Why San Francisco’s Real Estate Market Is So Insane

How the City by the Bay became the most expensive housing market in the U.S.

18 Reasons Why San Francisco’s Real Estate Market Is so Insane

If you live somewhere other than San Francisco, you might think the city sets a new record for median rent or home prices every month. And while there’s much more to this West Coast metropolis than seizure-inducing real estate prices, the local housing crisis does have its own Wikipedia page. That can’t be a good thing.

This housing crisis is certainly nothing new, and it seems to be as bad as ever. But how did it get this way? What happened in the City by the Bay? For one thing, San Francisco is a beautiful city and a desirable place to live. The weather is always mild, and the culture is as dynamic as anywhere in the country. And the food is really good.

But none of that stuff could cause a housing crisis in which the median rent is nearly $3,700 and townhouse advertisements come with the tagline “From the Low $1,000,000s.” No, something else must’ve caused this.

By the Numbers

Before diving into the reasons why San Francisco has such an insane housing market, let’s take a look at just how insane it is. In May 2019, the median rent for a one-bedroom apartment hit a record $3,690 per month. That’s the highest in the country, and it’s 30 percent more than New York City and double that of Miami.

For aspiring homeowners, the reality is even more bleak. The median prices at the end of the second quarter of 2019 stood at $1.7 million for a single-family home and $1.3 million for a condo.

Perhaps the only good news in all of this is that many homes are no longer going for above the asking price. While that’s short shrift for most of us, who exactly can afford these homes?

Only High Earners Need Apply

People with jobs that pay very well. Finance website SmartAsset analyzed housing and earnings data in 15 major cities and discovered that the minimum pay needed to afford to buy a home in San Francisco is more than $172,000 annually, much higher than anywhere else in the U.S. SmartAsset used five criteria to come up with this number: home value, down payment, property tax rate, homeowners insurance and other monthly debt payments.

In second place was San Jose, just south of San Francisco, at about $137,000 a year.

Is it the Weather?

A significant reason Northern California, and San Francisco in particular, is such a great and desirable place to live is the exceptional weather.

It’s rarely too hot or too cold, and extreme weather patterns are nonexistent. How much does this matter though? Anecdotally, a lot. There are no real metrics on whether the weather has a huge influence on why people live in San Francisco, but know this: During any given weekend during the cold season one could spend a Saturday four hours away skiing in the Sierra Nevada and a Sunday soaking up the sunshine at a beach much closer to home.

Or Is it the Food?

In addition to the weather, there’s also the culinary scene. The Bay Area is one of the only places where farmers markets operate year-round. And if access to high-quality food isn’t enough, dining out options are rivaled only by New York City, which is much larger.

Fact: San Francisco has the greatest concentration of Michelin-starred restaurants in the country.

A Healthy, Steady Economy

One of the main reasons San Francisco has been embroiled in a housing crisis for so long is that its economy has been in such good shape for years. Thanks to the tech boom, San Francisco and the greater Bay Area were not hit as hard by the 2008 recession as the rest of the state and nation.

But that only tells part of the story. For many, those elite and well-paid jobs in software engineering and other tech sectors never made it to their communities. Instead, many families and middle-income earners lived under the threat of losing their homes and livelihoods unless everything worked out perfectly. Predictably, things didn’t go well for everyone. Yet a healthy economy and tech jobs aren’t solely to blame for the housing crisis.

Supply and Demand

San Francisco is small. It’s somewhat famously referred to as the 7-by-7 city (there was even a magazine called “7x7” that went digital-only a few years ago), but it’s actually even smaller than 49 square miles (46.89 square miles, to be exact). And being located on a peninsula means there isn’t room to expand the borders in what’s already the second-densest city in the U.S.

So how do you increase supply to meet demand? Build up.

The Saga of Upzoning

In the 1960s and ‘70s, San Francisco was worried about becoming the next New York City. Residents didn’t want “Manhattanization,” so they pushed for zoning changes. In fact, a young Dianne Feinstein, now a U.S. Senator, was one of the first local leaders to use the term. Aside from becoming a seedy and dirty urban landscape, the fear was that something would be lost if big buildings came in. That something was essentially views and sunshine, so the city changed its zoning laws and only a small percentage of neighborhoods could be built up.

Here’s what happened: “San Francisco’s 1978 citywide downzoning decreased the number of housing units that could be built in the city by 180,000, equivalent to more than 50 percent of the city’s housing stock at that time,” according to The Nation.

A Culture of Saying No

San Francisco has seen this housing insanity before, which makes it doubly crazy that no planning for the future took place back in the 1990s, when city rents and sales prices were also some of the most expensive in the world. Instead, the locals just dug in deeper.

Back then, job growth also outpaced housing construction. And while it would have been relatively pain-free to add 80,000 new units in the late ‘90s without having to change any existing zoning laws, it just never happened. As SF Weekly wrote, “To this day, the city's most pitched civic battles are fought over seemingly suburban issues such as maintaining parking, preserving yard space, avoiding shadows, and maintaining, at all costs, unfettered bay views.”

