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Saturday, April 6, 2019

Forum on SB-50

California Housing
Challenging the Narrative

Summary:  The current narrative is that everyone wants to walk to work (especially millennials) and we should abandon Single Family Homes (SFHs) and build only high rise apartments.  Here we look at data relating to housing prices and commuting.  We see that about half the population prefers to own a single family house and commute and the other half prefers a denser environment (townhouse and condos) and walk, bus, or bike (not drive) to work.

Link to this post (for sharing):

Discussion and Slides:

These are the PowerPoint slides and text (with a few additions) Sunnyvale Council member Michael Goldman (me) used at a Forum on California Senate Bill 50 and related "housing" bills.  The forum was held on April 6th, 2019, in Cupertino.  Also presenting were city council members Lydia Kou of Palo Alto, Julie Testa of Pleasanton, and Mayor Steven Scharf of Cupertino along with Susan Kirsch of "Livable California".  A video of the event will be available soon, as will the slides used by all participants.

Slide 1 (click image to enlarge):

SB-50 applies to transit stops and "job-rich" areas with schools with "positive outcomes".  "Job-Rich" is defined as more jobs than surrounding area.  Does Merced have more jobs than surrounding farms and fields?  Sure.  Are there any schools that do not have "positive outcomes"?  No.  So SB-50 applies everywhere.

There is no time limit or other criterion for when we will no longer be in a "housing crisis".  Without any definition of the "housing crisis" we can't tell where or for how long it exists.  If you can't define the problem then you can't know when you've solved it.  So, SB-50 will apply everywhere and forever.  In other words the "housing crisis" will never end.  If it never ends, then SB-50 isn't going to solve the "housing crisis".  Maybe it isn't intended to.

The key thing to know about SB-50 is that it is not directly intended to increase housing “affordability”.  The idea is simply to increase the construction of apartment buildings by allowing them to be constructed in residential neighborhoods.

Under SB-50, any single family home can be torn down and replaced with an apartment up to 4 or 5 stories - with a “density bonus” that’s 5-6 stories.  Near transit stops it is 5-6 stories with density bonus going to 7-9 stories.  Only 1 parking space for every 2 apartments can be required by a city or county.  That means two 2-bedroom apartments (four bedrooms total) cannot be required by the city or county to have more than one off-street parking space to share among them.  The builder may decide to build more off-street parking for higher end apartments which might not rent without more parking.  However, no jurisdiction can require it.

Slide 2 (click image to enlarge):
Text of SB-50 here: 

This applies even to areas where housing costs are low and lots of housing is being built.  Areas like Riverside and Sacramento are already “affordable” to most people and there is lots of construction. Nonetheless, SB-50 applies there as well as San Francisco or Sunnyvale.

Slide 3 (click image to enlarge):
Minneapolis grew more than Silicon Valley?  Must be the weather!
The story is that there is a shortage of housing units because builders are unable to keep up with tremendous growth in the SF Bay Area.  This is false.  They can keep up with much higher growth in metro areas like Charlotte and Riverside where there is plenty of buildable land.

In fact, almost 90% of the top 300 US metro areas are affordable to any family with the median income.  It is only about 10% of those metro areas that are hard for median income buyers to afford.

Slide 4 (click image to enlarge):
So why are housing prices high in the SF Bay area?  Simple - there's not much land to build on and some people can afford the high prices!  Revenue per employee is $1.3M at Google, $1.6M at Facebook, $1.9M at Apple.  Their employees don't get paid that much but they get paid enough more than the average worker that they are better able to outbid others for a single family home close to work.

You cannot bring in trillions of dollars from around the world and thousands of highly paid workers (with stock options) and expect costs to not increase.  What are people thinking?

Slide 5 (click image to enlarge):
Shortages increase costs.  But high costs don’t mean there's a shortage.  A Lexus 500 costs 5 times a Corolla but there is no shortage.  Go buy 10 of them if you have the money.

Slide 6  (click image to enlarge):
The Great "Lexus Crisis" of 2019
So why are people commuting long distances instead of living near work?  Well, half the population wants to live in a small town.

Slide 7 (click image to enlarge):
About the above graph - I want to point out this was from a survey done for both the "Urban Land Institute" (ULI) and "National Association of Realtors" (NAR).  The ULI desperately wants to stop suburban sprawl and get everyone to live in high rises.  They keep asking the same questions year after year hoping they will get answers they want to hear.  Instead they keep getting results (like slide 8 below) that say 50% prefer a Single Family Home, driving to work and stores, instead of condo/apt. and walk to work and stores.

Slide 8 (click image to enlarge):
Random variations in sampling means you never get the same proportions year to year.
This applies to all generations - including "millennials".  Of millennials, 47% prefer "large yards & drive" vs. 53% who prefer "small yard and walk".  That is - with random variations in sampling - equivalent to a 50-50 split.

Slide 9 (click image to enlarge):
The "Greatest" generation are in their 70's and older and are less likely to want to drive.
More at:
So, lots of people commute from single family homes in distant suburbs to areas with lots of jobs but no room for more single family homes.  And VICE-VERSA!  People change jobs on average every 5 years - they aren’t going to change houses every time they change jobs!

And this shows up in actual data.  If we look at Palo Alto (slide 10) and how many commute more than 50 miles not only TO Palo Alto but FROM Palo Alto, we see that as population increases both the number and percentage of super-commuters increases – BOTH ways!  

Slide 10 (click image to enlarge):
Palo Alto increased both the number of jobs and the number of housing units from 2002 to 2015
resulting in more "super commuters" (Both Ways) than before.  (From Census data)
More here:
This is absolutely normal.  This is how people organize themselves around metro areas in the US.

Slide 11 (click image to enlarge):
More here:
We have been building in the SF Bay area for years and are currently at the low end of affordability but it has been worse as well as better.  Slide 12 below shows that housing affordability in California has varied from a low of 14% in 2007 to a high of 55% in 2011.  It is currently at about 28% or roughly half way between the extremes.  Similarly for Santa Clara County, 27-year range of 12% to 42%, currently at 17%.

Slide 12 (click image to enlarge):

We are in the longest economic expansion in US history and it shows up in housing prices – if anything, it is a bubble not a crisis.

Slide 13 (click image to enlarge):
From John Burns Real Estate Consulting newsletter
This is projected to come back down to the trend-line by 2021 as seen in slide 14, below.

Slide 14 (click image to enlarge):
So what will happen?  "It is really hard to make predictions, especially about the future" (Yogi Berra) but two possibilities seem likely.

1.  Silicon Valley becomes like NYC with lots of tall buildings in the center and millions of commuters on mass transit (costing $Billions) - with suburbs sprawling out to Merced and Sacramento - or ...

2.  We become like LA.  We stop growing with new job centers forming in adjacent counties.  Many companies move to Texas or Washington state.  Silicon Valley population growth - already anemic at 6% below the national average - simply slows to a crawl.

Either way it gets more expensive.

Slide 15 (click image to enlarge):

For now this is....