3 ms·

It's pretty obvious why luxury development is preferred; anybody, in any market, would prefer to make luxury units. Yet no other market seems to operate by sup

It's pretty obvious why luxury development is preferred; anybody, in any market, would prefer to make luxury units. Yet no other market seems to operate by supplying only luxury units and depending on trickle down. Why are there Corollas, instead of just more Lexuses?

kelnos 9y ago
SF already has plenty of "non luxury" housing that has been gobbled up for luxury prices, often displacing people who could normally afford such housing. The theory is that building more luxury housing will take pressure off the non-luxury stock. I agree with that theory, but building more affordable and below-market housing (instead, or simultaneously) will likely have a faster, more positive effect.
- jogjayr 9y ago
  But it's impossible to make affordable and below-market housing profitable unless the underlying issues, land acquisition costs and zoning, are addressed. That means the government will have to subsidize these units and they still won't be enough to meet demand. So only the lucky few who win the housing lottery will benefit. Everyone else (most lower-income people, middle-income renters overpaying for low-end housing) still loses out. I'd prefer that we solved the problem for most people rather than just a lucky few. If people couldn't afford food because not enough farmland was available for reasons like "preserving the character of the area" (imagine that you can't truck food in from lower-cost locations in this scenario) you bet we'd find a way to start growing more food stat. No one would say "Well we'll just subsidize food for some people so fewer people will starve. But it's no use letting farmers farm because they'll just grow Kobe beef and avocados instead of wheat and corn".
  - kelnos 9y ago
    > But it's impossible to make affordable and below-market housing profitable unless the underlying issues, land acquisition costs and zoning, are addressed. Totally agree. Developers don't want to build affordable housing because they in some cases actually stand to lose money when doing so. SF's byzantine planning process makes it that way, and that's not going to change without some heavy reform there.
jogjayr 9y ago
> anybody, in any market, would prefer to make luxury units. It really depends on the market. Builders aren't stupid. If there's no one willing or able to pay for granite countertops they won't spend the money putting them in. They will build luxury units if they are profitable, otherwise they'll build cheaper ones that they can let out. Alternatively you might get a building boom where everyone overbuilds luxury units and prices collapse. Either way, win-win for consumers. > Yet no other market seems to operate by supplying only luxury units and depending on trickle down. Why are there Corollas, instead of just more Lexuses? You have to consider: 1. It's easy to ramp up (and down) car production, but not so much for housing. If carmakers had restrictions on how many cars they could produce every year, there's a good chance they too would try to focus on the higher-margin market. But because they are allowed to build without restrictions, they produce something that's affordable to every segment. I'm not saying "build baby build" because real estate is different from cars. But the current regime in the Bay Area is way too far in the other direction. It's like the government saying no one can build any new cars at all for multiple decades. Software engineers making $200k/year would be driving 15-year-old Corollas with the hubcaps falling off and Bill Gates would have the only Tesla in private hands (I'm exaggerating obviously) 2. There actually is (in a way) trickle-down at work in the car market: used cars. Used cars add to the supply of cars on the market, keeping prices lower. A lot of used car buyers are lower-income people who may pay cash because they don't qualify for financing on a new car, or because it may be financially ruinous for them to go into debt on a depreciating asset. 3. Much of the intrinsic value in real estate is in the location and the land. Whereas for a car most of the intrinsic value is in the design, marketing, quality of parts, engineering etc. Where an apartment is located determines how much it will rent for to a much greater degree than the quality of the apartment (assuming basic livability standards are met). $700k will buy you a burned-out 1-bedroom house in San Francisco or 2 spacious 3-bedroom houses in suburban Houston. Why? Because of where these dwellings are located.
labcomputer 9y ago
> Yet no other market seems to operate by supplying only luxury units and depending on trickle down. Why are there Corollas, instead of just more Lexuses? Because no other market has fixed unit quotas set by the local government[1]. There's no rule about how many Lexuses and Corollas Toyota is allowed to build. The dirty secret of the Bay Area housing market is that a lot of Lexus buyers have started buying Corollas because there aren't nearly enough Lexuses to go around. They can afford to pay Lexus prices for the Corolla, so they do. But that means Corollas now cost as much as a Lexus. Corolla buyers can't afford that, so they start paying Corolla money for a Yaris. But now Yarises cost as much as Corollas. Yaris buyers can't afford that, so where does that leave them? They either take the bus or walk. Building more Lexuses will stop the Lexus buyers from buying Corollas. Build enough, and you can even make this whole process run in reverse. [1] Actually, there was. The US government threatened Japan with trade sanctions unless Japanese manufacturers agreed to voluntary export limits. So Toyota created the Lexus brand to sell more profitable cars within their alloted quota.

