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To solve affordability crisis, Bay Area housing stock must grow 50 percent in 20 years

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The San Francisco Bay Area population was approximately 2.3 percent of the U.S. total in 1970 and has maintained roughly the same ratio ever since, despite the tech boom. (Kevin N. Hume/S.F. Examiner)

When a region is fortunate enough to host the birth of a new industry, its population tends to increase. New jobs are created, attracting workers from outside the region who may bring their families. Those new employees need goods and services, which, in turn, attracts more workers and their families to arrive.

We have seen this pattern play out in past economic booms.

The automobile industry exploded from 1910 to 1930, during which the metropolitan area of Detroit, already one of the nation’s largest urban areas, grew its share of the United States population from 0.8 percent to 1.9 percent. The U.S. auto industry subsequently lost its preeminent position with the rise of Asian competition in the 1980s, and Detroit’s share of the U.S. population declined from 2.2 percent in 1970 to 1.4 percent as of the most recent 2010 census.

The Texas oil boom began in 1901 with the development of the famous Spindletop oil well, which over several subsequent decades allowed Texas to dominate the oil market. Texas was already a large state in 1900, with 4 percent of the U.S. population. Nevertheless, over the next six decades, its share of the U.S. population steadily increased, reaching 5.5 percent in 1970, when the era of Texas oil domination was coming to a close. Unlike Detroit, Texas has since continued to thrive, and its share of U.S. population has continued to grow, reaching 8.1 percent in 2010.

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The San Francisco Bay Area enjoyed a postwar economic boom from 1940 to 1970. We produced almost 45 percent of all cargo shipping tonnage and 20 percent of warship tonnage built in the U.S. during World War II. After the war, that expertise helped power economic growth in missiles, electronics and microcomputers. The Bay Area, already one of the largest metro areas in America, grew its share of the U.S. population from 1.3 percent in 1940 to 2.3 percent in 1970.

Of course, the Bay Area has continued to boom economically since 1970. The 1970-1990 period saw the rise of the microprocessor industry — which is where the “Silicon” in Silicon Valley comes from — and the subsequent two and a half decades have seen the rise of the software and internet industries. Given our economic prosperity, one would naturally assume that our share of the U.S. population continued to grow — but that is not the case.

The San Francisco Bay Area population was approximately 2.3 percent of the U.S. total in 1970, and it has maintained roughly the same ratio ever since.

The tech boom is a Bay Area phenomenon, so we focus on the entire region, rather than just San Francisco proper, but San Francisco has done no better. The City’s population shrank substantially from 1950 to 1980 in absolute terms, even while the U.S. was growing, and the population in 2000 was essentially the same as in 1950, even as U.S. population had almost doubled. Since 1990, the growth rates of both San Francisco proper and the broader Bay Area have been very similar: Although our economies have boomed relative to the nation, our populations have not increased relative to the rest of the US.

Because we have not allowed our population to grow commensurately with our post-1970 boom, we have forced price to do the work of balancing demand and supply. Instead of building all the houses and apartments we need, the existing houses and apartments have become more expensive.

As of 2015, the median annual household income in San Francisco was $90,530, and the average market-rate apartment rent is approximately $3,600 per month, or $43,200 per year. By these estimates, the average market-rate apartment rent consumes about 48 percent of the median household’s annual pre-tax income. This is a staggeringly high rate: A more normal level is for housing to cost between 25 and 30 percent of pre-tax income. No wonder San Francisco has the lowest housing affordability in the nation, and almost one quarter of the population living below the poverty level when local housing costs are factored in. The figures differ by county but are similar throughout the Bay Area.

So what would it take for the Bay Area to bring its housing costs down to an acceptable level?

A 2016 academic analysis by David Albouy, Gabriel Ehrlich and Yingyi Liu estimated that, in general, rents decrease by 3 percent for each 2 percent increase in the housing stock. (This estimate is close to the estimate of a lengthy blog post analysis at Experimental Geography, done two years ago, looking specifically at San Francisco’s history over the last six decades.)

If our goal is to reduce the average market-rate apartment rent to 27.5 percent of median household income (the midpoint between the 25-30 percent range that is normal), that means reducing the rent from $43,200 to $24,895, a 42.4 percent reduction. Using our ratio of a 2 percent housing stock increase leading to a 3 percent decrease in rents, that means, keeping all else equal, the Bay Area would theoretically need to increase the number of housing units overnight by 28.3 percent. (Let’s round up to 30 percent to make the subsequent calculations more intuitive).

In reality, of course, housing is not built overnight. It will take many years for the Bay Area to make up its housing deficit, so we need to take into account the underlying trend growth of the U.S. population over the intervening period.

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For example, if it takes 20 years to make up our housing deficit, and underlying trend growth for the U.S. population is 0.7 percent per year (15 percent over 20 years), and the average household size remains 2.3 persons, then the Bay Area will need to grow households 30 percent more than the amount of households needed to accommodate trend U.S. population growth (i.e. 30 percent more than the underlying 15 percent population growth), for a total growth of housing stock of approximately 50 percent over 20 years.

Let’s state it plainly: The Bay Area must increase its total housing stock by 50 percent over the next 20 years to bring affordability down to a reasonable level.

It is worth keeping in mind that, by historical comparison, growing the Bay Area population by 30 percent more than underlying U.S. population growth over the next 20 years is a perfectly achievable outcome. Detroit and Texas grew far faster during their booms, as did our own Bay Area in the 20 years following World War II.

Intellectual honesty requires taking numbers seriously. Either we prioritize making the Bay Area affordable for all of us or we don’t. The less housing we build, the more wealth will be trapped in high housing prices. Unless we decide to grow our housing stock to accommodate our economy, we are continuing to choose the interests of those who are rich or who already own their homes over the interests of the struggling middle and working classes.

Special thanks to Salim Furth, Senior Research Fellow for the State and Local Policy Program at the Mercatus Center at George Mason University, for his suggestions and review of this column.

Patrick Wolff lives in the Sunset District. Email him at info@followthemoneysf.com.

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