The Juice Is Loose: A Brief(ish) Intro to Loose Cash and Housing Speculation

A friend of mine, reading Bloomberg News’ recent exposé of $120M-funded startup Juicero – makers of a $400 Wi-Fi enabled juicer that simply squeezed out prepackaged bags of juice also sold by Juicero – recently pointed out that, “at least [fraudulent blood-testing startup] Theranos was pretending to solve an actual problem.” The Juicero machine was clearly geared toward buyers with enough cash to purchase a shiny object that had nowhere near the use value to justify its insane price tag.

Unfortunately, much of our housing supply appears to serve the same purpose.

The concept of “commodification” in housing – in which its value as an investment opportunity or status symbol trumps its value to society as a place for people to live – continues to manifest itself in metropoles across the globe. The primary mechanism by which this occurs is speculation, the dictionary definition of which we’ll supply here:

spec·u·la·tion: Engagement in business transactions involving considerable risk but offering the chance of large gains, especially trading in commodities, stocks, etc., in the hope of profit from changes in the market price.

The trite Econ 101 explainers often trotted out by supply-siders ignore the fact that housing is both a commodity and a speculative asset; real estate is just another tradable instrument in the global financial market, especially in hot housing markets like San Francisco.

Since the 2007 crisis, interest rates on loans have remained low due to fears of an economic slowdown if rates are raised; unfortunately this cheap borrowing has encouraged speculative investment across the board. As a recent exposé from the Economist shows, we’re not the only ones feeling the crunch:

Screen Shot 2017-05-29 at 4.54.56 PM

Here are three big ways in which speculation and commodification help generate affordability crises in SF, the Bay Area, and around the world:

Short-term speculation, a.k.a. “flipping”. The San Jose/Silicon Valley nexus and the SF Bay Area are the two American housing markets where house flipping is most profitable. (Plenty of ink has been spilled on the ongoing saga between AirBnB and its hometown concerning the regulation of short-term rentals, which we will leave aside for today.)

This is where Ellis Act evictions factor heavily into the local equation. The Ellis Act allows property owners “exiting the market” (selling the entire property) to summarily evict all of the building’s existing tenants at once. It’s clear that those that already have the means to snap up housing also stand to benefit from evicting tenants, repurposing/upscaling units via condo conversions, and flipping the property for a quick and handsome profit. In San Francisco, a recent investigative report estimated that around a quarter of owner move-in evictions (OMI) could be fraudulent, meaning that the new buyer didn’t in fact move into the property purchased but converted it into a more lucrative opportunity.

Harvey Milk foresaw this problem in the 1970s, having been the victim of a speculative eviction himself, and planned to introduce a speculation tax for short-term “flipped” properties prior to his death. Proposition G, from the 2014 SF ballot, attempted to revive this idea but received a total lack of support from Mayor Ed Lee, while real estate interests outspent proponents 12-to-1. The proposition was narrowly voted down, partly due to a perceived lack of exemptions for small property owners selling to families. Meanwhile, speculation continues apace.

Long-term speculative investment. While short-term house-flipping gets a lot of attention from local press due to particularly egregious summary evictions, the desirability of the Bay Area to both local and international investors appears to be a long-term reality that requires long-term policy planning.

As we’ve mentioned in earlier pieces, the Pacific Union real estate firm recently estimated that a third of all-cash home purchases in San Francisco are for investment only, some of which is coming from foreign investors (especially from along the Pacific Rim) looking for a safe place to park their cash. Tucked into the same Economist piece as the earlier graphic was an estimate by the National Association of Realtors that Chinese foreign investors were responsible for over 29,000 home purchases just last year, primarily here in San Francisco, as well as Seattle, Miami, and New York City.

While many people like to bring up that only 12 percent of SF residents are tech employees, Fitch Ratings also estimated that 14 percent of SF residents’ income comes from capital gains, much of which is driven by IPOs and equity sales in turn made possible by a glut of venture capital funding. (These gains aren’t shared evenly, which is why wealthy tech evictors gain notoriety while most tech workers burn half their income on rent and often face punishment for speaking out about insufficient labor rights and wages).

