Housing is in short supply in Silicon Valley, especially affordable housing.
Unfortunately, no amount of the current sort of government efforts in this area will change the situation. As an article in the Weekly recently noted, there are builders who have permits ready to go for residential multi-unit developments — and they're not building them because the numbers "don't pencil out."
The market forces at work were first understood when McKinsey studied the paint industry decades ago. They found that when there's a couple percent too little supply to meet demand, market prices jump up to where the highest-cost producer makes good money, and all the lower-cost producers go to the bank. Conversely, when there's a couple percent too much supply, the market price drops to where the lowest-cost producer barely scrapes by and everyone else loses lots of money. This reality about markets has now been shown to be true for many, many industries, commodities and situations and — it's just a fact.
Here's how that is working here in Silicon Valley where there's more than a few percentage points difference between housing supply and demand: market prices escalate to the maximum that the market will bear. And this maximum is determined by how much of a mortgage loan can be secured by a potential buyer, in the context of their income and other debts.
With that being the case, a developer would need to have rocks in their heads (or be related to Mother Teresa) to build affordable residential. Oh, and they can also develop office space that's much more lucrative. So, again, ain't gonna be affordable housing.
This is clear from the empirical results we see in how little affordable housing has been built despite governmental requirements to include such units. Developers avoid building these units any way they can, via so-called community benefit negotiations and such.
Many years ago, I wrote a guest opinion about how it was quixotic to continue to harp on the jobs-housing imbalance in Palo Alto — because when you study the numbers, as my article did, you find that several dozens of 50-story buildings would need to be built to get the balance right. And that obviously isn't going to happen.
This time I'm writing to note that even if it did, if in 2021 a tweaked SB50 shows back up and passes and 4-5 story buildings are allowed helter-skelter in heretofore low-density residential neighborhoods, the outcome still wouldn't solve the problem. Developers still won't develop units on which they can't make money, given the land and construction costs (which of course would escalate further if there were to be more building projects) in the area. And if developers could/did build, it would absolutely destroy any quality of life that any of us has. Traffic and pollution would be awful, schools and parks would be overwhelmed. The next step you're seeing in this is the fact that soon we'll have to pay tolls just to use what's currently still the commuter lane — and all day long, not just at commute hours.
Unlike in many geographies, we don't have any land into which to expand our footprint. So if we just densify maximally, we can all look forward to multi-hour traffic jams at least twice a day. I suppose our governments could eat up open-space districts for housing, if they can figure out a way to do it legally. This, too, would overwhelm schools and parks and services, as well as taking a hammer to quality of life. And even then, as noted, what would get built wouldn't be affordable housing.
Do any of us want this other than governments seeking to continue growth in tax revenues and builders seeking to build?
As a human being and citizen, I don't want any of this and suspect many readers don't either. For years, I fully supported all the growth — but now that quality of life is being reduced more and more, we need a solution. And there is a solution. The people who brought us this situation, the burgeoning tech industry who hired all these employees to the area, for which many are for sure grateful, is at the heart of the solution. They now need to embrace hiring elsewhere, expanding their campuses into more and more of the country's cities of 500,000 to 1 million or more people. And they'll be able to offer many existing employees the option of moving to those places, affording much bigger homes and enjoying much lower costs of living. And the tech giants will be able to hire people more economically in those locations — so it benefits them, too. Eventually, this will take pricing pressure out of the system, or at least stop it from growing and possibly substantially reduce it. It's simple: It's demand reduction rather than supply expansion.
You may have seen announcements this month that Google is planning to triple its Canadian headcount and that Amazon is planning a huge expansion in the northwest. What about cities in mid-America that have good universities, services, and land a-plenty? It's good to see Microsoft adding heads in Charlotte and San Antonio. Getting these companies to expand elsewhere is, in fact, the only real solution — and one they seem to be starting to see themselves. The proposed headcount-based business tax (I hope it gets set really high!) is but one useful tool that governments can use to accelerate these huge companies' desire to expand elsewhere rather than here.
Over time, that's the solution. The only solution.
It's that, or increasingly lousy quality of life.
Palo Alto resident Andy Robin likes facts. He can be reached at [email protected].