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The Unaffordability Paradox

How do San Franciscans justify the cost of San Francisco?


Living in San Francisco during the fallow years between the dot-com bust and the housing-bubble pop, David Albouy had good reason to wonder why people continue to live in cities that they can’t afford. A graduate student in economics at UC Berkeley, he was in that very quandary: He appreciated what the city had to offer, but wasn’t in the right income bracket to make living here a breeze. And he was far from alone.

“I met somebody from Fresno,” Albouy recalls. “He had been in the closet, and he moved to San Francisco to come out and be happy. But he couldn’t afford to live anywhere except inside somebody’s walk-in closet.”

Out of the closet, back into the closet: A modern-day San Francisco parable. A decade before Silicon Valley’s lean and hungry startup scene began its full-sail migration north, jacking up commercial rents and whipping the city’s real estate market into a frenzy, Albouy’s acquaintance still had to give up plenty of comfort for the privilege of enjoying the San Francisco life. And the sacrifices have only grown since.

Standard economic theory argues that expensive cities attract and keep citizens by rewarding them with high wages that make crazy rents and $9 pints of beer “affordable.” That’s certainly true for the greater San Francisco Bay Area, which boasts the second-highest median household income of any region in the United States (only Washington, D.C.’s is higher). But Albouy, now an urban economist at the University of Illinois, came up with a way to calculate how high wages should be in a city with as good a quality of life and as tight a housing market as San Francisco’s. His conclusion: We’re not getting paid enough.

With the possible exception of lower Manhattan, living in San Francisco requires “the highest level of sacrifice in the country,” says Albouy. San Franciscans are paid well, he acknowledges—53.3 percent more than the U.S. median— but “even on top of that, the cost of living is absolutely astronomical.” Our sacrifices don’t apply merely to the obvious pain of high rent for a small (or shared) living space or the relative cost of a cup of coffee or a slice of toast. Albouy’s research also takes into account how comfortable the average San Franciscan would be if he or she lived somewhere else in the United States. According to his number crunching, the disparity for San Franciscans is more extreme than for residents of other highly desirable cities, like New York or Honolulu. Simply put, San Franciscans are getting ripped off.

Which raises the obvious question: Why are we willing to put up with this? Moreover, why do people desperately compete to live in a city that, rationally speaking, they flat out can’t afford? When economists take a stab at answering such questions, the first thing they do is redefine what “rational” means. The canonical maxim that warns against paying more than 30 percent of one’s income in rent doesn’t capture the full picture in a city like San Francisco. In economist lingo, cities are loaded with “amenities” that make sky-high rents worthwhile—walkability, diversity, a high number of bars and restaurants per capita, widespread public transportation, proximity to culture, a good job market. Pricing the exact value of a particular amenity is something of a black art, but one of the most compelling data points comes from Harvard economist Edward Glaeser. According to his research, as urban amenities have grown over the last 30 years, the wage premium offered for urban living has remained static or fallen. The city delivers so much inherent value that one’s income becomes a less important proxy.

San Francisco checks so many boxes on the urban amenities spreadsheet that Albouy concluded in a 2009 paper that it boasts the highest overall quality of life of any major American city. There’s great natural beauty, a moderate climate, plenty of Silicon Valley– fueled jobs, a rich cultural scene, the best burritos in the world, more artisanal rye whiskey than any one person can handle, and— despite all the sniping about the inadequacy of BART and Muni—a relatively robust transportation system. The latter factor may seem a head-scratcher, but consider: When the cost savings from shorter commutes and fewer car miles are factored in to the overall cost of living (part of a “location affordability” index devised by the Department of Housing and Urban Development), San Francisco is found to be the second-most cost-efficient major city in the nation, again behind D.C.

Of course, there’s a catch. Just because you find it rational today to funnel a huge percentage of your income into rent doesn’t mean that the same will hold true tomorrow. Every person has a tipping point: that moment when manageable sacrifices become unsustainable misery. Desirability begets more desirability, a fact of economic life that means housing and other costs will always rise alongside the standard of living. Compounding that harsh reality is another, mainly political, one: For decades in San Francisco, housing stock has not kept pace with demand. The calculus is grim: The combination of rent control (which helps plenty of individuals but also constrains the market as a whole by stifling mobility) and stringent limits on new development ensures that the level of sacrifice necessary to survive in San Francisco keeps rising. At some point, the numbers will no longer work for anyone except the most well-off.

But that’s the future. For now, if you’re still hanging on by your fingernails, teetering between reasonable costs and unjustifiable ones, you have to be strategic about where and how you spend your money. Speaking of which, whatever happened to that guy in the walk-in closet?

“He moved back to Fresno,” says Albouy. “He couldn’t hack it.”


San Francisco's expensiveness seems as natural and eternal as the fog pouring through the Golden Gate. And the main culprit is not surprising: According to a 2013 survey by financial publisher Kiplinger, the city’s housing costs are nearly three times the national average. Earlier this year, the National Low Income Housing Coalition calculated that the hourly wage necessary to rent a two-bedroom “fair-market-rate” apartment in San Francisco is $37.62, higher than in any other metro region in the United States. (A fair-market rent is equivalent to the 40th percentile of the typical rent for a standard unit.) The numbers for actual market-rate rents are just as bad. Estimates vary, but in November 2013, data compiled by the real estate site Trulia pegged the median monthly cost of a two-bedroom apartment in San Francisco at $3,250—the highest of any metro region in the country. By September 2014, the same measure had jumped to $3,600.

