Why SF is So Crazy Expensive & DC/NY Are Better

As we’ve established and you already knew deep in your bones, the same house will be more expensive in Greenwich, CT, than in Fargo, ND. What you may not have known, though, is that the difference in price is not merely reflective of the difference of costs, specifically land and material costs in CT vs ND. There’s an X factor too, or, as the experts call it, a “shadow price,” that makes San Francisco so absurdly unaffordable it might as well be Mars.

The price of a house or apartment, the authors argued, is more than just the value of the land plus the value of the building. There’s a third, shadow price, which represents how difficult it is to get something built given local regulations. In highly restrictive places like San Francisco, regulations impede the supply of new buildings, and so raise the price of housing.

So, like, for example, materials and land cost 2x the national average in SF, and yet a house costs 3.6x the national average. The difference can be attributed to regulations. You know, bureaucracy, red tape, all that nonsense. The Economist flatly states, “the [Bay Area] is one of the most difficult places to build in the country. Prices are therefore soaring and neighbourhoods are changing, touching off some occasionally nasty social conflicts.”

DC apartments, though nutsy, remain more reasonable than SF’s, in part because, after our nation’s capital went through crisis after crisis between 1969 and 2001, it decided to get back on its feet by investing in tons of new housing — for DINKs. If you build it, DC figured, they will come, “they” being single, sexy, spendy types, which represent more short-term gain for an urban area. And lo, the city was right.

Mayor Williams and Adrian Fenty after him planned dozens of dense residential projects filled with studio apartments and hip bars on the ground floors, beautified the city’s waterfronts and incentivized the arts, knitting everything together with bright red buses and shareable bikes. Meanwhile, the percentage of residents under the age of 18 declined from 20.1 percent in 2000 to 17.2 percent in 2013. And the city’s budget was running a surplus.

Will the good times keep rolling? Who knows. But DC has started pouring money into rejuvenating its school system as well, and that will pay dividends, literally, if those young professionals decide to stay put and nest. Can SF streamline its regulatory procedures to make more new housing possible?

The Economist argues that SF has no incentive to:

If local regulations did not do much to discourage creation of new housing supply, then the market for San Francisco would be pretty competitive; anyone with land in San Francisco could make more San Francisco by building on that land. The price of San Francisco would then fall to the marginal cost, which is the expense of building another unit of housing, which is not very high.

Now because the cost of living in San Francisco would not be very high, the consumer surplus available from living there would be extraordinary, and everyone would want to move there. Inflows of people would stop when the cost of making more San Francisco rose to meet the value derived from San Francisco by the marginal resident. Costs would rise, because the denser the city became the more expensive it would be to build new units (building super-tall towers does cost more, per unit, than building relatively modest apartment buildings). And the value to the marginal resident would fall for two reasons. First, the marginal resident will definitionally be someone who is relatively indifferent between living in San Francisco and living somewhere else. Everyone more eager to live there would already have moved in. And second, as people move in congestion costs within the city rise, reducing the value of San Francisco to everyone in San Francisco. …

the city devises a set of regulations that effectively make current residents monopolists, able to artificially limit supply and raise price. Society as a whole is slightly worse off; San Franciscans are slightly better off.

Basically, the city doesn’t need or want the new residents, not to mention the high rise condos necessary to contain them. And the selfishness is very successful:

Zoning restrictions are a tool of the oligarchy, effectively. I’m only one-fourth kidding. But they are; they are a means by which owners of capital extract an outsized share of the surplus generated by job creation.

See? Say what you want about the unfriendliness of New Yorkers. At least we let you in the door before we starve you out again.