City’s ‘miss­ing mid­dle’ squeezes home buy­ers

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Trevor McNeil and Sarah Mon­toya, both 35, would love to buy a home in San Fran­cisco, but like many young cou­ples, they make too much money to qual­ify for a be­low­mar­ket-rate unit and too lit­tle to af­ford a mar­ket-rate one.

So for now, they are stuck in their one-bed­room, third-floor walk-up apart­ment in the Sun­set Dis­trict, with twin boys who were born in Jan­uary and a 2-year old girl. When one is cry­ing, it’s hard to get the others to sleep, but the hard­est part is tak­ing the kids out. Their land­lady won’t al­low strollers in the lobby, so they have to lug a dou­ble and a sin­gle up and down two flights of stairs or put their daugh­ter on a leash — some­thing Mon­toya thought she’d never do.

Hous­ing is ex­pen­sive for every­one in the Bay Area, but it’s es­pe­cially chal­leng­ing for mid­dle-in­come buy­ers. Most new sup­ply is at the high or low end. The gap in be­tween is of­ten called “the miss­ing mid­dle.”

Be­tween 2007 and 2015 in the nine Bay Area coun­ties, per­mits were is­sued for a to­tal of 27,451 units (rental and for sale) for low- and very-low in­come peo­ple mak­ing up to 80 per­cent of each area’s me­dian in­come, ac­cord­ing to data from the As­so­ci­a­tion of Bay Area Gov­ern­ments. These are gen­er­ally deed-re­stricted units with in­come lim­its.

By com­par­i­son, the re­gion per­mit­ted 13,164 units that peo­ple mak­ing 80 to 120 per­cent of area me­dian in­come the­o­ret­i­cally could af­ford. And 110,159 units for peo­ple mak­ing more than 120 per­cent of me­dian in­come re­ceived per­mits.

In San Fran­cisco, low­er­in­come peo­ple who have not owned a home in the past three years, at­tend a home buyer’s work­shop and get coun­sel­ing at an ap­proved agency can en­ter a lot­tery to pur­chase a be­low­mar­ket rate unit through the mayor’s in­clu­sion­ary own­er­ship pro­gram. The in­come limit varies by unit, but buy­ers gen­er­ally can’t earn more than 100 per­cent of the area’s me­dian in­come for their house­hold size. The San Fran­cisco me­dian is $103,750 for three peo­ple or $124,500 for five.

McNeil and Mon­toya didn’t qual­ify for a be­low-mar­ket-rate unit in the past be­cause both were work­ing. McNeil earns a lit­tle un­der $100,000 a year teach­ing mid­dle school in Menlo Park.

They thought they’d qual­ify this year be­cause Mon­toya quit her job as a hos­pi­tal chap­lain to watch the kids. But when the cou­ple went for coun­sel­ing, they were told they still wouldn’t qual­ify be­cause the city would av­er­age Mon­toya’s past earn­ings and in­clude it in this year’s in­come.

The Mayor’s Of­fice of Hous­ing and Com­mu­nity De­vel­op­ment said it cal­cu­lates in­come three ways and uses which­ever is high­est. One is to add the house­hold’s gross in­come from the two most re­cent in­come tax re­turns and di­vide by two. This would put the cou­ple over the limit, be­cause Mon­toya’s in­come for the past two years av­er­aged $60,000.

The cou­ple looked into get­ting a Pop­py­loan, which of­fers up to 100 per­cent fi­nanc­ing, from San Fran­cisco Fed­eral Credit Union. But they both have stu­dent debt, and the most they could bor­row with their cur­rent in­come was $600,000, and that would have re­quired them to cash in their re­tire­ment ac­counts for a $50,000 down pay­ment, McNeil said.

In San Fran­cisco, where the me­dian list price is around $1,000 per square foot, that might buy a 650-square-foot house — no big­ger than what they have now. McNeil’s fa­ther of­fered to co-sign a loan, but the credit union won’t al­low cosign­ers who don’t live in the house.

If Mon­toya was work­ing, they could buy a larger house, she said, but then they couldn’t af­ford day care, which runs around $1,500 per child per month at the cen­ter her daugh­ter at­tended.

The cou­ple has not con­sid­ered mov­ing out­side of San Fran­cisco. “My wife’s world is her com­mu­nity,” McNeil said. Liv­ing in their one-bed­room unit “is frus­trat­ing and un­sus­tain­able, but we know how lucky we are to even have a home, not to men­tion a good­pay­ing job,” he added.

Maria Ben­jamin, who runs the city’s in­clu­sion­ary own­er­ship pro­gram, said ap­pli­cants should pro­vide as much in­for­ma­tion as pos­si­ble about their in­di­vid­ual cir­cum­stances. “Ex­cep­tional life oc­cur­rences hap­pen and when they do they are con­sid­ered by staff on a case-by-case ba­sis,” she said in an email.

Most Bay Area cities have in­clu­sion­ary hous­ing pro­grams that re­quire de­vel­op­ers to set aside a cer­tain per­cent­age of units for lower-in­come buy­ers — or pay a fee that cities can use for af­ford­able hous­ing else­where. For rental hous­ing, they can charge an im­pact fee, based on the project’s size, to be used for sub­si­dized hous­ing else­where.

Lo­cal, state and fed­eral funds are also avail­able for hous­ing de­vel­op­ment, al­though state fund­ing was cut way back when Cal­i­for­nia dis­solved its re­de­vel­op­ment agen­cies, said Gil­lian Adams, prin­ci­pal plan­ner with the As­so­ci­a­tion of Bay Area Gov­ern­ments.

