Where do the Service Workers In San Francisco Live?
Recently, I was in San Francisco on family business, and I took several taxi rides. Without exception, the drivers voiced the same two complaints: competition from Uber and the high cost of living, particularly the high cost of housing. Some drivers indicated they were throwing in the towel and moving to less expensive metros.
The San Francisco Bay Area is expensive. The median house price is seven times the median family income, one of the highest ratios of house prices to incomes in the U.S. It is not unusual for firms in the Bay Area to lose promising job candidates from other areas after an initial house-hunting trip. The shock of how little house even a high San Francisco salary will buy is too much for some families.
San Francisco isn't the only expensive area in the country. Many of the most desirable metros in the U.S. are among the most expensive housing markets as well. Housing advocates worry about where less-affluent households can afford to live. Even in San Francisco, where the tech industry has driven incomes far above the national average, the metro still needs a full complement of middle-income workers—police, firefighters, schoolteachers, accountants, and the like—in order to function. San Francisco needs lower-income service workers as well—waiters, baristas, janitors, security guards, and on and on. All these people need someplace to live in one of the most expensive areas in the country. So, where do they live? And how well?
How expensive is San Francisco?
The overall cost of living in the San Francisco metro is roughly 50 percent higher than the national average. 1 Food, transportation, health care, entertainment—all are more expensive than the average in the rest of the U.S.
But housing stands out. The median sales price of a home in the U.S. in 2015 was just over $200,000.2 In San Francisco, the median sales price was just over $700,000, more than three times as much. Rents are much higher in San Francisco as well. The median asking rent in 2015 in San Francisco was almost twice the median for the U.S.
Salaries in San Francisco are higher than the U.S. average, offsetting in part the higher cost of living. The median family income in San Francisco in 2015 was $103,237, roughly 50 percent higher than the U.S. median of $68,260.3 Aside from housing, higher incomes in San Francisco appear to more than compensate for the higher cost of living. But, again, housing costs stand out. In 2015, the ratio of the median sales price of a home in San Francisco to the median family income was 6.8, that is, the median home sold for almost seven years of the median family's income. In the U.S. as a whole, the house price/family income ratio was 2.9 in 2015.
"California is a garden of Eden,
A paradise to live in or see.
But, believe it or not, you won’t find it so hot
If you ain’t got the do-re-mi"
Houses (and rents) are expensive in San Francisco, but are they unaffordable? After all, people are living in all those houses and apartments, so they must be able to afford them in some sense. And demand for houses and apartments in the San Francisco metro remains high. At the end of 2015, houses sold in San Francisco typically remained on the market less than a month,4 and the inventory of houses for sale was much lower than the National Association of Realtors’ six month rule of thumb for a balanced market. Additionally, rental vacancy rates in San Francisco have remained below four percent the last few years while the average in the U.S. has ranged from seven to nine percent.5
Affordability is a tricky concept, but a common approach focuses on the ability of middle-income families to purchase the typical home in the area. Specifically, the median family income is compared to the income required to qualify for a standard mortgage6 to purchase the median-priced home. This type of approach highlights the financial challenges faced by the middle class, but doesn’t speak directly to the level of affordability for lower- and higher-income residents.
The National Association of Realtors (NAR) calculates perhaps the best-known housing affordability index (HAI) and HUD publishes the NAR index on its website.7 An HAI value of 100 indicates that a family with the median income has exactly the income required to qualify for a mortgage to buy the median-priced house. Higher values of the index are better. For instance, a value of 120 indicates that the median family income is 20 percent higher than the income required to qualify for a mortgage on the median-priced house.
Exhibit 1 compares the HAI trend in the U.S. to the trend in San Francisco. For the U.S., the HAI dropped below 70 in 1981 when 30-year mortgage rates exceeded 18 percent. As mortgage rates declined following their 1981 peak, affordability increased steadily until the housing crisis in the mid- 2000s. Following the onset of the crisis, affordability spiked driven initially by falling house prices, then later by ultra-low mortgage rates. Today, affordability is near its all-time high. The median family income is more than 60 percent higher than the income required to purchase the median-priced home.
According to this metric, housing has always been much less affordable in San Francisco. The shape of the HAI trend line in San Francisco is roughly similar to the shape of the U.S. line, but the affordability gap has grown over time. In 1981, at the low point of national affordability, the HAI in San Francisco was approximately 40, 29 points below the U.S. The HAI in San Francisco has remained below 100 since and stands today at 72, a full 92 points below the U.S. Ironically, this reading marks a relatively-golden period for middle-class affordability in San Francisco.
