Anyone willing to hire the right lawyer can keep the process going for years, de-facto killing a project. Developers usually settle because they are on the low ground. The usual settlement gets the lawyer paid and a contribution made to an environmental organization, fueling a suit on some other project. Simple blackmail, and a line item of cost, plus another line item for the added risk.
Another club is endangered species, many of which are not the least bit endangered. I have personally given over a hundred acres to the Salt Marsh Harvest Mouse, the world’s most prolific endangered species. During one conflict I had with the Corps of Engineers, I was informed that I had to contribute land for mouse habitat. I asserted that there were no mice on the land in question. I was told by a Corps staffer that he had some in the trunk of his car that could be deployed to defeat that assertion.
I’ll end this litany with regulations/extractions that add to the cost of any new building. Disabled access, energy conservation, fire protection, storm water retention, storm water filtration, impact fees, park districts, infrastructure upgrades, mandated sweetheart deals with building trade unions are but a few. All added with the best of intentions and all resulting in much more expensive buildings. The big new club is BMR (below market rate). In order to get a permit in many jurisdictions, the developer must agree to build a certain percentage of units that are rented or sold below the cost of production. The current raging political argument is how high the percentage can go before all building stops. The theory is that greedy developers are making a fortune; they should give some back. The fact is that the cost of BMRs is a line item in the budget, and it gets spread over the purchase price of the market rate units. Instead of a wealth transfer from nasty developers to poor folks, it is a wealth transfer from middle class home buyers to a very few poor people, coached by activists and social workers to enter the right lottery at the right time. That’s how you get million dollar condos and $5000/month apartments. Nothing else will pencil.