“Why Can’t Those People Move To___________?”

Why a Housing Shortage Hurts Everyone

People in Palo Alto often suggest that anyone negatively impacted by our absurd housing prices “should just move to Pleasanton” or something similar. Let’s turn to Swimmer75 of Pleasanton for his thoughts on the matter:

STOP, STOP, STOP the East Side Development Project Entirely! Listen to the people of Pleasanton!! We don’t need more houses, traffic, people, noise, pollution, etc. that this project will bring!!! The only people that benefit from this project is the Developers……

As you can see anti-housing sentiment knows no bounds in the Bay Area. Every part of the Bay Area claims that they should have no obligation to build housing and that people simply shouldn't move somewhere they can’t afford. “Why can’t those people just move to ___________?” they say. So, let’s answer this question once and for all: because a lack of housing negatively affects everyone, and not just the people who can’t afford to live in Palo Alto.

Economists Chang-Tai Hsieh and Enrico Moretti recently quantified the costs of a housing shortage. They found that lowering regulatory constraints on housing would expand our workforce and increase US GDP by a whopping 9.5%. For context, that would be the equivalent of the US annexing Australia or Canada.

So let’s break that down in a way that everyone can understand…

When There Aren’t Enough Homes to Go Around

Employees can commute from further away to take advantage of cheaper rents/prices. However, doing so has a ripple effect on the region (and of course also has an effect on the community that loses a member).

Consider that when a Palo Alto employee can’t afford to live in Palo Alto anymore because there aren’t enough housing units and moves to, say, San Francisco, he bids up the rents in San Francisco. That housing market, like all housing markets in the Bay Area, is also under-supplied and he will literally bid with several other people to move into an apartment.

As the sale and rental of new housing units in San Francisco becomes more profitable, landlords and developers have more incentive to raise rents and to evict people from their apartments to reset rent-controlled rents and build bigger buildings with more units in the place of older ones (note that more developers would build more brand new housing instead if the process of getting all the permits, approvals, and now, votes, to do so made that a more profitable option; they evict and rebuild because of anti-housing zoning). Now, there’s a wave of people in San Francisco who are either evicted or can’t pay the rent hikes and they, too, seek a cheaper place to live in a different area. However, their arrival in, say, Oakland causes the very same effects that our Palo Alto worker’s move caused in San Francisco. And so the cycle will continue…

This ripple effect happens across the entire Bay Area. The entire Bay Area has gotten more expensive over time because, as a whole, the Bay Area has failed to build enough housing to keep up with job growth. At the very end of the ripple are people who just can’t keep their job and keep commuting from where they live anymore. At some point, the cost of gas, the lost time spent in the car, the inability to squeeze more people into a small apartment, rising rents, and the cost of childcare during such long commutes adds up to the point that this life is no longer sustainable.

When that happens, people might 1) seek a job in another part of the country, or 2) end up homeless, perhaps even deciding to keep the job and sleep in the car or on friends’ couches with the hope that something will change and a new housing opportunity will arise.

This piece focuses on option #1 as it addresses the common question “why can’t those people move to ______________?” It should go without say that option #2 is problematic on its face for those who end up homeless. And it’s problematic for the rest of us, too: San Francisco alone spends $166 million a year on homelessness…and barely makes a dent.

Economic Damage to Businesses

An employee who moves away can be very expensive to businesses. ZaneBenefits estimates that the cost of replacing an employee making under $30,000 a year is 16% of annual salary and 20% for an employee making between $30,000 and $50,000. That’s all money that could have been used to hire more people, give workers higher salaries or better benefits, or invested in developing new products or services.

Keep in mind, too, that as housing gets more expensive because the population grows while the housing stock doesn't, employers need to raise employees’ salaries in order to retain them and/or attract new employees. Raising salaries to keep up with the rising cost of housing is a vicious cycle with no real winner because over time other companies do the same, and yet the housing supply and the number of people who can live near your company remains stagnant. Unfortunately, anyone who doesn't work for an employer actively raising salaries to keep up with housing costs will be in the first round of people priced out of their communities.

Lastly, when employees start leaving because they have been priced out, it becomes harder to attract new employees (read: create more jobs) who are wary of the cost of living here. It may not seem that way because we see tech giants growing and we see them opening offices in other areas, but we don’t see foregone growth. Establishing offices in other cities is often much more expensive than adding headcount to existing infrastructure, culture, and knowledge base. UC Berkeley professor Enrico Moretti and University of Chicago professor Chan-Tai Hsieh estimate that if housing were built in quantities commensurate to job growth, the average American salary would increase by several thousand dollars a year. For context, a raise of $3k for all workers in the US would mean more than $27.6 billion in additional tax revenues — that would cover more than half the federal government’s budget for housing programs in in 2015.

Less Progress for Everyone

Economics is all about opportunity cost and this answer wouldn't be complete without thinking about the opportunity cost of companies spending money on recruiting and training replacement employees, as well as increasing salaries as a result of limited housing supply. We need to question the wisdom of policies that encourage companies to divert cash away from R&D (things like developing new vaccines, cancer treatments, and clean energy research) in order to further enrich landlords. Who are the real winners and losers when capital is handed to already wealthy landlords instead of invested in projects aimed at curing our diseases, enhancing our safety, and improving our quality of life? We are all losers.

