The San Francisco Bay Area is home to some of the highest housing prices in the United States. CNN Money lists the medium home price in the San Jose area as close to $750,000. In the nearby San Francisco area, housing is nearly as pricey: $720,000. Such prices are tremendous compared to other metropolitan areas, even those with high-tech industries.
What's the cause behind such a disparity in housing costs? Why aren't developers building additional houses when they could easily sell them for over $700,000 and bring down prices by increasing supply?
A friend of mine pointed out the anti-development atmosphere in the San Francisco Bay area as being responsible for this situation. He noted development restrictions and the desire of environmentalists to keep local lands undeveloped. This had the effect of restricting supply and keeping housing costs high.
Later I came across an article by Steven Landsburg explaining the possible causes of the outrageous costs of Bay Area real estate: "When you buy a house, you’re not just paying for the land and construction costs; you’re also paying for a building permit and other costs of compliance. You’ve got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc."
A look at the Bay Area from satellite further confirms these suspicions about what is going on. The C-shaped body of water in the center of the satellite image is the San Francisco Bay. Urban and suburban areas are gray and dull green, respectively. San Francisco is located on the tip of the prominent peninsula on the left and San Jose is located at the southern end of the bay. Here is a map that indicates the locations of these two major cities in the Bay Area.
The developed areas on the peninsula form a narrow strip between San Jose and San Francisco. The land to the south of this strip is green and undeveloped, yet much of this land is easily within driving distance of the two major cities and the cities and towns in between. Although this region appears mountainous from space, its terrain appears suitable for development (photo, photo). With such high housing costs, there is no reason why new houses can't be developed in this part.
One state agency that oversees this land shortage is the Midpeninsula Regional Open Space District, a California state district that administers the Open Space Preserves in the San Francisco peninsula. According to their website, the Preserves contain 50,000 acres of undeveloped land. Assuming that a single-family home can be built on a quarter acre of land and house an average of three people, that is to enough room for 600,000 people! For comparison, San Jose is the largest city in northern California but has less than a million people as of the 2000 census.
The District's website boasts that the “preserves are generally kept in a natural condition in order to best protect the environment and wildlife habitat, and are developed with only the amenities needed to provide low-intensity recreation." If this were done in accordance with what people are willing to pay for, then there is no problem. But the District has declared that this land should be designated as open space, supported by property taxes and unaffected by market demand
As a result, people don't have a chance to determine with their economic decisions how much real estate to develop and how much land to keep preserved. As a result of government takeover of this land, prospective homeowners are unable to have the real estate that they would otherwise have had and thus must pay higher prices for housing in the Bay Area. To the central planners who run the district, there is apparently nothing like keeping raw land empty while residents nearby pay sky-high prices for housing.
Many people think that higher market value for real estate means more wealth, but Paul Tolnai has debunked this notion. Additionally, although nominal incomes in San Jose are higher compared to other cities with cheaper housing, the difference in incomes is much less than the difference housing costs between San Jose and other cities. In fact, when adjusted for the cost of living, a significant chunk of which is housing, incomes are actually lower in San Jose and San Francisco than elsewhere. The sad truth is that environmental regulations on land development make people poorer, in the Bay Area and wherever else they exist.
August 4, 2006
