Regional Conversations: Bay Area Housing Supply & Affordability

Transcript

The following transcript has been edited lightly for clarity.

Laura Choi:

An important part of what we do here at the San Francisco Fed is conducting research but also engaging in dialogue with members of our communities to understand what’s happening in the economy, to get really behind the thinking of some of the decisions that are driving economic outcomes. So, I’m really excited for this conversation today. An important part Sylvain mentioned, we’re here serving the Twelfth District, which is the nine western states, two territories and a commonwealth. So, it’s a big territory to cover.

But we want to make sure that the perspectives and concerns of people in our District here on the Western United States are well-represented when the FOMC (Federal Open Market Committee) is making its monetary policy decisions. So, that’s an important component of this, making sure that local perspective, local views are really surfaced as part of the national monetary policy decision making. So, today we’re going to explore the topic of housing supply and affordability from a lot of different perspectives. So, we’ve got macro to the micro, researchers and practitioners. We’re going to talk throughout the income distribution and lifecycle, covering this very complex issue from multiple angles.

And this is really important because I’m sure all of you are representing different parts of the housing ecosystem, and people come with different motivations, different priorities, so it’s important for the Federal Reserve to hear that full range of issues when considering the impacts of housing on the economy overall. I’m sure many of you have been to housing conversations where perhaps the conversation is narrowly focused on a specific issue area or market segment, but we really wanted this to be a different kind of conversation, one where we really are looking at the entirety of the housing ecosystem. So, you’re going to hear maybe some different perspectives on stage today. And that’s by design, because again it’s important for the Fed to hear that full range of issues when considering their implications for the economy. Today’s conversation is going to be focused on the Bay Area, but when we’re out talking to people across the District, housing comes up in any community that you’re in. So, I hope what you hear today will be informative for your work no matter where you live. Before we jump into the conversation, I do want to let you know that the views you hear today are those of our speakers and do not necessarily represent those of the Federal Reserve Bank of San Francisco or the Federal Reserve System. So, with that, I’d like to introduce our panel. I’m delighted to be joined on stage by John Mondragon, who is Research Advisor in Economic Research here at the San Francisco Fed. And his work focuses on mortgage and housing markets, and empirical macroeconomics.

Next to John, we have Elizabeth Kneebone, who is Assistant Vice President of Research in Community Engagement and Analysis here at the San Francisco Fed. And her work explores housing, geography, and access to economic opportunities. Then we’ve got Alex Mehran, Sr., who is Chairman of the Board of Sunset Development Company, which is leading the redevelopment of Bishop Ranch, a mixed-use community that includes housing, retail, office, and recreational spaces in San Ramon, California. And Ann Silverberg, CEO of Related California’s NorCal Affordable and Northwest Divisions, where she oversees the three and a half billion-dollar affordable portfolio in Northern California and the Northwest.

So, very excited. Thank you all for joining us today. So, John, I want to start with you and start with the big picture. You’ve done a lot of work exploring housing trends at the macro level. Can you give us just an overview of some of your key research findings?

John Mondragon:

Great. Thanks for joining us for this conversation. So, research that I’ve been working on lately, which is a bit controversial, I want to preface that, is trying to grapple with the big picture question of we know that there’s been huge changes in affordability, both in the U.S., lots of different cities in the U.S., but also in lots of rich countries across the world. And it’s attracted a lot of attention, so we’re trying to understand what the levers or the key economic mechanisms that might be able… that we can pull on or try and push against to affect, to change these affordability dynamics. And so, what we do is we look at across U.S. metro areas, and try and understand over the last 20 or 40 years, do we have measures of regulatory constraints or geographic constraints that really explain why affordability has become so much worse in some places and why it might be so much better in other places?

And the big picture take away from our results is that we don’t. Is that when you look across lots of different markets, they do have very different affordability outcomes, but it doesn’t seem that they’re explained very well by these measures that we have of either the regulatory constraints or the environmental constraints, or land costs and things like that. And so, I think the big takeaway for me that’s been kind of motivating is that there may not be a silver bullet, or at least that if there is or there’s more research and conversations like these that are needed to figure out what it is exactly, that might really turn the key on solving this really big pernicious problem.

Laura Choi:

Definitely no silver bullet. Hopefully, we would’ve found it by now if it was that easy, so definitely a big complex issue. Thanks for setting that at the macro level. And then Elizabeth, I want to drill down a little bit to think about housing at a much more localized scale. How are you thinking about housing supply and affordability through that lens? And how can that help us make sense of John’s research at the macro level?

Elizabeth Kneebone:

Yeah. Thanks for that question. In the research that I’ve been doing around housing supply and affordability, really even predating my time at the Fed, some of the things that I’ve been looking at and exploring is the role of land use regulation and housing policies. The makeup and mix of the housing stock, and how that’s trended over time, and relates to affordability. Also unpacking things like what are the different drivers that have been driving up the cost of producing housing, especially in regions like the Bay Area. And when you think about what does it take to build housing, what does it take to really move these national numbers, I mean, there are macro forces, of course, that matter, like inflation, supply chains. These kinds of issues can influence the cost of building housing. Federal policy, state policy, all influence this landscape. But really, a lot of the cards are held by local jurisdictions.

