> … how is the Bay Area housing market artificially inflated?

I shouldn’t have an opinion on this because I don’t live in the Bay Area or closely follow its politics, but the most common refrain I see is that policies (e.g., zoning) prevent building more and higher density housing, thus artificially limiting supply.

Artificially constrained supply combined with marginal buyers that earn >$300k/year and 0% interest rates would lead to extremely high prices.

dual income with socioeconomic equals too

The Bay Area is also geographically constrained by water and mountains. This is compared to say a plains city that can greatly expand in all directions e.g. Dallas (?).

That's nowhere near being a real constraint.

It's refusal to allow housing construction all the way down.

IIRC, new housing is not being approved for construction mainly because the local gov is full of people who own real estate. In a natural situation, supply would be increased to meet demand.

It's important to take into account the construction costs (and all the parties that are profiting from building new stuff). I think the cost of construction has gone up a lot in recent history. People in general also have much more luxurious requirements for housing than in the past which contributes to the cost. So, building just more is not some magical way to solve this. It's one efficient tool, however, especially if legislative point is made to strongly prefer affordable housing (and be strict about it).

Additionally cities earn more from commercial zoning than residential. And dense residential projects reliably get blocked by NIMBY neighbors. (NIMBY = Not In My Back Yard)

But this is not artificial.

This is a result of the fact that some resources do not have infinite space to increase supply. Land is one of those resources.

No matter how much someone demands it, we cannot simply wish more land into existence in SF.

So while we can increase housing supply by optimizing the usage of that land (more houses per unit area), this has adverse consequences for the people already using it...

> So while we can increase housing supply by optimizing the usage of that land (more houses per unit area), this has adverse consequences for the people already using it...

It would certainly have some kind of consequences for the people currently using it. Whether they would be better or worse that the consequences already being experienced is a matter for debate. I don't live in the bay area but would assume more density would largely be a good thing for regular people -- either their rent will drop because the market isn't so tight, or the home they own would rocket in value because it can suddenly be cleared to make way for an apartment or condo building (that they might have a hope of affording a unit in).

There are other people "using" the land though: the rentiers who run the local (and state, and national) government.

The way I see it, you have these tech companies that are writing larger and larger checks to their employees. Combine that with limited housing and you start getting bidding wars from folks making $500k, all of a sudden that house that went for $600k is now going for $1.2M. If you work back from that price you see that the prices would not have been able to go that high had all these tech companies not offered massive comp packages.

That's not artificial though, that's fair market pricing. It's growth in income leading to higher prices for goods purchased with that income.

That is true and I’m not here to disagree, but what the parent pointed out raised a question for me: weren’t these salary increases in part due to the fact that since the 2008 Financial crisis, money has been cheap, and now with the Feds raising rates, money is now more expensive? And if so, and those salaries were not sustainable because the profits that allowed for them hypothetically cannot be sustained because people are out of work and tightening their belts or taking salary cuts to land their next job and taking out a loan to cover payroll for businesses is a more costly proposition, then isn’t this actually a volatile situation for the Bay Area housing market and the mortgages backing it?

More important than LIRP influence is that Bay Area tech companies were incredibly successful in the decade at increasing revenues, so they could afford to pay more.

Apple: $65.2B in 2010 vs $260B in 2019 Facebook: $1.97B in 2010 vs $70.9B in 2019 Netflix: $1.67B in 2010 vs $20B in 2019 Google: $29.3B in 2010 vs $160B in 2019

You make an excellent point and I had to sit down and think about this more holistically because I’m just trying to understand what is going on in the economy right now and using this comment chain as a lens to try and do it in. So what I came up with is that is true but more context is necessary I think: payroll isn’t the only cost they increased. M&A was also huge this past decade: Apple bought Beats for $3B, Intel’s modem business for $1B and between 2010 and 2022 they had at least 14 other acquisitions for >$100M and this is excluding the financing and equipment purchases for their suppliers including TSMC and that weird deal they had with the PRC to invest $275B into mainland China.

Facebook’s 4 largest purchases in the last decade were WhatsApp for $19B, Oculus VR for $2B, Instagram for $1B and Kustomer for $1B along with at least 5 other acquisitions for >$100M.

I don’t want to go down the whole list in detail, but Google has invested heavily into YouTube, Waymo and other bets this past decade and Netflix was up until very recently just pouring money into Hollywood and other media markets like Japan to acquire production and/or distribution rights and built up pretty much their entire streaming infrastructure in the post-2008 world. All of this was an also financed with cheap money and these investments allowed them to grow their revenue, maybe some more successfully than others.

None of that is really artificial inflation, but I guess this is why dollar inflation is called inflation?

What about all of the startups whose profits are over the horizon?

It's inflation. Now it's leaked out into the general economy as a result. Same thing happens when you inflate a tire: it makes it nice a hard until it goes boom.

I think that when people describe these kinds of markets as "artificially" inflated, they're reacting to the sharp increase in income inequality. For a person who has had a 60-80th percentile income for 20 years, it probably feels more like prices are artificial than it feels like their economic status has declined significantly. Unfortunately the latter is the case, as increasingly fewer people gather an increasing share of wealth.

I would definitely agree that the pricing is not artificial, but I don't think I would call it fair.

> I assumed the high prices were the normal market response to high demand from many people with deep pockets.

The response is normal, but the deep pockets were an aberration. No one was making $$ in cash; tech stocks floated to ~80 P/E for mature companies and higher for billion dollar _growth_ companies (aka a bubble).

I'm referring to the most recent artificial fluctuations in home prices that were not caused by some noticeable increase in people living in the Bay capable of paying off a 1.2 M loan, rather than referring to the default baseline of high prices.

artificially inflated in the sense that if it wasn’t for government regulation that makes building difficult, then the normal market forces that incentivize builders to meet demand would result in costs lower than they are now.

If you want to model the hypothetical non-artificial situation, you have to remove all relevant government-controlled knobs and levers.

That can't be the only one?

Instead you have million dollar hovels surrounded by $20 tents.

Zoning and other municipal restrictions along with environmental regulations dampen the supply of housing