What Is Supply and Demand in Housing? San Diego As a Textbook Example

by on May 2, 2022 · 15 comments

in San Diego

By Mat Wahlstrom

It’s the mantra of pro-developer pundits who self-describe as “YIMBY,” or ‘Yes in My Back Yard,’ that anyone who opposes their agenda of total deregulation on land use as a prerequisite for creating affordable housing, simply doesn’t understand ‘supply and demand’ — or as they put it, “Economics 101.”

If the problem is people need affordable housing, then we just need to allow a ‘free market,’ unconstrained by regulation, to supply whatever housing it wants in order to meet that demand. Then at the convergence of the lines on the magical graph that results, we will have achieved it.

But this is a fundamental misrepresentation of the housing market and development in general, and of providing affordable housing in particular.

It presupposes that any unregulated market produces anything that is ‘affordable’ that doesn’t pay for its production and takes in enough profit to be considered worthwhile.

And after all the millions in taxpayer subsidies our electeds keep throwing at developers to ‘incentivize’ them to produce affordable housing yielding ever more diminishing returns, it should be clear the market isn’t the answer.

Or at least not a market one can understand if they stop at Econ 101.

Because as Ray Kroc of McDonald’s famously realized, he wasn’t in the hamburger business — he was in the real estate business: “The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”

Let’s rewind a bit.

Mayor Gloria at his “Middle-Income Working Group” announcement. Behind him stand developers and their enablers, such as Marcela Escobar-Eck and Colin Parent.

Developers and their related real estate investment trusts, management companies, private equity funds, and financial underwriters are businesses; and like every enterprise their business is producing capital. It only seems like they produce housing, because that’s what you see on the ground around you and where you pay to live.

But as far as they are concerned, whether a parcel of physical land contains X number of actual houses or apartments per acre or is allowed for them to be built is literally immaterial. For them, a parcel is no more than a concatenation of its entitlements, deeds, debts, and rents — substantial or speculative.

And that is what developers build, buy, and sell: abstract financial instruments nominally attached to land.

Which is why if there is existing housing on a parcel that is naturally occurring affordable or historical yet doesn’t deliver ‘highest and best use,’ that is, return on investment, it gets bulldozed for something that does or left to rot until it could.

It’s why those who kept a neglected neighborhood alive are displaced once it becomes ‘opportunity rich’ enough for ‘urban renewal.’

Or the rent for an apartment in an unimproved decades-old building is raised when a new high-rise goes in nearby or the area it’s in upzoned for more density. And why apartments in that new high-rise, if built under an affordable housing density bonus, include no more than the absolute minimum number of units necessary for it to ‘pencil out.’

It explains how in all of San Diego between 2010 and 2020, only 37 new units were built by the market for those earning between 80% and 150% of the area median income — and why those same market representatives tasked for fixing this won’t.

It even impacts those who own their homes outright — thanks to the elimination of single family zoning, short-term vacation rentals, ADUs, transit oriented development, and other schemes to extract ever more capital at the expense of community.

This is the real ‘housing’ market: parking for capital not homes for people. And as George Carlin said, “It’s a big club, and you ain’t in it.”

Going back to the example of McDonald’s: they supply a product for their franchisees to pay for their rents, along with shared standards, corporate support, and integration into the community — such as it is. It’s paternalistic and problematic to be sure, but at least there’s a vested interest in their restaurants’ success — a ‘win-win’ situation, if you will.

But supplying housing isn’t like that. If McDonald’s kicked its hamburgers and all the rest to the curb, they’d be no different than any other landlord. Developers have no concern for how “our tenants can pay us our rent,” which is why we see the carnage of precarity, displacement, and homelessness increasing all around us.

In other words, it is YIMBYs who either do not understand economics, or they intentionally mischaracterize the actual relations that a market system such as ‘housing’ entails in order to increase the returns on developers’ investment in their organizations.

As in every industry, each deregulation of the housing market has resulted in a worsening of the housing crisis.

Two weeks ago today, the mayor Todd  wrote an opinion piece for CalMatters in favor of Assembly Bill 2097, that would mandate statewide the same elimination of parking requirements for new developments that the City of San Diego implemented in 2019.

The horse trading over providing affordable housing in lieu of parking was a clunky but reliable way to ensure new multi-family projects included affordable units. But after 2019, there was no longer any reason to include either. And worse, it did so with no obligation to pass along the cost savings — which he tagged at $30,000 to $90,000 per stall — directly into developers’ pockets.

The results have been decreased production of affordable relative to higher end housing, and increased misery for the 86% of people in San Diego who don’t or can’t walk, bike, or use transit to commute.

And the mayor had the gall to justify this by repeating the divisive and false YIMBY argument that we must choose between people or parking, glossing over that it is people who drive cars, so it is people who need parking.

We need to elect leaders who meet the demands of voters not supplies to their donors. That’s Political Economics 101.

 

{ 15 comments… read them below or add one }

Mat Wahlstrom May 2, 2022 at 1:00 pm

FYI, not saying I agree or disagree with it, but the photo caption was not part of my original article.