When we think about these national numbers and the gap that needs to be filled to address affordability and have adequate supply, it’s really reliant on decisions made by thousands of jurisdictions across the country. Because local jurisdictions can control things like, what does the zoning look like? What kind of housing? How much housing will we allow in this community? A locality could choose to say, “Well, only large lots and really large single-family homes.” And if that’s the kind of housing that’s built, that’s more expensive. But a community may also say, “Let’s allow for a wider range of options, a whole continuum that has space for more inherently affordable types of housing.” So, things like even smaller format, single-family housing, duplexes, triplexes, that kind of missing middle that we’re hearing a lot more about in conversations these days.

And large apartment buildings, whether that’s condos or rental, all have this role in the ecosystem that they can play in helping address supply needs or affordability across the income distribution. But cities get to decide, local jurisdictions get to decide how much of it and what kinds they’re going to allow in their communities. And they also get to decide things like, what does the permitting process look like? How complicated is it? How protracted or how streamlined can it be to get housing approved? Things like, what are the local building codes or considerations for design requirements? All of these things layer together to affect how much housing gets built, what kind, how expensive or affordable it is.

And to John’s point, this idea that getting all of those decisions and policies arrayed perfectly to support more housing, doesn’t just automatically turn on the supply. It is a necessary condition. It is the ground game that is like, what is potential? What could we even achieve and how much housing we can build? All of those decisions affect that. But they also have to then have a lot of other pieces fall into place to make it work. So, think about the local labor market. If you’re trying to build for diversity of housing types, a high-rise steel and cement construction type is different than a backyard accessory dwelling unit or this mix of middle housing that more communities want to build. Is the labor market arrayed in a way that will support the production of that kind of housing. Is the financing arrayed in a way that will support that mix of housing types, because they all draw from different sources and financing structures to make them happen?

Some previous research I did focused particularly on subsidized housing, on affordable housing, which I’m sure Ann can speak more to, that this is an important rung in the housing ladder for lower income households. But delivering that below market rental, that subsidy also requires layering a bunch of other, in many cases, a bunch of other funding sources. And that in itself can create complexity, it can add costs, especially when those different sources have different requirements for what can be built and what populations can be served.

So this is just a very complicated landscape, and I’m only talking about new construction. There’s also another part of this equation that housing stock ages, it gets torn down, it becomes uninhabitable. There has to be that full consideration of the scope and mix of housing that determines, what is the new net supply? How affordable is it? Who does it serve? Who can live where in that housing supply?

And we know that when you get all of those pieces right, it makes a difference. Research supports that, it shows that you can affect affordability by building more housing in a community, but that has to happen in enough communities at the same time, at the scale that would be required to move the needle in the kind of research that John is doing. And that’s really the challenge, and what makes this a no silver-bullet solution and such a complex issue.

Laura Choi:

Yeah. Thanks, Elizabeth. I think that dynamic here between the macro and the micro, I think that speaks to what Sylvain was raising about the complexity of local decision-making. Can that happen in enough places to affect the macro level? So I really appreciate this dynamic here. I was in a housing conference recently and they said, “Affordable housing financing is like lasagna. Lots of layers and very, very messy.” So we’re going to get into that a little bit more.

Alex, I want to turn to you to talk about housing supply from a practitioner perspective. So after the pandemic, there was a lot of interest in whether vacant office space could be reused to add to the housing supply, and we learned that there were many reasons why this wouldn’t pencil out perhaps for a downtown office skyscraper like we may have down the street here in San Francisco, but it could be feasible in other areas. So I wanted to hear about the work that you’re doing to repurpose suburban office parks in the East Bay with the goal of producing 8,000 new housing units in Bishop Ranch. So can you tell us a little bit more about this redevelopment, and talk us through some of the main decision points and lessons that you’ve learned about expanding housing supply through adaptive reuse?

Alex Mehran, Sr.:

Well, thanks, Laura. So the story begins in April of 2020 during the beginning of the pandemic. I was on a telephone call with Sam Hawgood, it was a group call, who was the chancellor of UCSF and he was talking about Coronaviruses. And he said, “Coronaviruses are not something that we are unfamiliar with. It’s a very familiar kind of disease. This particular coronavirus, the COVID-19 virus, is going to be much more lethal because it affects the lower respiratory system, and it’s going to kill a lot of elderly and vulnerable people. We will probably go through three phases of this virus, each of which will be about eight months, and I predict that we will not be done with social distancing until we get through that third phase.” So I used my grade school math, three times eight was 24, and 24 was two years.

I got on the phone with my son who was running the company at that time and said, “This is going to be a long-term haul. It’s going to have impacts that are going to be deep-seated. People are going to be working from home for a long time, and they will normalize that behavior and it’s going to be very disruptive.” So from that call, we went into action to start re-entitling much of our property. We use the analogy of e-commerce as the base plan that we were looking at, which was e-commerce basically created about 30% demand destruction in the retail business. And it may be more than that today, but we used that as a baseline. We thought that remote work would probably destroy about 30% of demand for office.

