At Landed, we talk to a lot of people about the current housing crisis that many cities are facing. Given the price of homes, many young people can't imagine a permanent life in the cities they love. But the problem is in fact two distinct problems, and as soon as you think of it this way, the solutions become a lot clearer.
Accessibility vs Affordability
At Landed, we think of two distinct problems that result from high land prices. For the sake the this discussion, we’re going to temporarily put aside whether home prices in cities are just temporarily inflated (ie. at the top of a bubble), or perhaps something more permanent (as a result of foreign capital flows, permanently lower interest rates or protectionist land use policy).
We propose that the two distinct problems with high prices are:
- They make homeownership less affordable.
- They make homeownership less accessible.
Affordability is a pretty simple thing. Your current income gives you to ability purchase a home (and the land it sits on) at a certain price. As land prices go up, the amount of land you can afford becomes smaller and smaller, and/or further and further away from the centers of economic activity.
If cities don’t keep getting more dense (i.e. taller buildings with more housing units on any given parcel of land), then there are no housing options for you to buy on an affordable amount of land. The only option available to you is to live further and further away. But eventually that hits a limit. People are only willing to commute so far to make ends meet.
That, in a nutshell, is exactly what is happening to single-income educators in San Francisco. Thirty years ago, a single-income educator in San Francisco still struggled to buy a home in San Francisco itself (more below), but could buy a home within a 40 minute commutable distance. Today, everything within commutable distance is largely built out and San Francisco has struggled to add significant new density. As a result, the only available homeownership options available to educators are far too expensive or an impossible commute away2. We are at the breaking point.
The bad news. There is only one way to solve the affordability problem and it's not popular. To address affordability, cities need to build more four story buildings, more high-rises, more town homes… all of it and lots of it. The denser a city becomes, the less land you are forced to buy with any one housing unit. You end up paying primarily for constructions costs, which can be much more affordable.
There is a second problem that high land prices create. It is a little less straightforward, but it is increasingly more prevalent. A higher price tag means a higher down payment. And without a big gift from Mom or Dad, a higher down payment just takes more time to save.
Many people that are saving for a down payment will eventually be able to afford the homes they purchase… it is just taking them a very long time to access them. Currently, the only way to access a home sooner is to take on a very high level of risk (by taking a 90% or 95% mortgage), which puts both them, and our banking system at risk should housing prices adjust even a little.
The good news. There are lots of ways for the private markets to improve housing accessibility. We think Landed is a good one. Rent to own models could work, and so could other down payment assistance programs.
So which is the bigger problem?
As it turns out, it has always been expensive to buy a Bay Area home.3
Income Required to Qualify for a Bay Area Home (assuming a 20% Down Payment)
From this chart, we can draw that, historically, you've always had to be 1.25x - 2.5x richer than the median household to be able to buy a Bay Area home. We can also draw that while this has gone up and down over time, the trend has stayed pretty constant.
We can also draw that SFUSD (San Francisco Unified School District) educators have a very different problem from MVLA (Mountain View Los Altos High School District). A household of two SFUSD educators has always struggled to afford a Bay Area home (an affordability problem), while an MVLA educator has at some points been able to afford a home on just the single salary (less of an affordability problem).
So if the situation has always been this bad, what's different today? Let's look at accessibility next.4
Years of After-Tax, After-Rent Income Required to Accumulate a 20% Down Payment
This chart is answering the question: if I was gifted a 20% down payment from my parents, how much home could I afford? Now, if instead I had to save for that down payment myself, how many years would it take? Specifically, if it took every last dollar I earned after paying taxes and rent, in today's market it would take me 3.5 years to save for a 20% down payment. Forty years ago, it would have taken 2 years. That is a material difference.
So while affordability hasn't necessarily changed, how long it takes to afford a home has. Now clearly, a household has more expenses than just taxes and rent, so 3.5 years is completely unrealistic. Rather, it is much more likely that it takes 5 to 10 years to save. By that time, a household is likely to have children, increasing its expenses and therefore the amount of time required.
It has always been expensive to buy a home in the Bay Area. Perhaps counter-intuitively, the median family has never been able to afford the median home. What is happening today is pretty consistent with what has happened historically except for one important difference: saving for a 20% down payment today takes almost twice as long as it did for the previous generation. That is the problem Landed is trying to solve.
Educator salaries were drawn from historical salary schedules based on the 10-yr mark for an educator with a Bachelor's degree. 'An average Bay Area home' is defined as the Median Home Price for the San Francisco-Oakland-Redwood City HPI region. Qualification was calculated based on 43% DTI. ↩
We used Median San Francisco Rents from the St Louis Federal Reserve. Calculation was based on the income of a household that can just qualify for the median home described in 3. ↩