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Paul Webb May 2, 2022 at 1:37 pm

When you look at the actual housing needs in San Diego, as presented by the Housing Commission, the greatest needs are in the population earning less than 50% of the AMI, with the greatest need within this population at less than 30%. There is no chance that any market rate housing is going to be affordable to this segment of our population. Only housing that is largely or entirely paid for by the public will reach this far down the ladder.

I have to laugh at the notion that all those ADUs that are going to be constructed are going to solve this problem. First, given the costs of construction today there is no way to recoup your investment without charging more for rent than the bottom end of the population can afford. Second, does anybody really believe that the nice middle- and upper-middle class families that can afford to build ADUs will want to have the very poor living in them? I may be cynical (disclosure – I am cynical), but I feel that race and class issues will keep this from happening.

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Mat Wahlstrom May 2, 2022 at 4:00 pm

Right again, Paul. In 2020, the Housing Commission also sounded the alarm on the emergency need to protect existing (or ‘naturally occurring’) affordable housing, and announced $46M in federal funds to do so. If there are reports of any results, I’ve missed seeing them; but every policy since has served to accelerate its demolition: https://www.sdhc.org/news-release/funds-available-create-preserve-affordable-housing/

And to me the big tell on ADUs was when staff pushed back against increasing setbacks specifically because they wanted to incentivize them in the legacy core (and poorer) neighborhoods, where lots are smaller than were platted further out later. Which again speaks to your point about who can afford to build them. Shows how concerned they are about equity!

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Gregg g Sullivan May 2, 2022 at 2:21 pm

So what is your solution?

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Mat Wahlstrom May 2, 2022 at 3:00 pm

There are many: “A list of genuine social justice policies to turn things around would include using eminent domain of commercial spaces for housing, downzoning to reduce inflated land values and restricting upzoning to truly affordable housing, enacting anti-speculation measures, creating robust tenant rights, underwriting investment in social housing, making affordable housing truly affordable, and instituting lending regulations for new development.” https://obrag.org/2021/08/what-the-yimbys-dont-want-you-to-know-neither-senate-bills-9-or-10-include-requirements-for-affordability/

And I expanded on the recommendations originally made by the LA County Grand Jury in 1966, in this article: https://obrag.org/2021/12/upzoning-the-developers-long-con-of-californians/

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Paul Webb May 2, 2022 at 3:48 pm

And let’s add leasing (not sales) of public lands at reduced prices to affordable housing developers. I’ve been a proponent of land banking for many years, but here in San Diego all we can seem to be able to do is sell off land to the usual suspects.

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Chris May 2, 2022 at 5:12 pm

Woosh!!

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Chris May 2, 2022 at 5:10 pm

There seems to be two kinds of “pro development”. Older conservatives would like to see more single family development in what is currently open spaces. Younger progressives would like to see more dense multi family units going up. Literally “up” as opposed to “out”, and they want these developments to make communities less car dependent. Part of the hope is these new communities will be on average younger and more vibrant. Basically, less people my age and older out and around in their presence (I’ve been told that point blank). It’s really kind of fascinating how younger progressives and older progressives who agree on a multitude of issues that divide left and right are so polar opposite in these regards.

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norma damashek May 3, 2022 at 3:44 pm

Here’s a good follow-up to Mat’s perspicacious observations. The headline reads: SUPPLY AND DEMAND DOESN’T APPLY TO HOUSING…EMPHASIZING SUPPLY INTENTIONALLY IGNORES WHAT DRIVES DEMAND: TAX SUBSIDIES FOR MULTI-BILLION-DOLLAR CORPORATIONS
https://www.washingtonpost.com/business/interactive/2022/housing-market-investors/

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Mat Wahlstrom May 3, 2022 at 4:14 pm

Thanks for sharing that, Norma. The Raleigh News & Observer last week published a blockbuster series exposing the corporate takeover of housing in North Carolina. They found that over 40,000 single family homes statewide are owned by just 20 corporations; and of the 13,000 in Raleigh, almost half of them are kept vacant. https://www.newsobserver.com/news/local/counties/wake-county/article261036377.html

Most of it is behind a paywall, but just today it was announced their mayor is requesting their city council and city manager to come up with ways to solve the problem…

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Paul Webb May 3, 2022 at 4:22 pm

This is literally the definition of rent seeking behavior.

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Mat Wahlstrom May 3, 2022 at 4:28 pm

Wow, I’ve been writing about this this whole time and didn’t know the name for it. Thanks again, Paul! https://en.wikipedia.org/wiki/Rent-seeking

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norma damashek May 3, 2022 at 4:05 pm

It’s awkward to do it this way but here’s the article I wanted to share that refers to the above link. Published in 48hills.org, the official publication of the non-profit San Francisco Progressive Media Center by MARY MCFADDEN MAY 2, 2022″