So, we had about 10 million feet of office space, and we decided that we were going to take down our older buildings, which was about three and a half to four million feet of office space and convert it into residential, which we have been doing. We’re at the final stages of completing that transformation, which will be taking down about three and a half to four million feet of office space and building 8,000 units—6,500 apartments and 1,200 single family, about 1,200 affordable units and a couple hundred senior living, will probably be more senior living than a couple of hundred, but right now it’s at a couple of hundred—and we’ll build another half a million feet of retail.

So, at the end of the day when we started, at our peak we were 30,000 people coming to work at Bishop Ranch every day. We were a pure play office with some support retail, no residential. At the end of the day, which we think will be probably ten years out, we will be at about 50,000 population with about 5 million feet of office. Five to six million feet of office space, about a million and a half of retail and 8,000 residential units through that mix, and we’re flooding the channels. And when you’re doing this number of units, absorption is an important element. So we’re flooding the channels between single family, multi-family, senior living, town homes, affordable to be able to get all the channels out there, to get the traction, to get the public to understand that the critical mass of residents that create a community will be present.

We are, at our heart and soul, community developers and we started in 1951, when my father started the business, as community developers in Livermore. We tried to emulate that in our office activities, and now we’re doing it again with this new adventure we’re on at Bishop Ranch. So I’ll stop there.

Laura Choi:

Definitely an adventure. Thanks for that, Alex. And I want to come back and talk a little bit more about the portfolio mix in a bit, but Ann, I want to turn to you. Elizabeth’s talked about the housing ladder. We often think about housing as a spectrum, and we definitely need that wide range of housing types to make sure that people of all income levels can live and work in the Bay Area. I want to talk specifically about affordable housing. Can you give us a sense of the policy and funding landscape for affordable housing? And talk through some of the recent changes in areas of progress that you’re seeing as it relates to your work at related.

Ann Silverberg:

Sure, sure. So I would say with policy and funding, it’s a mixed bag. There’s good and there’s bad. We’ve seen incredible progress in the policy arena. I think there are things that we could only imagine before that are actually our reality right now. Changes in the Surplus Land Act, the Governor’s excess site program, has made so many more sites available for affordable housing, and in the Bay Area, where land is very expensive, that’s very meaningful and impactful. But beyond that the reforms with land use, the series of laws that have been passed starting with SB 35, including SB 330, AB 1763 which is density bonus, and AB 2162 for permanent supportive housing . There are just so many.

I think there were five pages of laws that have been passed, and that has really changed the way we approach affordable housing. And I know, I see some friends out here too, and we used to engage in very long, very expensive battles for affordable housing with uncertain outcomes and now it’s much more streamlined, it’s much more rapid, it’s much more certain and it’s enabled us to advance many, many, many more affordable housing projects in a way that, again, we couldn’t really even imagine before. Our company has entitled about 2,000 units using these laws. Most would have been in the planning stages still if we didn’t have these laws. So that has been really fantastic and a tremendous amount of progress.

At the same time, I would say we’re challenged on the funding side. We just are. We’ve had some wins and some victories and we are still able to move some projects forward, but nowhere near the amount of funding that we need to actually deliver the number of housing units that we need in the Bay Area or in California. We just keep falling further and further behind. And I just think without a stable, secure, robust enough funding source, we’re just not going to be able to get the traction that we need to deliver those housing units. So again, a little good, a little bad, probably funding will be a theme, at least for me, through this conversation. But that is our challenge today.

Laura Choi:

Okay. Thanks, yeah. It’s definitely a mix, and we’re going to shift a little bit to talking about macro conditions and I think that’ll get to some of the cost of development in a bit. So John, I want to turn back to you. So we’re here at the Fed, and the Fed recently lowered the Fed funds rate by a quarter percent. So can you share how changes in the Fed funds rate impact mortgage rates? Can you just go through that briefly? But then, I think more so, speak to the latest data on macro housing trends and what you think the implications are for housing development.

John Mondragon:

Yeah, happy to. I’m probably not actually the expert in this room. I’ve talked to some pretty impressive folks already. But so yeah, this question comes up a lot. We changed the short-term rate, as Sylvain was saying. How does that transmit into the really complicated family of interest rates and financing costs that exist in the economy?

And so the problem, not the problem, the challenge with longer-term financing like the mortgage rate or other financing you might need for other kinds of long-term investments, is that they depend not just on the short-rate today, but also on how people think that short-rate is going to evolve over the next five to 10 years. And so it’s these expectations of what’s going to happen in the medium and long run. They’re actually going to be really dominant in terms of thinking about short-term financing. So mortgage rates are high today, and what’s going to happen in the next meeting or so is likely going to have a very small impact on the mortgage rates overall and the problem that homeowners have been having in the housing market, of being able to afford houses at these really high prices and high mortgage rates.

So that’s all to say that the financing side from housing demand is likely still pretty challenged, and I think you see that when you look at a lot of the market data. So rents broadly across the country seem to be pretty slow. That’s also going to be something that factors in very strongly to the profitability of a new development, and how much of an incentive is there for turning that around. And you see that in the permits data.