Institutional financial speculation. Undaunted by a catastrophic international financial crisis instigated by subprime mortgage lending and securitization, our friends on Wall Street are at it again: Buying up billions in foreclosed and other cheap housing, including rent-controlled housing stock here and in Europe, pushing distressed tenants into eviction and homelessness. It should come as no surprise that Wall Street is profiting off a crisis they created. After all, they have some of the world’s deepest pockets, and are able to obtain favorable financing rates, outbid aspiring homeowners, and rake in hundreds of billions in profit from appreciating home values.

The Anti-Eviction Mapping Project shows an alarming trend of home acquisition by mega-investors in the East Bay and the I-80 corridor, especially where foreclosures were concentrated during the financial crisis. The continued rise of private equity and real estate investment trusts (REITs) have professionalized mass investment in and securitization of housing. The Bay Area is unsurprisingly a top market for both residential and commercial REIT investment.

The consequence of all this? There is a private market and a public market for housing, and understanding conflicts between the two as they play out in politics and policy on global, national, and local scales is key to better housing policy. Housing researcher and professor Dan Immergluck put it this way after analyzing affordability crises in the Atlanta area:

As the industry follows a herd mentality by chasing the luxury rental market, owners of, and investors in, lower-cost units may disinvest out of more affordable units, converting them to upscale, much more expensive units or demolishing them to make way for luxury units or nonresidential uses. While the increased development of luxury units may have a marginal negative effect on high-end rents, this activity may actually draw capital away from the more affordable sector, leading to disinvestment and shrinkage of that supply. The two ends of the market are in fact segmented from each other, but they compete for land and capital, and so the proliferation of the luxury market may, in fact, result in less on the more affordable end.

Policies that sacrifice permanently affordable housing units in favor of market-rate construction are predicated on the idea that segments of the housing market are not “commodified” or incentivized for investment rather than affordability. Such policies ignore that housing speculation signals the market to pile on the luxury units while affordable projects remain underbuilt, to transition legacy affordable housing to luxury housing or short-term rentals via “condo conversions”, and to outright demolish existing “naturally” affordable stock in favor of more expensive units. More eviction and displacement will ensue.

Additionally, speculation undercuts attempts by community land trusts and city affordable housing funds to buy up existing land and property to maintain as permanently affordable, because local public taxpayer resources simply can’t compete against a global infusion of capital. If we don’t craft local, state and national housing policy to constrain the effects of loose cash, opaque housing finance practices, and a global speculative real estate market, we’ll be “build, baby, building” little forts in the snow and ignoring the looming avalanche.

In future posts, we’ll tackle what speculation-proof housing policies can look like on all levels of governance, and what you can do as a Baysider to work for speculation-proof, truly affordable housing development. In the meantime, check out the Housing Rights Committee’s local tenant conventions, happening across SF right now.

One thought on “The Juice Is Loose: A Brief(ish) Intro to Loose Cash and Housing Speculation

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  1. “In future posts, we’ll tackle what speculation-proof housing policies can look like on all levels of governance, and what you can do as a Baysider to work for speculation-proof, truly affordable housing development.”

    Yeah, we tried this during the Western SOMA Citizens Planning Task Force. We did the work over a year to get support across the task force for what we called “boom-proof zoning.” This would have set a cap for market rate production at 110% of a rolling 10 year average and required developers to bid for unit slots based on incremental contributions to additional exactions, housing, open space, transportation and such. It was slated to go into the final plan, but Newsom yanked the nonprofits’ chains and it was yanked.

    And we tried to do Community Land Trust conversions more than a decade ago. Gullicksen objected to any limited equity condo conversions at all, but relented towards the end of his life. The CCHO saw CLT small site acquisitions as a threat to their property claims on Mayor’s Office of Housing affordable housing dollars and they steadfastly blocked any use of public dollars to purchase rent control units at risk of eviction and flipping and condo conversion when housing prices were south of $500K/unit.

    Now there are dollars for small sites acquisitions. But private operators like MEDA are competing with cooperative CLTs for those dollars. I do not know what is worse, a private for-profit or non-profit landlord. Democratic self determining cooperatives and CLTs are the only place we should invest precious public resources in this regard.

    Our problem is that the nonprofiteers that bogart the land use public policy table on behalf of “the most vulnerable” and the rest of everyone who is not a developer are comfortable behind the eight ball, always 5-10 years behind the curve. They cannot conceptualize a political approach where they can deliver benefits faster than the market exacts damage. Misery is a business opportunity to them.

    We need democratic, participatory housing and a democratic, participatory progressive politics not dominated by private nonprofits.

    Like

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