kelnos 9y ago

SF already has plenty of "non luxury" housing that has been gobbled up for luxury prices, often displacing people who could normally afford such housing. The theory is that building more luxury housing will take pressure off the non-luxury stock. I agree with that theory, but building more affordable and below-market housing (instead, or simultaneously) will likely have a faster, more positive effect.

jogjayr 9y ago
But it's impossible to make affordable and below-market housing profitable unless the underlying issues, land acquisition costs and zoning, are addressed. That means the government will have to subsidize these units and they still won't be enough to meet demand. So only the lucky few who win the housing lottery will benefit. Everyone else (most lower-income people, middle-income renters overpaying for low-end housing) still loses out. I'd prefer that we solved the problem for most people rather than just a lucky few. If people couldn't afford food because not enough farmland was available for reasons like "preserving the character of the area" (imagine that you can't truck food in from lower-cost locations in this scenario) you bet we'd find a way to start growing more food stat. No one would say "Well we'll just subsidize food for some people so fewer people will starve. But it's no use letting farmers farm because they'll just grow Kobe beef and avocados instead of wheat and corn".
- kelnos 9y ago
  > But it's impossible to make affordable and below-market housing profitable unless the underlying issues, land acquisition costs and zoning, are addressed. Totally agree. Developers don't want to build affordable housing because they in some cases actually stand to lose money when doing so. SF's byzantine planning process makes it that way, and that's not going to change without some heavy reform there.

jogjayr 9y ago

> anybody, in any market, would prefer to make luxury units. It really depends on the market. Builders aren't stupid. If there's no one willing or able to pay for granite countertops they won't spend the money putting them in. They will build luxury units if they are profitable, otherwise they'll build cheaper ones that they can let out. Alternatively you might get a building boom where everyone overbuilds luxury units and prices collapse. Either way, win-win for consumers. > Yet no other market seems to operate by supplying only luxury units and depending on trickle down. Why are there Corollas, instead of just more Lexuses? You have to consider: 1. It's easy to ramp up (and down) car production, but not so much for housing. If carmakers had restrictions on how many cars they could produce every year, there's a good chance they too would try to focus on the higher-margin market. But because they are allowed to build without restrictions, they produce something that's affordable to every segment. I'm not saying "build baby build" because real estate is different from cars. But the current regime in the Bay Area is way too far in the other direction. It's like the government saying no one can build any new cars at all for multiple decades. Software engineers making $200k/year would be driving 15-year-old Corollas with the hubcaps falling off and Bill Gates would have the only Tesla in private hands (I'm exaggerating obviously) 2. There actually is (in a way) trickle-down at work in the car market: used cars. Used cars add to the supply of cars on the market, keeping prices lower. A lot of used car buyers are lower-income people who may pay cash because they don't qualify for financing on a new car, or because it may be financially ruinous for them to go into debt on a depreciating asset. 3. Much of the intrinsic value in real estate is in the location and the land. Whereas for a car most of the intrinsic value is in the design, marketing, quality of parts, engineering etc. Where an apartment is located determines how much it will rent for to a much greater degree than the quality of the apartment (assuming basic livability standards are met). $700k will buy you a burned-out 1-bedroom house in San Francisco or 2 spacious 3-bedroom houses in suburban Houston. Why? Because of where these dwellings are located.

labcomputer 9y ago

> Yet no other market seems to operate by supplying only luxury units and depending on trickle down. Why are there Corollas, instead of just more Lexuses? Because no other market has fixed unit quotas set by the local government[1]. There's no rule about how many Lexuses and Corollas Toyota is allowed to build. The dirty secret of the Bay Area housing market is that a lot of Lexus buyers have started buying Corollas because there aren't nearly enough Lexuses to go around. They can afford to pay Lexus prices for the Corolla, so they do. But that means Corollas now cost as much as a Lexus. Corolla buyers can't afford that, so they start paying Corolla money for a Yaris. But now Yarises cost as much as Corollas. Yaris buyers can't afford that, so where does that leave them? They either take the bus or walk. Building more Lexuses will stop the Lexus buyers from buying Corollas. Build enough, and you can even make this whole process run in reverse. [1] Actually, there was. The US government threatened Japan with trade sanctions unless Japanese manufacturers agreed to voluntary export limits. So Toyota created the Lexus brand to sell more profitable cars within their alloted quota.