So permits data are actually still quite healthy relative to where we were coming out of the Great Recession, some of the lowest permitting that we’ve had over a 10-year period, but we had that huge boost during the pandemic period reflecting the really high demand and low cost of financing, and things are definitely slowing down, it seems. And so in terms of near-term relief to how much housing there is and the cost at which it is going to be provided, it seems that things are tight. So prices might go down, but it’s likely reflecting demand conditions, is what I would summarize.

Laura Choi:

Okay. Thank you. Well, let’s turn back to Alex and Ann. So John gave an overview of some of the macro conditions, so how are these macro conditions impacting your work and how are you adapting in light of this to move your projects forward? Alex, why don’t we start with you?

Alex Mehran, Sr.:

Well, I think the driving force is the reduction in the labor force. We’re probably seeing something like one and a half million workers go out of the workforce, and that’s a real number. So we’re suffering from the denominator effect. At the same time, we are at the beginning stages of the impact of the tariffs, which is going to create inflation. So the affordability issue is a real factor.

I’ve been told that the cost of construction is dropping, which is good news. My friends who are builders are seeing somewhere in the range of 10 percent reduction in overall costs from six months ago, but that’s being outweighed by the affordability issue. Income disparities are real and are really impactful here. We’re also seeing additional used houses coming back on the market. We’ve seen a jump up there, but I’m most concerned about the demand side and how the public is viewing making that big financial decision of buying a home with higher rates, higher prices, and great uncertainty about what their economic future is. People are not going to plunk down $200, $300, $400, $500 thousand of down payment in an environment where they’re not sure about their jobs. So that all portends some weakness in the housing business for the foreseeable future until things clear up a little bit. I don’t think that the short-term rates are going to impact this. This is more about fiscal policy than it is about monetary policy. All it means is the steepening of the yield curve. Now, what the Fed does in terms of its securities composition and mortgage-backed securities has some impact on financing, but not a great deal. All of this net-net means that things are going to slow down a little bit, people are going to be on the sidelines and the affordability issues become more acute.

Laura Choi:

Well, with that, Ann, why don’t we turn to you and hear how these conditions are impacting your work? And again, how are you adapting in light of these conditions?

Ann Silverberg:

So many of the macroeconomic issues and challenges that are faced by market rate are also faced by affordable, so some of the things that Alex just said are things that we’re experiencing as well. There are some differences also but I think that the cost of capital, the cost of construction, absolutely affects our ability to deliver affordable housing. No doubt about that. And I think that we’re encouraged by interest rate drops, and we hope that that finds its way to our actual borrowing rates, but I don’t think it’s enough yet to make a difference. Cost of construction, we haven’t yet seen the drop for pricing, and I think part of it is, we have some offsetting conditions like tariffs and other things that are impacting cost of building and so we haven’t yet seen the softening.

So, we’re seeing those same challenges. The thing I would say about affordable housing that’s a little bit different than market rate is that, especially if you think about multifamily market rate development where you are, it depends on the cost coming down or rents going up in order for projects to be feasible. We can build. We’re not dependent on rents in that way. There’s always demand for our product. And in fact, we intentionally keep rents low. We can build when the market is down for market rate housing, we can be countercyclical, but we just need the funding to do that. So here’s my theme for the day. I mean, we’ve seen this in the past where affordable housing has been countercyclical and built in times when land is more available. We’re not competing with everyone for labor, for materials, for everything. That’s a great time for affordable housing to move forward. And we have been able to make some progress during those times.

But we’ve also seen times where we’ve not been able to move forward and actually we’ve fallen further behind. 2011 is a good example of that where we just could not continue moving forward because we didn’t have the funding. And I’ve become a little bit worried. We have some funding for affordable housing, but if you look into the future, that’s a little uncertain. So talk about uncertainty. We’re nervous about the availability of funding for affordable housing. And what makes me worried is that we’re going to fall further behind, and we’re already behind. Every home counts. Every home is a family that has affordable housing. We cannot afford to fall further behind.

But more than that, it’s labor market. If we’re not able to build during this time, what’s going to happen to labor? And we’ve seen this before. They move away, they move into different sectors, and they don’t come back. And so when we are able to build, it’s going to be that much tougher. So I do worry about that as well.

Laura Choi:

All right. Thanks for that. Well, Elizabeth, I want to turn back to you. Common theme here, there’s no silver bullet, there’s no easy solution to solving this issue. But it is important to think about the different ways that communities are responding to some of these issues and surfacing some of those local innovations. So can you tell us about your approach to practice-informed research and what you’re learning through some of the work that you’re doing with practitioners?

Elizabeth Kneebone:

Yeah. And I really like that phrase: practice-informed research. I think it’s so important in the work that I do, but really, across the Community Engagement and Analysis team, it’s sort of baked in on the research side. But also we have colleagues who are in outreach and engagement functions. They’re really embedded in communities across the District and have really deep networks of actual stakeholders who are on the ground, like those who are joining us today, doing the work and trying to address these challenges and find innovative ways to move forward. And that network, I think it really is a thread through all of our work that’s so important in a number of different ways.