“Zelda Bronstein in her article, Supply Sophistry, is completely correct in her examination of the many flaws in the supply and demand argument as it pertains to housing. It is worth noting that supply and demand doesn’t really apply to anything.
The supply and demand mantra has infiltrated all our economic debates and permeates our housing discussions even as it leads further and further away from economic justice. This myth is propagated by those who profit from entrenching it into our assumptions. Nothing has ever been a direct supply-and-demand relationship because a host of conditions—slavery, labor devaluation, tariffs, taxes, global corporate conglomeration—make consumerism an indirect relationship.
Apple still gets huge tax breaks that promote the economic inequality behind the housing crisis.
Supply-side economics was Ronald Reagan’s simplistic explanation of capitalism, the discredited “trickle down” theory. The idea is that perpetual growth, sponsored and spurred by tax benefits and subsidies for wealthy individuals and corporations, will inevitably dribble downward to the lower classes. As comedian Will Durst put it, “Trickle-down means the rich can pee on us from greater and greater heights.”
According to the Department of Treasury’s investigative and research unit, FinCen, the main drivers of housing prices are luxury housing, real estate speculation, and investment packaging by financial institutions. Conclusions of multi-year studies by Dr. John Rose as well as a 2018 paper from the International Monetary Fund, show that housing prices are disconnected from supply and demand for multiple reasons, not the least of which is that it never applied in the first place.
From 2012 to 2019, SF Bay Area housing prices rose by 110 percent. The population decreased by 12 percent. What did increase was the wealth gap. During that same period, the average wage worker earned $45,000 a year, while those who received compensation rather than paychecks earned $160,000 a year.
According to Forbes, nearly one-third of San Francisco residents are multi-millionaires—that is, people who have received more than $2.3 million per year in liquid assets (stocks, investments, trusts, financial instruments that translate into cash) for at least three years. Those who live on paychecks cannot compete against those who can borrow against and get a tax write off for loans against investments. Teachers do not get stock options.
In a block of $1 million houses, when someone comes in and offers $2 million, then all the houses are worth $2 million. When a real estate speculator turns a $1 million single-family home into three units, they don’t build three $500,000 units, but three $2 million units. This has nothing to do with demand, and everything to do with wealth distribution.
Even if supply and demand were a real process, emphasizing supply intentionally ignores what drives demand: tax subsidies for multi-billion-dollar corporations to continually enlarge. Corporations don’t set up in places that do not, cannot provide the deep level of financial support that comes from wealthier states like California and Texas with strong supplemental industries like agriculture, oil, and manufacturing. When Kansas tried, it went bankrupt.
Tech, finance, and real estate development companies would not have imbedded themselves so deeply in the heart of San Francisco were it not for the billions of dollars in Department of Defense funding, tax breaks to stay in California, billions more in federal funds to keep expanding, and taxation policies that treat a paycheck with derision, but a dividend with reverence.
Good Jobs First reports that megadeals for datacenters supported by “state and local subsidies to Google, Apple, Microsoft, Facebook and Amazon Web Services…cost (taxpayers) $1.9 million per job.” Apple has an ongoing agreement with Santa Clara to collect sales taxes that residents presume are going to public works. Fresno gave Amazon $30 million, part of sales tax revenue, and control of the city budget.
Now that some non-white people have the economic ability to afford the satisfaction, generational wealth, and financial security of single-family homes, those in power have cast them as the cause of high housing prices. Legislators funded by real estate and finance companies have upzoned and subsidized massive developments that target communities of low-and middle-income homeowners in San Francisco, Los Angeles, Atlanta, Miami, and Seattle. Politicians have laden residents with density and land-use requirements that place a financial burden on those least able to bear it. Those laws also come with an exorbitant environmental cost.
It is physically and financially impossible to build forever. A skyscraper does more harm to the climate than a flat home because a single-family home can have a radiant roof and dirt and trees, while a tower has more heat radiating area and requires a host of ecologically detrimental support systems. The loss of cities’ largest open space, backyards, has shifted everything from wind patterns to water retention, has changed the behavior of birds and bears. San Francisco, once a moderate temperature town, is now the fifth hottest heat island in the US. Density is doing damage and it’s pushing people further and further into rural areas.
The Washington Post reports that 30 percent of homes are being sold to investment companies rather than to homeowners. That’s a really different demand than family home ownership to secure a place on the economic ladder.
Housing is at once a need, an investment, and a commodity. It involves multiple layers of creation, accessibility, availability, and safety. Housing is not simply a product universally available and analogous in quality like soap, yet public discussion continues to rely upon a dangerous economic mythology and ignore the immoral underpinnings of public policies.”

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Vern May 3, 2022 at 6:05 pm

“… YIMBYs started with a self-serving agenda: to force the production of more luxury housing that they could live in — no matter the consequences to working-class communities. To further their agenda, YIMBYs co-op housing justice messaging, but they’re not housing justice activists. In fact, they have a long, disturbing history of clashing with the housing justice movement. YIMBYs push pro-gentrification, trickle-down housing policies that generate obscene profits for Big Real Estate…”

https://www.housinghumanright.org/what-is-a-yimby-hint-its-not-good/

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Paul Krueger May 4, 2022 at 9:04 am

Thx so much for this very insightful and well-reasoned column. I have recently had a gut feeling — based on my observation of the exclusively market-rate rentals being produced by developers who are taking advantage of the city’s loosely written “bonus” ADU incentives— that taxpayer subsidies and public/private/non-profit partnerships are the key to building the very-low and low-income and supportive housing we need most.

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