Of course, San Franciscans also tend to make more money than people living in more affordable regions. Census data from 2013 place the median household income of the San Francisco–Oakland–Hayward metropolitan area at $79,624, behind only the D.C. region. Ironically, that’s almost exactly the annual income required to afford a fair-market rent for a two-bedroom apartment, which means that half of the people living here can’t actually afford what a “fair” market demands. (It also means that those currently enjoying rent-controlled units—at least the ones whose landlords aren’t threatening evictions—are very lucky indeed.)

Which brings us again to the pressing question: Why, when it has become economically irrational to do so, do we stay?

Getting clarity on this mystery requires a detour into how economists think about a couple of concepts, the first being happiness. Happiness, as it is generally understood, implies that one is feeling good in the moment. If we were motivated solely by happiness, we’d move to whatever place made us the most happy and stay there until circumstances changed. And, to be sure, San Francisco traditionally scores well on various happiness surveys. The well-regarded Gallup Healthways Well-Being Index, for example, ranks San Jose and San Francisco as the two happiest large cities in the United States. (That shouldn’t be too surprising. Happiness—as defined by how people report their own “sense of well-being” in surveys—usually tracks income. The more money, the more well-being.)

But there’s more to living in the big city than happiness. There’s also that second concept, one much beloved by economists: utility. “Utility,” says University of Michigan economist Justin Wolfers, “is whatever the hell it is that makes you better off.” It’s a broader concept than happiness alone: You could be living in San Francisco because you need access to its job market, or because you think that your children will be better off in the future, or because you’re a member of a tight-knit, protective community, or because walking or taking BART to work is more convenient than a two-hour stop- and-go freeway commute. Questions of utility are what inform our crucial decisions; happiness, as economist Gary Becker has written, “is just an input into the utility function.” When the issue is boiled down to utility, the reason why someone will pay $3,000 a month for a hole-in-the-wall becomes clearer.

“The short answer is because the place is worth it,” says Richard Florida, author of The Rise of the Creative Class and director of the Martin Prosperity Institute at the University of Toronto. He describes a kind of virtuous cycle: A hot job market attracts highly skilled workers, and a region with a huge agglomeration of talented workers in turn attracts new businesses. If you are a software entrepreneur looking to staff up quickly, for example, it’s impossible to beat San Francisco. But, Florida adds, people don’t live in San Francisco just in order to work there. The city is also inherently attractive. The abundant amenities that San Francisco provides more than justify its high cost for those who can afford it, he says, and they convince many who can’t really afford it to give city living a try anyway.

“San Francisco’s urban culture is psychologically stimulating,” says Florida. “Emancipating yourself from a car brings tangible health benefits.” Florida has been studying the rise of the city as a hotbed of so-called creative class clustering for decades. His explanation of why people try to make a go of it here makes intuitive sense. But in recent years, newly emerging patterns have imbued his argument with a darker hue. “The problem,” he says, “is that because of all of this—the clustering of talent, and high tech and its innovation and productivity, and, ultimately, rising wages—a larger share of people end up getting priced out.”

Cities, to be blunt, may have become too successful for their own good. In 2011, the expansion of amenities that urban centers have become so efficient at delivering to their inhabitants led to a remarkable event: For the first time in decades, big cities started growing faster than their suburbs. The trend has continued in the years since: Between 2010 and 2013, U.S. cities grew by 20.7 million people while suburban and rural areas shrank by 13.3 million. This reverse migration, dubbed “the great inversion” by the urbanist Alan Ehrenhalt, has been much remarked upon by sociologists. San Francisco may be one of the most extreme examples of this trend, a consequence of the intersection of the tech economy and the preexisting cultural attractions for which the city is so famed.

Still, needless to say, all is not well here. Florida points to research by Rebecca Diamond, an economist at Stanford who has studied the changing class backgrounds of urban populations over the past 30 years. The great inversion turns out to be qualitatively different from the migrations that built American cities into thriving metropolises a century ago. Back then, cities were major manufacturing hubs that offered jobs for workers on every rung of the ladder. But Diamond’s research indicates that beginning around 1980, cities began to increasingly attract wealthier, college-educated workers in disproportion to poorer, non-college-educated workers.

Cities no longer have the manufacturing jobs that drew workers in the past, but they are loaded with amenities that college-educated workers lust after: museums, a vibrant music and art scene, ahead-of-the-curve food offerings. And, according to Diamond, the more college-educated workers that a city attracts, the more amenities that come in their wake, in a kind of Mission Chinese thrice-cooked-bacon-wrapped feedback loop. “Bars and restaurants per capita, crime rates, and pollution levels improve in areas with larger college populations and decline in areas with larger non-college populations,” she writes.

Over time, a critical mass emerges that can financially support three craft breweries per city block. More amenities, in turn, make a city even more desirable, leading to higher housing costs and an influx of even wealthier immigrants. The stratification of cities into bastions of highly educated, high- income populations is happening everywhere—it’s a form of national gentrification. But San Francisco is at the vanguard: Its booming tech economy and restrictive housing policies are setting the stage for what local planning guru Gabriel Metcalf has called “hyper gentrification.”

Barring an economic catastrophe or some kind of dramatic breakthrough on the affordable housing front, the pattern in place now will only intensify. “Housing prices will continue to rise, and artists and musicians, working people, service workers, and the poor will continue to get priced out,” says Florida. “San Francisco’s very real economic advantages bring it face-to-face with a looming urban crisis.”

In other words, San Francisco’s growing economic divisions have the potential to undermine the city’s greatest strengths. People will hang on as long as they can, but if the internal logic that Florida describes holds true, then the math coming out of our utility function could produce a less diverse, less equitable, less exciting, and less innovative city. The kind of place that is no longer worth making sacrifices for.


Originally published in the November issue of San Francisco

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