So, one is just the data that we want—to be able to ask the questions and answer some of the questions we have about the housing market and supply and affordability—are not always available, or if they’re publicly available, they can be limited, they’re lagged, there are constraints. So when I mentioned things like the financing complexity of affordable housing or cost drivers, that work really all came from collecting original data from developers and builders who are able to provide that in order to do the research and get this finer-grain look that doesn’t really exist in publicly available data sets in the way that we would need it to answer those questions.

But whether working with publicly available data sets or original data collection, there’s also this great benefit to ground-truthing the data with people who are on the ground doing this work because it helps us, again, especially for lag data, it helps us understand real-time perspectives and conditions. It helps really expand our understanding of why we’re seeing what we’re seeing in the data and the patterns and the trends that can really broaden our understanding in important ways to think about how this is transmitting through the economy, how this is affecting supply and conditions in neighborhoods across our District.

It’s also a way that we do, what you mentioned, Laura, which is surfacing some of these innovative approaches. Whether that’s on the financing side, with practitioners who are able to point to ways that they’re able to reduce frictions of having multiple capital sources coming into a project by perhaps aligning the timing of those subsidies or having those subsidies align in a way that helps reduce those frictions. Others are turning to different financing sources, trying to look for more innovative ways to bring capital into a project that maybe makes that project less reliant on public subsidy, and that opens up different options for how that housing might get developed or different kinds of housing that can be developed.

We’re seeing, through our networks, through some of these local on-the-ground solutions, evolutions of public-private partnerships in the ways that jurisdictions are working with developers to think about infill housing and some of these parcels that they may be able to open up for affordable housing options or homeownership options that might be more available to entry-level or lower-income buyers. So again, I think being able to get those solutions show it’s multifaceted, it’s going to take a lot of different efforts chipping away at this to get to that continuum of solutions that we need. But by surfacing the solutions we can also share those, not just broaden our own understanding, but share those with other stakeholders who are trying to solve the same problems. So that’s also a part of getting to a better scale is just being able to surface those solutions more in real-time and across communities that are working on these issues.

And the last thread, a part of this that I want to mention is, this feedback loop works in both directions because by being connected to people on the ground, people who are actually doing this work every day, it also helps us hear what we should be asking and thinking about from a research perspective. Through our networks in Community Engagement and Analysis, we’ve been hearing from a lot of different corners as we think about the preservation piece and that important role that affordable housing plays, that there are stressors, there’s some headwinds that are affecting certain parts of the multifamily affordable market.

They’ve seen things like rising operating costs for some increased acuity in the needs of the populations that some of these portfolios are serving. So you have these mounting pressures that, in a portfolio that’s already operating on slim margins, can really raise concerns about preserving that part of the stock in that rung of the ladder, if you will. So I’m doing work right now because we are hearing that from people in real-time, what’s playing out in different parts of our District, doing work to better understand, unpack what these stressors are, what kind of portfolios they’re affecting, thinking about how that transmits through the economy and what’s available for affordable housing supply. But also looking for those solutions. We’re also seeing people and portfolios who are figuring out how to navigate some of those headwinds, and that that can be part of that other role that we play in helping to surface some of those solutions and add more evidence and data to the conversation about how to address some of these challenges.

Laura Choi:

That’s great. I love the idea of that back and forth between research and practice informing each other. Thanks for that.

Alex, I want to turn back to you and back to the discussion around the portfolio mix. So you walked us through the different types of housing. Can you tell us a little bit more about the portfolio mix, but specifically how did you land on that mix and how does that fit into the broader conversation on housing supply and demand in the region?

Alex Mehran, Sr.:

Well, we started with an acreage that we were going to be working on which was known, and then we actually started with about 10,000 units and found that the larger lots that we had in the townhomes were going to be much more marketable than the more dense units. So we backed away from that 10,000 to get to a more acceptable market product. The senior side was pretty straightforward. There’s a lot of demand for seniors, and we’ve got numbers of people who want to participate in that. But I think it was iterative between zoning requirements, market demands, and the ability to be able to provide a mix of different units across the portfolio.

But I just want to go back to something that was said. I think it’s important for us to think that housing and affordable housing are two different animals. Housing is in short supply because of entitlements and land, and that entitlement process is difficult. I encourage you to read Abundance, if you haven’t, to show how difficult it is to get entitlements that will allow the free market to be able to do what they’re going to do. And affordable housing is a public policy issue and we need to adopt public policy to encourage affordable housing. But these are two very different animals, and we’ve tried to balance that in the mix that we have between the 1,200 affordable units and isolating that to give the affordable units the best sponsors possible because they know what they’re doing. The Related California kinds of affordable developers know what they’re doing. They’re much better at it than the people who are trying to incorporate it.

I think that it’s counterproductive to try and entitle property and then burden it with the affordable housing that raises the price of the market rate house. Those things need to be separated, and we’ve tried to do that in this mix that we’ve developed.

Laura Choi:

Ann, I want to give you a chance to weigh in here on the topic. And then also there’s a big jump between an affordable rental unit and then a market rate single family home. Alex was talking about the different types. There are different ways to think about how to integrate affordable housing into a community. Can you talk about what you see as the opportunity for increasing the supply of this missing middle, kind of the continuum of housing, and how you’re approaching this in your own work?