Another approach to measuring affordability tracks the cost burden; that is, the share of family income devoted to housing costs. Housing economists traditionally regard a family spending more than 30 percent of income on housing—owning or renting—as cost burdened. A family spending more than 50 percent of income is defined as severely cost burdened.
Exhibit 2 displays the cost burden of the median-income household in nine metros. San Francisco is highlighted. The median family in San Francisco spends 32 percent of its income on housing, putting it near the high end of the distribution.8
Where to live in San Francisco
The metrics discussed above provide a general guide to how affordable—or unaffordable—it is to buy a house or rent an apartment in the San Francisco metro area. However, they don’t identify where to live in the metro area. That decision involves tradeoffs between the cost burden of housing, the time consumed in commuting, and the quality of the neighborhood a family chooses.
Consider the case of a family of four where both spouses have jobs in the city of San Francisco. To minimize commute time and maximize family time, this family may choose to buy a house in the city. House prices are particularly high in the city, so the family is likely to end up with a smaller, older house than they could get in the suburbs, and there almost certainly won’t be the type of yard you’d find in a suburban home. Alternatively, the family may choose to locate in a less, expensive outlying area. Still there are tradeoffs. Areas with high-performing public schools and community amenities like parks, summer youth programs, community swimming pools, etc. are likely to be more expensive than grittier neighborhoods with fewer amenities and perhaps more crime. Choosing among these alternatives is complicated, and families must make difficult trade-offs between the cost burden of housing and the quality of life.
The problem becomes more tractable if we concentrate on just the affordability of different locations. We begin by mapping the spatial distribution of house prices.
The spatial distribution of house prices
Exhibits 3 and 4 display information about the distribution of house prices at the ZIP code level in the San Francisco metro area, an area that includes, not only the city/ county of San Francisco, but four other counties as well: Alameda, Contra Costa, Marin, and San Mateo. The two East Bay counties—Contra Costa and Alameda—are significantly less expensive than the two West Bay counties—San Francisco and San Mateo. Marin County is a little harder to classify, but it is more similar to the West Bay than to the East Bay counties.
Exhibit 4 provides another view of the differences in house prices by county.9 Across the entire San Francisco metro area, median house prices are below $1 million in 104 of the 161 (65 percent) of the ZIP codes. In San Francisco proper, however, median prices are below $1 million in only six of the 25 (24 percent) ZIP codes. It’s even worse than it sounds. Of those six ZIP codes, only three are priced below $900,000. In contrast, median house prices are less than $1 million in 84 percent of the ZIP codes in Contra Costa county and 87 percent of the counties in Alameda County.
Exhibit 5 displays a map of the five counties in the San Francisco metro area. The color of each ZIP code corresponds to the median house price in that ZIP. Lower-priced ZIPs are colored light orange, while more expensive ZIPs are darker orange. Clusters of high-price “hot spots” are apparent in San Francisco, San Mateo, Marin and Contra Costa counties. A band of less-expensive “cool spots” extends up the western edge of Alameda County through Oakland. A second band of less-expensive ZIP codes runs along the northern and eastern borders of Contra Costa.
In many metros, house prices drop the farther the distance to the central business district (CBD). That distance can be measured in miles or in commute time. Intuitively, homeowners are willing to endure a longer commute in order to live in a nicer house and nicer neighborhood.
San Francisco is not entirely typical in this regard. It’s true that some of the less expensive areas can be found in the more distant reaches of Contra Costa County. And house prices in Contra Costa County drop by almost $8,000 for each mile further they are from the CBD in San Francisco, just as theory would predict. But the relationship is reversed in San Mateo County. House prices increase by almost $20,000 for each mile further from San Francisco.
It turns out there is more than one CBD in metros like San Francisco. San Mateo County lies in “tech heaven,” with San Francisco and its start-ups to the north and Santa Clara County (read “Silicon Valley”) to the south. San Mateo County is no slouch either. Google was incorporated in a garage in Menlo Park in San Mateo County. A San Mateo County ZIP code distant from the CBD in San Francisco might be only a couple of minutes from Infinite Loop, the ring road around the Apple campus in Cupertino, CA.
