Priced Out of San Francisco

San Francisco Becomes Too Cool

San Francisco has long been considered a "cool" hotbed for bohemian culture. It is a very left leaning city that that thrived with the help of artists, hipsters and musicians. For decades these people have been the heart and soul of the city. But, as more and more people have been attracted to the city, those who make up it's cultural background are quickly being priced out.

San Francisco Rent Growth

As you can see from this graph, San Francisco was a relatively inexpensive city for most of the 20th century and it was easy to afford to live here. By since the early 1980's, rent prices have risen at an alarming rate for residents of the city. The current median rent in the city is $3,396 according to CNN, that equates to over $40,000 per year. This is more expensive than any other American city. It's no wonder many working class residents can no longer afford to live in San Francisco. Many of these people are hopping across the bay to Oakland where rents remain more reasonable.

Why Has This Happened?

Most large cities have seen rising prices across the country, but San Francisco is an outlier. Many residents blame an influx of high-wealth technology workers for rising costs, but this is really a symptom instead of the problem for the city. The real problem in San Francisco is that residents are resistant to new construction of higher density housing. San Francisco is not generally zoned to accept new high rise construction out of fear that it will ruin the character of the city.

Economically speaking, the problem is with supply and demand. There is a severe shortage of housing supply in the city at a time when demand for living within the city is skyrocketing. Because the shortage is not being addressed effectively, prices continue to drift upward. If the city could change some of it's zoning laws to allow more construction, housing supply could be increased and counteract some of the upward price movement. Many long-time residents want to see their city stay the same, but if they want to afford to keep living there, they eventually must be willing to accept change.

Can You Live Where You Work?

Cost of Living vs. Income

Americans often complain about their long commutes as traveling 45 minutes or more to and from work each day has become the norm. The natural response to this is to suggest moving closer to work. It is certainly true that moving closer to work would alleviate some of the stresses of commuting, but often times it is not economically possible to do so. 

To give a quick example, this graph shows the change in income and rent prices in the New York City area. As you can see, rents have risen while incomes have fallen slightly. For the "average" person in this circumstance, they have had less and less money available to pay their ever increasing rent payment. At some point, this "average" person will experience a drop in lifestyle if they remain in New York City or they will have to move away from the city to live in a cheaper apartment while maintaining their lifestyle. 

According to a study by the Manhattan Rental Market, the average price to rent an apartment in Manhattan is now $3,822 per month, or  $45,864 per year. The common rule is that you should not spent more than 30% of your annual income on housing. So in order to afford living in Manhattan, you would need an average of $152,880 per year in income. Most professions averages do not make the cut. For example, the average Manager makes about $108,000, Professors make around $73,000 and Judges make an average of $126,000. We think of all of these occupations as high-wealth and respected, but you need to be better than average in order to make it in Manhattan. One of the only people who could live comfortably here is an anesthesiologist who makes an average of $232,000. 

Interestingly enough, 1.6 million people actually live in Manhattan. These people must either be quite wealthy, work several jobs or live in more dangerous sections of the city. 

Rent or Buy?

Buying is not Always Best

Homeownership has long been a strong component of the American dream, but over the past decade or so, homeownership rates have been declining for a variety of reasons. Many people lost their homes during the recession and others are too mobile to go through the hassle of buying a home in a single location. As Americans, we have the idea that owning a home is one of the key markers for success and that we will be better off if we choose to buy a home. This is not always the case. I will go into a discussion further, but if you don't believe me, check out this calculator by the New York Times.

There are a variety of reasons that you could be better off renting a home than buying. As you might see from this map, the decision is not always clear cut in favor of buying. Let's discuss some key factors.

Rent vs Buy Map

1. Location

In some locations in the country, you could pay more to rent a home than to buy the same home. There are a variety of market conditions that may influence this. In a situation like this, it is important to be aware that your budget, even if unchanged, will buy different things in the rental vs. owner markets. This is not a be all end all factor for everyone, but it is important to be aware of. 

2. Mobility

How long are you going to stay in one place? In general, the longer that you stay in one home the more financially attractive it becomes to buy. This is because when you are paying off a 30 year mortgage, you pay mostly interest in the beginning; equity does not begin to accumulate quickly until after year 10. That means that if you sell before 10 years, you will have accumulated little equity and the transaction costs of selling and buying may outweigh these equity gains. 

3. Lost Opportunity Costs

This one may be the most subtle but most important. When saving for a home, we usually try and accumulate a down payment as fast as possible by stashing cash in the bank. Once we buy the house, we tend to feel that we are "paying ourselves" and that gives us less of an incentive to save. In general, it is cheaper to rent than to buy. Imagine that you have the choice to buy a house for $1200 per month or rent for $1000 per month. If you rent, you can invest that extra $200 per month, which will likely appreciate faster than the value of the home. If you are consistent, you can make a lot of money this way over time. This idea however gets flipped in markets where it is cheaper to buy than rent!

Despite our apprehensions about renting, there are certainly times that it works out to be a better option than homeownership. Americans should stop putting themselves into mental boxes because when you think narrowly, you can avoid making the best decisions.