Ann Silverberg:

Yeah. Yeah. I like a good home improvement metaphor. So “ladder” I’ll use as opposed to sports metaphors. I always get those wrong. So I think that the missing middle is a missing rung on the ladder. We focus on affordable, and the market focuses on providing market rate housing, but middle income is very difficult to address. And I think it’s a really important rung on the ladder for a variety of reasons. I think that we focus on providing secure, affordable, stable, affordable housing for our residents, but we also value economic growth and wealth building. And it is great when someone is able to have an affordable rent, save money, improve their incomes and move out, move up and out. And that makes room for someone else to move in. But if there isn’t a place for them to go because there’s too much of a jump to get to market rate housing, they’re stuck. And so I think for that household, and for communities, that missing rung is a really important one, and I think that we should be focused on it.

I do think it’s very difficult for the market to respond on its own to that segment of the housing ladder because it’s difficult given the cost and everything else that we’ve just been talking about. And so I think if we’re serious about addressing the missing middle, I think that we have to get deliberate with our policies. And I think that that is true for affordable. I think it’s true for middle income as well. And I think it doesn’t have to be the tax credit program or all of the programs that we use with affordable, but it might be a bundle of approaches to provide the incentives and the benefits that would cause the market to respond. And it could be tax incentives, it could be property tax exemption, it could be some subsidy or some combination of those that make it possible to deliver housing at that middle income band. I do think it’s important.

Laura Choi:

Great. I want to come back to this. I think this missing middle concept is super important. But I want to turn to some of the audience questions that we received from all of you, so thank you for submitting those questions. The first one, John, this is going to go to you. Once I read it you’ll know why. Okay. Why does the Fed include owner equivalent rent in inflation calculations when it may not reflect actual market trends? And then I’m going to add a follow-up along that theme, which is what are other ways, methods, data that the Fed is using to ensure that we have a good handle on affordability? And Elizabeth, feel free to weigh in as well.

John Mondragon:

Yeah, that is a great and perennial question. So for those of you not familiar, when we try and measure, I’m saying we broadly as a society, when we try and measure inflation there’s a deep kind of issue of, well, how do you measure the cost of housing? For renters that’s very simple, right? It’s what they’re paying in terms of rent. For homeowners it’s actually a kind of deeper and almost at sometimes metaphysical question. What is the cost of housing? So back in the ’80s, what we used to do is we actually factored in the interest rate that they would pay and kind of that sort of stuff. And what this meant was that when rates went up, the cost of housing went up, but that seemed to not accord with what we thought was economically going up.

So, the idea is to try and come up with a measure given the stock of housing that we have, some of its owners, some of its renters, try and value it all in a similar way, which is what is the flow cost of living in that house? What’s the rental cost? And so, for owners, what you do is you ask them, if you were to rent your house what would that cost? And you only use that to get a sense of how expensive the house is. And then we, again, as a society, use data on actual changes in rents to put in the inflation there.

So, the short answer is we’re just trying to get a snapshot of given what the composition of houses that we have, what might the change in the rental cost of this be. Now, it’s true that that snapshot is not going to reflect the very short run dynamics of what’s going on in the rental market because if you had to go out and rent a house, what would you have to pay for that? That’s actually going to be quite different from this snapshot that we just took. And we do internally in the Fed look at all of those data to try and see what’s going on in the market in the short run.

But that’s to answer a different question, which is where’s the economy headed? What’s the information we can gather? Whereas for CPI to measure the price level, we just kind of want to know what are people actually paying? And that’s kind of an answer, that this owner’s equivalent is kind of a picture of the cost of living in that house, is an answer that’s been given. But actually, it is a deep question.

Laura Choi:

Great. Thanks. Elizabeth, do you want to weigh in? Or John, if you have anything else to add on? Just how do we understand current market trends and affordability given some of the challenges with things like OER (owner equivalent rent)?

Elizabeth Kneebone:

Yeah, so I mentioned the data landscape in my earlier response. We bring a lot of different data sources together. Some of it is publicly available. We get snapshot data from the American Community Survey that gives us a sense of the overall makeup of the stock and some insights into how prices are trending or rents are trending we can use Also, especially thinking about supply and that localized really deep dive picture tax assessor data that gives us insight into just parcel level information about what’s being built or what’s the landscape looking like in different neighborhoods and different types of communities. My colleague, Lizzy Mattiuzzi was recently writing with co-authors about homeownership options beyond single family. So talking about some of the missing middle-type formats we were talking about, or even the role of things like accessory dwelling units and was able to use some of this proprietary data that aggregates up tax assessor data to do that. And then like I mentioned, sometimes it really is original data collection and these qualitative insights that can be really important in building out a fuller picture of what we’re getting from the different quantitative sources we’re able to put together.

Laura Choi:

Great, thank you. So I want to circle back to this idea of housing options beyond single-family. This was another question that came in. So there were two questions. One was about how do we address the lack of financing options for middle density housing, the duplex- fourplex-type units? And then what are the opportunities to expand different types of ownership? So whether it’s shared equity or co-ownership housing models. So Ann, maybe we can start with you, if you want to talk more about the financing side on some of the missing middle.