The spatial distribution of affordability
We can combine information about ZIP-level median family income with the house price data discussed above to calculate ZIP-level housing affordability indices (HAIs). Exhibit 6 maps these ZIP-level HAIs for the San Francisco metro area.
Recall that an HAI of 100 indicates that the median family income is exactly equal to the income required to qualify for a mortgage for the median-priced house. Higher (lower) index numbers indicate greater (lesser) affordability. By this measure, 23 percent of the ZIP codes in the San Francisco metro area are affordable for the median-income family living in those ZIP codes. However, in San Francisco, San Mateo, and Marin counties, there are no affordable ZIP codes; those counties appear entirely in shades of dark orange in the map. Fifteen ZIP codes (32 percent) in Alameda County and 22 ZIP codes (58 percent) in Contra Costa County are affordable—thus the many light orange areas in those two counties in the map.
If you’ve compared Exhibit 6 to Exhibit 5, you’re probably wondering why the more affluent households all live in unaffordable ZIP codes?10 It turns out that this pattern is not specific to the San Francisco metro—it’s a common relationship across the country. One reason for this phenomenon is the nature of the HAI calculation—it looks only at income and ignores wealth. Higher-income households tend also to be wealthier households. In other words, they don’t depend so much on current income to cover their housing costs.11
How does San Francisco compare to an average metro?
The map of ZIP-level HAIs in Exhibit 6 demonstrates that the high salaries in the San Francisco metro aren’t keeping up with the high house prices in the area. As a comparison, consider the Kansas City metro area, an area with incomes just a bit higher than the U.S. average. Exhibit 7 compares the distribution of family incomes in San Francisco to the distribution in Kansas City. Median family income in San Francisco is 32 percent higher than in Kansas City. But median house prices in San Francisco are 262 percent higher than in Kansas City.
Exhibit 8 displays the ZIP-level HAIs for the Kansas City metro area. Almost the entire map is light orange—in all but three ZIP codes, the median-income family can qualify for a mortgage to buy the median-priced home (HAI>100). Family incomes and house prices are in better balance in Kansas City than in San Francisco. Even ZIP codes close to the central business district of Kansas City are affordable by this measure.
Where do the service workers live?
So far, we’ve concentrated on the affordability of each ZIP code in the San Francisco metro area for the median-income family in each ZIP. But service workers—with lower than- average incomes—also need to find someplace to live.12
Despite the high cost of living in San Francisco, the share of service workers in the San Francisco area is similar to the share in Kansas City and in the U.S.
Family incomes of service workers are higher in San Francisco than elsewhere, as expected, but the difference is smaller for service workers than for middle-income families. Median family income in San Francisco is 52 percent higher than in the U.S. Median servicer worker family income is only 19 percent higher in San Francisco than in the U.S.13
Calculating ZIP-level affordability is more challenging for families headed by service workers than for middle-income families. ZIP-level income for service workers is not readily available. Moreover, it doesn’t make sense to compare service worker family income to the median-price home. For instance, in the San Francisco metro area, there are no ZIP codes where the median-priced house is affordable to a family with the metro-level median service worker family income.14
To get a rough idea of affordability for service workers, we first calculated the house price that would produce an HAI of exactly 100 for the median income of a family headed by a service worker. In San Francisco, that income was $52,000 in 2015. With that income, a house price of $276,000 produces an HAI of exactly 100. Next we calculated the share of houses in each ZIP code that are priced at or below $276,000.15 That defines the affordable pool of houses for families headed by service workers.
Exhibit 10 maps the share of service worker- affordable houses in each ZIP code. Not surprisingly, Exhibit 10 looks similar to Exhibits 5 and 6. Areas with relatively high median house prices tend to have few houses affordable to families headed by service workers.
Some ZIPs have no houses that are affordable to service workers. Exhibit 11 lists the percentage of ZIPs in each county with no service-worker-affordable houses. Almost half (42 percent) of the ZIP codes in Marin County have no affordable houses for service workers. As usual, Alameda and Contra Costa counties are more affordable than the other three counties.
But where do the service workers actually live? Exhibit 12 displays the ZIP-level shares of service workers. For the most part, the share of service workers in a ZIP increases with the share of houses that are affordable for service workers. But some service workers also live in ZIP codes that don’t appear to have any service-worker-affordable houses. On average, service workers comprise 15 percent of the working population in the “unaffordable” ZIPs. Marin, San Francisco, and San Mateo counties have unaffordable ZIP codes where more than 20 percent of the workers are service workers.