The Decline of Local Retail

Retailers respond to the housing shortage by increasing wages to attempt to keep up with the costs of housing. This cost is more acute for them because they are already in a line of business with a much smaller profit margin than, say, a software or biotech company. A restaurant in Palo Alto can expect a profit margin somewhere between 1.8% and 3.5%. By comparison Palo Alto’s largest tech company, VMware, has a profit margin in the 9% to 20% range, depending on the quarter, with much deeper cash reserves and access to leverage. The more retailers spend on wages that ultimately get paid to landlords, the fewer employees they can hire and the less eclectic our choice of retailers becomes.

A lack of sufficient housing also impacts a retailer’s customer base. Retail does less well in areas where there are far fewer people in the evening than during the daytime. Restaurants and markets surrounded by a sea of offices (think the financial district in either SF or NYC), where there aren’t enough customers in the evening to justify paying for an extra shift of workers may not be sustainable at all. They need to utilize their property to its maximum potential in order to afford the rent (which is high because competing land uses like housing and office space are more profitable for landlords), but can’t do so with only “part time” customers.

Loss of local retail is a loss to all of us.

Long Term Wage Losses

An employee who leaves the Bay Area to seek employment elsewhere may hurt their long term prospects. First, consider that many areas simply don’t have the same job growth rate or number of jobs per capita as the Bay Area. Second, consider that various cities have their own dominant industries — banking in New York, entertainment in LA. So if you’re a graphic designer who moves to Houston, for example, there will be fewer total graphic designer positions available than in the Bay Area and the rate at which more such positions are added will be slower.

That means that for many professions, even if you move for a specific job, moving to the one after that will be harder than it would have been in the Bay Area. You will be in less demand and you will be competing with more people for the same position. That will depress your long-term wage potential relative to opportunities in the Bay Area even after you factor in the cost of living.

Look at it this way: the median salary in San Jose in 2011 was $80,764 and $42,877 in Houston. Yet $80k in Houston dollars would be about $53k — about $10k MORE than the median salary in Houston. That tells us that on average, even when you factor in the cost of living, your long-term salary prospects in Houston are worse than they are in the Bay Area, probably because there is more job creation, more new companies (and their attendant IPO and acquisition wealth), and a better match between skills demanded and skills available in the Bay Area than in Houston.

An important caveat here is that this obviously varies by profession. This math is more likely to hold true for an engineer or a nurse than for a barista, for example, because the Bay Area has more engineering and nursing jobs than many other areas and because those professions have high upper salary bounds.

Nevertheless, on average, moving to a less job-rich area has long term ramifications. Depressed wages ultimately mean that:

• your investment opportunities are more limited (you legally cannot invest in private companies (be an accredited investor) if your income is less than $200k/yr),
• you have less money with which to start your own business,
• you have less money to retire on,
• you have less money with which to buy a home (many economists now believe that homeownership is the #1 driver of income inequality in this country),
• and it’s harder to send your kids to college.

All of that translates into less upward economic mobility for people in less job-rich areas, and contributes to our country’s growing income inequality. Consider that Palo Alto median household incomes have grown to be 33% higher than the rest of the county — and 227% higher than the rest of the country.[1]

To the extent that Americans believe in meritocracy and one’s ability to lift himself up by his bootstraps, we are all losers when we allow housing policies that undermine the core values of our country.

Our Taxes

Individuals who pay an increasing share of their income towards housing, who become homeless, or move to less job-rich areas of the country because of a lack of housing are more likely to need more in the way of a social safety net. They are more likely to need Medicare/Medicaid, various tax credits, welfare, food stamps, housing subsidies, etc. Policies which place more people in the position of needing help — people who in most cases had skills and jobs but not the means to pay for soaring rents — hurt all of us.

With fewer people in need, we could afford to tax everyone at a lower rate or we could spend that same money to solve other problems like our decaying infrastructure, our floundering schools... maybe we could have a real space program again.

The Environment

From an environmental perspective, growth in non-urban areas will hasten global climate change. According to the journal of Environmental Science & Technology (ES&T), suburbs account for half of all household greenhouse gas emissions, even though they account for less than half the U.S. population. The average carbon footprint of households living in the center of large, population-dense urban cities is about 50 percent below average, while households in distant suburbs are up to twice the average. The carbon footprint of an urban Californian is also smaller because California requires less heating and air conditioning than virtually anywhere else in the country. Even if one isn't sentimental about species extinction, the estimated trillions of dollars of damage that climate change will bring by way of flooding (especially here in the Bay Area), natural disasters, and the rising costs of food are hard to ignore.

Conclusion

Visualizing macroeconomic trends is hard. Visualizing the world that “could have been” is hard. Nevertheless, those numbers matter and impact our day to day lives. We have the data to know that our housing shortage isn't just hurting those who can’t afford to move here; it’s hurting all of us.