Ann Silverberg:

So, we don’t do as much of the duplex work or co-op work, so I don’t have as much to draw from there. But I do think on the middle income, some of what we might want to think about is getting creative with some of our programs. I do think that the zoning changes, the ADU laws, some of this will naturally help us deliver housing at a more affordable price. I think we can supplement and add to that with some financing tools if we want to. And so getting creative with that.

In the past, we’ve had programs where we’ve been able to write down interest rates when we are delivering at a certain income level. That might be something that we explore. I’ve already mentioned property tax exemption or other kinds of tax incentives. Tax exempt bonds, we may want to think about using some of our tax exempt bond authority for activities like this under private activity bonds that are very oversubscribed right now. So a lot of policy considerations there. But I think that there are things that we might be able to consider to make it easier to finance those either at the duplex or fourplex level, or at a much larger scale as well.

Laura Choi:

Great. Did anyone want to add anything else on this topic?

Elizabeth Kneebone:

Yeah, I would just build on this point that Ann made. Sometimes when you change the rules and allow certain types of housing types, the financing then does follow along. We can see that in the accessory dwelling unit space. Especially in the state of California, a lot of laws were shifted so that becomes a more common and allowable building type. And in the beginning, what you saw is people self-financing that a lot, that there wasn’t really necessarily that financing option to help more people access that accessory dwelling unit, even though the law has permitted it. But we do see that shifting. There are more products coming online. There’s more experimentation around how do we make sure lower- and moderate-income households are also able to benefit from this because that can help with rental income streams or make home ownership more attainable. So that’s just one example, but I think that it does take time for those tools to catch up. But by having that allowable use in the first place, you’re opening up space to allow for experimentation and new tools to develop.

Alex Mehran, Sr.:

Laura, I’ll just add, I think it’s an important social policy to have homeownership in America. For people to own a piece of the country is important. They have a stake. I think homeownership is critical to our democracy and people feeling as though they are owners in this economy of ours. Renting has its place for sure, but ownership is a real social policy imperative. I’ll just say that I think that different forms of ownership, as we’ve seen in my lifetime, we saw the development of co-ops and condominiums, which weren’t there in the early days. I think keep your eye out on tenants in common, TICs. I think we’ll see a number of apartment units in San Francisco being converted to TICs that get taken out by some financing mechanisms. But the more vehicles that we create to provide for homeownership, the better.

Laura Choi:

That’s great. Yes. Lots of room for innovation on this front, so I appreciate that. Okay, another audience question we got was, again, in light of the conversation we’ve had around some of the rising development costs, what are the implications of rising development costs for inclusionary housing requirements and what are some opportunities to address them? I’m sure all of you could weigh in on this, so I’ll open up. Who wants to jump in first?

Alex Mehran, Sr.:

Well, the implications are higher costs.

Laura Choi:

So maybe it’s how do we address this issue?

Alex Mehran, Sr.:

As I said, housing and affordability are two different issues, and the affordability issue is a much more intractable complex problem to be solved than the housing issue. We can solve the housing issue by just streamlining the entitlement process. The affordability issue, just the basic cost of a unit, if you give the land away and you just put sticks and bricks in the air, you still have an expensive unit that’s unaffordable. So how do you solve for that problem? It’s a much more difficult problem. And then you layer on these new things, the fees and the land and everything else, and it’s just a killer.

Elizabeth Kneebone:

And I’ll just offer to that, I feel like part of this also gets back to policy design and what are the goals and intentions of different policies. Because there may be reasons that a locality wants the inclusionary component, wants to see some mixing. There might be some just local policy goal that they’re trying to achieve with that sort of measure as opposed to keeping it separate. But also, the structures that we’ve built to fund affordable housing kind of do push you to this 100% affordable space. It gets hard to make those, as Alex was mentioning, hard to make those deals happen in real life. So even if that’s the policy goal, having the financing structures and the incentives aligned, it feels like there’s still more work and experimentation to be done there to make that more actionable.

Laura Choi:

Great. Thanks for that. Okay. So I want to turn back now to one of our goals for this forum was really to bring these different perspectives together to be in dialogue together. So John and Elizabeth, I want to start with you. We wanted to have researchers and practitioners to really bridge that gap between theory and practice. So what stood out to you from this conversation as you hear about some of the issues that practitioners are facing? What are additional research questions or what additional thoughts does that bring to you as a researcher?

Elizabeth Kneebone:

I think returning to the theme of no silver bullet, just how complex this landscape is. But I think it’s so useful and fruitful to see these really interesting innovative approaches, like office conversion, thinking about the mix, what does it actually take to make these deals pencil, and what are the different tools we can bring to bear? And it has been really striking to see all the movement in the Bay Area, trying to get all of the pieces in place.

So, when I think about research opportunities, it’s figuring out, well, what’s working here that could work in other markets that are like the Bay Area? Are there lessons even for not high-cost markets about how we can pull some of these tools together? I think there’s a real opportunity for that kind of data collection. And thinking about, as we try to scale up or that demand or need to scale up, what different pieces fit where in that continuum to help make that happen?