Check out this graph for a shocking look at just how long San Francisco residents have been saying no to housing development — nearly half of the housing stock was built before 1940 and 80 percent went up prior to 1980.

Local Control Tug of War

If you’re at all familiar with local politics, especially throughout the state of California, then the idea of “local control” isn’t news to you. But for everyone else, it essentially means that decisions affecting a local community should be decided by that community and the leaders they elect. That’s all fine and well, except when those leaders ignore the mounting problems facing their community and instead lean hard on the local control crutch. And in local politics, moving the water dish often isn’t an option.

But if you can’t get it right — i.e., build housing for all income levels to meet demand — then why should you be trusted at the helm of the ship? This brings us to two politicians in the City by the Bay.

Introducing Scott Wiener

For the past two state legislative sessions, State Sen. Scott Wiener has tried to pass a bill that would build housing density around heavily used transit corridors. The response has been anything but positive, and to be fair it’s not just local leaders in Wiener’s home city who abhor his ideas. But there certainly is an irony in the fact that those local leaders grandstand so much about “gentrification” and “neighborhood feel” when rejecting Wiener’s proposals. (Of note: Local politicians have zero say in state matters, but from a political standpoint it looks bad for Wiener when his hometown — which happens to be one of the largest cities in the state with one of the worst housing shortages — won’t get on board.)

Introducing David Chiu

On the flip side, State Assemblymember David Chiu, also from San Francisco, was able to pass a transit-oriented housing bill in 2018 against the wishes of many Bay Area cities (it was designed to only impact property owned by Bay Area Rapid Transit, the local rail transit system). So while the law was intended to relieve housing pressure and traffic congestion in the Bay Area, it was still a major wedge issue simply because of the loss of local control.

The Impact of Gentrification

For as much as San Francisco lawmakers have a “Not in My Backyard” attitude toward housing development, it’s true that gentrification has played a role in the changes the city has experienced in the past 10 to 15 years.

BuildZoom, a website for researching and hiring contractors, found that between 2005 and 2016 newcomers to San Francisco earned $12,640 more per year than those who moved out of the city.

Tenants' Rights, Not More Tenants

San Francisco’s elected leaders are often blamed for the housing shortage, and it seems they deserve this criticism. For too many years, the Board of Supervisors (which in a city-county like San Francisco is the equivalent of a City Council) has been more concerned with preserving the existing housing stock and making sure rents don’t increase for those who can afford them the least.

This is an admirable and necessary pursuit, but it mostly makes for good talking points during re-election campaigns. As local media has pointed out, San Francisco already has the nation’s staunchest tenant protection laws but does a laughable job of getting enough housing built to have a positive impact.

Lack of Options for Income Levels

Another major problem with San Francisco housing is the availability of units for different income levels. In short, the city has almost no housing diversity. As Curbed reported, “In 2017, [the Mayor’s Office of Housing and Community Development] conducted 104 housing lotteries. Over 85,000 households applied for 1,210 units of affordable housing through the MOH housing lottery system. Low- to moderate-income hopeful homeowners submitted 1,510 applications for 185 units and 83,733 very low- to low-income households applied for 1,025 rentals.”

What’s in the Pipeline?

Unfortunately, not very much. The city’s Planning Department reports that there are over 72,000 units in the pipeline, but when you parse the figures, there aren’t that many units actually under construction — just 8,500 to be exact.

Did Tech Ruin Everything?

Not really. As we’ve already learned, the annual pay someone needs to earn to afford a home in San Francisco is comical. So even many six-figure earning techies can’t afford to live in the city. Again, it’s a lack of supply in the face of the huge demand that drives the housing crisis.

Tech Ruined Something

Protestors block commuter tech buses in San Francisco's Mission District in May 2018.

We can’t let tech off the hook entirely, especially when large business campuses within 30 minutes to 1 hour south of the city are shuttling thousands of workers to their jobs every day. One of the major issues with companies like Facebook and Google is that they employ young workers yet aren’t located near the cool bars and breweries and Michelin-starred restaurants that dot the San Francisco landscape. Young people would rather live in a fun city than the sleepy suburbs, and the Googles and Facebooks of the Bay Area are more than willing to make that possible for these workers.

Some 800 shuttle buses ferry 34,000 workers from their home cities to their jobs every day, with the most activity happening to and from San Francisco. This does indeed take solo-vehicle trips off the region’s highways, but if the cities where these business campuses are located had better housing options there would be fewer people making these long commutes.

The Most Outrageous San Francisco Real Estate Story

By now, hopefully you’ve come to realize that poor planning and execution coupled with a booming economy and being a desirable place to live all contribute to the San Francisco housing crisis. But one thing we have not provided is that OMG, only-in-S.F. example for why the housing market is so nuts out here.

There’s a luxury condo tower in the city’s South of Market neighborhood in the downtown core that’s sinking. In the face of this, people are naturally trying to get rid of their homes, so one might think this is an opportunity to get into the real estate market at a steal. Right?

A condo sold in the building in 2018 for more than $1 million less than its asking price, but it was still $2 million more than the original sale price. And this was despite the fact that the tower is sinking and will require a mind-boggling $100 million to fix.