John Mondragon:

Yeah, I think I’m naturally tending more to the aggregate kind of big picture thing. The thing that keeps jumping out I think is the financing constraint. That financing, just capital, solves a lot of problems and you need some of these other things to move to make that work maybe in the most efficient way or something like that. And so, I think learning a lot more about what those constraints are and how much of an impact they can have in tweaking these different levers is very intriguing to me.

Laura Choi:

Great. And then Alex and Ann, I’m going to flip it a little bit. So for you as practitioners, what’s something that you would want housing researchers to keep in mind, or what’s the research question you would like housing researchers to explore?

Ann Silverberg:

Well, first of all, I think the conversations need to continue. I think that they’re great and I think that the collaboration between research and practice is really, really valuable and useful. I do think that throughout this conversation, it’s been said and re-said that if there’s something we want, we need to have a policy or a program to promote that if the market’s not providing it already. And understanding more about that, do our policies and programs actually achieve what we want them to achieve or are they not? What’s happened, what’s working, what’s not working? But what else can we do to get the outcomes that we need, and we want? And yes, money might be the silver bullet here, money does help, but I do think that it would be helpful to shed a light on that because money is challenging and difficult to get. But if that’s what we need, we need to talk about it, and we need to find a way to bring that to the solution.

I would love, in my lifetime, to know that we have enough money and the programs in place to actually deliver the housing that we need in this state. And I would’ve loved to have said, I’d like that in the next five years, but I’ll just settle for my lifetime. I really feel like we can make that progress, and we need to make that progress. And I’m hopeful, and I think the research is a really important part of that.

Laura Choi:

Thanks, Ann. Alex, how about you?

Alex Mehran, Sr.:

I’ll just add that I think that the real estate business in general, and the home building business in particular, is remarkably Balkanized. And it takes a long time to accomplish objectives because of the disparate voices that are pulling on public policy. And the more that the industry can speak with a single voice, the better off we will be.

When I’m trying to solve a big problem, I always try and use an analogy and so let’s just analogize the home building conundrum that we face today to what the automobile industry faced with pre-auto emission regulations. It took generations to be able to convert our fleet from a polluting fleet to a relatively pollution-free fleet by a number of different mechanisms. And we have to take a long-term perspective in the housing business. We’re incredibly short-term in our view in the industry. It’s been that way from the day Christ was a small boy, and it just is incredibly difficult. And we need to take long-term perspectives to deal with things. I have been an advocate for land use courts. If you go through all the entitlements, and there’s one person in the audience who doesn’t agree with you, they appeal, they appeal, they sue. You’re in litigation, and you’re there for years. We got our first ChatGPT lawsuit the other day.

Laura Choi:

Oh, wow.

Alex Mehran, Sr.:

And so it means anybody can kind of pull up a lawsuit, not have to pay anything, and the guy doesn’t even understand how he can dismiss his suit. So that’s the kind of public you’re dealing with. That just delays things. And so, you need a land use court, so that you can immediately go to that court, get adjudication quickly, and advance. The judge or the panel can say, “This is a legitimate case. It needs to go through the process.” Or “This is illegitimate. It needs to be put aside.” But we need to speed the process up. We need to also look for long-term solutions in terms of finance, in terms of entitlement, in terms of public policy.

Laura Choi:

I want to close on this note about long-term solutions and thinking about the housing market in the long-term. I think that dovetails really nicely with the Fed’s work because we are really focused on the long-term health of the economy. And so thinking about what’s going to get us there over the long term, I think is a really important consideration.

So, I want to close this just first by thanking our panel. Thank you for sharing your expertise, your views with us. I want to thank all of you for joining us. I hope you took away something new from hearing very different perspectives and it gave you a different insight into how you think about your work as it relates to the housing market. And hopefully you learned something about the Federal Reserve’s work in supporting, again, the long-term health of the economy.

If you’re interested in learning more, please feel free to follow us on social media. Sign up for our newsletter. You can scan the QR code there for more information. Again, thank you so much for joining us today. Really appreciate your time.

Summary:

The Federal Reserve Bank of San Francisco draws on local insights to inform monetary policy decisions for the nation. As part of this work, the Bank hosts Regional Conversations – a dynamic forum that brings together researchers, business leaders, and community leaders across the Western U.S. to explore real-world solutions to economic challenges. By bridging theory and practice, Regional Conversations provide on-the-ground perspectives that contribute to the Fed’s work of supporting the nation’s monetary, financial, and payment systems.

On September 23, 2025, the San Francisco Fed hosted a discussion on housing supply and affordability in the Bay Area, featuring insights from Bank researchers and local housing practitioners.

Watch the full recording and learn about the key takeaways from the event:

  • There is no single solution that will deliver the range of housing types and affordability needed in the Bay Area but shifts in policy and innovative approaches in market-rate and affordable housing development point to opportunities for progress.
  • Multifaceted solutions discussed include repurposing office parks, creating a mix of housing types and affordability levels to meet a range of needs, and developing public-private partnerships, especially to help deliver affordable housing options for lower- and middle-income households that the private market alone would not provide.
  • Drawing on a range of perspectives—from practitioners and researchers, with a view toward national trends and local dynamics—is essential to understanding the complex dynamics of the housing market and its implications for the economy overall.

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