“The cost of build­ing an in­clu­sion­ary unit is the same as build­ing a mar­ket-rate unit. But if you sell them at a lower rate, in or­der for the build­ing to make eco­nomic sense, those costs have to be passed onto the mar­ket-rate units, which make those fur­ther out of reach for mid­dle-in­come buy­ers,” said Matt Re­gan, a se­nior vice pres­i­dent with the Bay Area Coun­cil, which rep­re­sents busi­ness.

In most eras, in most cities, mid­dle-class hous­ing is cre­ated through a process econ­o­mists call fil­ter­ing.

“Take a place like Dal­las; it’s grow­ing rapidly,” said Christo­pher Thorn­berg, founder of Bea­con Eco­nomics. “What do Texas home builders build? They build high-end apart­ments, high-end homes. All these high-in­come peo­ple move into the high-end hous­ing. Up­per-mid­dle-class peo­ple move into the hous­ing they moved out of, and mid­dle-in­come peo­ple move into the hous­ing up­per-mid­dle-in­come peo­ple moved out of.”

But fil­ter­ing only works if you have lots of new con­struc­tion. “Nowhere in Cal­i­for­nia is there lots of new con­struc­tion,” said Richard Green, chair­man of the Lusk Cen­ter for Real Es­tate at the Univer­sity of South­ern Cal­i­for­nia. “That’s why you are not get­ting the fil­ter­ing ef­fect.”

Cal­i­for­nia’s fail­ure to cre­ate enough hous­ing to keep up with pop­u­la­tion growth has been well doc­u­mented. The Leg­isla­tive An­a­lyst’s of­fice, in a 2015 re­port, blamed the short­age in coastal cities on “com­mu­nity re­sis­tance to hous­ing, en­vi­ron­men­tal poli­cies, lack of fis­cal in­cen­tives for lo­cal gov­ern­ments to ap­prove hous­ing” and high land and con­struc­tion costs.

In the Bay Area, “We have cre­ated 540,000 jobs and ap­proved 123,000 (new hous­ing) units since 2011. For prices to be sta­ble, we should have cre­ated one new hous­ing unit for every 1.5 new jobs, or a to­tal of 360,000 units,” said Paul Ni­eto, chair­man of the Build­ing In­dus­try As­so­ci­a­tion of the Bay Area.

One-fourth to one-third of the cost of hous­ing con­struc­tion in the Bay Area is the re­sult of “dis­cre­tionary de­ci­sions of gov­ern­ment,” Re­gan said. This in­cludes strin­gent earth­quake, health and safety, dis­abil­ity ac­cess, en­ergy-ef­fi­ciency and other build­ing code re­quire­ments. “All, on their in­di­vid­ual mer­its, are ad­mirable things so­ci­ety should as­pire to. But we put all those costs onto the con­struc­tion of new units.”

It also in­cludes im­pact fees de­vel­op­ers must pay for fire, po­lice, wa­ter, sewer, schools, trans­porta­tion, parks, li­braries and other ser­vices. These fees can add an av­er­age of $100,000 per unit, Re­gan said.

These fees are partly a re­sult of Propo­si­tion 13, which gen­er­ally lim­its prop­erty tax in­creases to 2 per­cent a year un­til a prop­erty is sold and can be re­asss­esed. “The legacy of Prop. 13 is that ex­ist­ing home­own­ers do not pay their fair share for the needs of their com­mu­ni­ties,” Re­gan said. “So it tends to be the last per­son in the door, the new renter or pur­chaser, who pays for most of the needs of the com­mu­ni­ties.”

Prop. 13 has also en­cour­aged some cities to fa­vor com­mer­cial de­vel­op­ment over hous­ing, be­cause new stores and of­fice build­ings gen­er­ate taxes with­out hav­ing to pro­vide for the needs of new res­i­dents, said Cyn­thia Kroll, ABAG’s chief econ­o­mist.

Thorn­berg said the way to pro­vide more mid­dle-class hous­ing is to pro­vide in­cen­tives for the pri­vate sec­tor “to build way more hous­ing than they are now. Even if it’s all high­end, that’s OK,” be­cause it will trickle down to the mid­dle class.

Abol­ish­ing Prop. 13, eas­ing en­vi­ron­men­tal and other reg­u­la­tions, re­duc­ing im­pact fees and union-la­bor re­quire­ments could en­cour­age new hous­ing, but none of those steps would be easy.

In San Fran­cisco, where only 12 per­cent of house­holds can af­ford a me­dian-price home, su­per­vi­sors re­cently passed Home-SF, a vol­un­tary pro­gram that will let de­vel­op­ers build taller, denser build­ings if they make 30 per­cent of units avail­able to low- and mid­dle-in­come house­holds. The city also has a down-pay­ment as­sis­tance pro­gram for buy­ers earn­ing up to 175 per­cent of the me­dian in­come, al­though funds are lim­ited and this year’s ap­pli­ca­tion dead­line has passed.

A pair of state laws that took ef­fect in Jan­uary are de­signed to en­cour­age home­own­ers to add a sec­ond unit to their prop­erty, which is an­other way to add lower-cost hous­ing.

What can mid­dle-in­come buy­ers do now? One thing is to look out­side the high-price cities. “San Le­an­dro is sup­posed to be a re­ally nice fam­ily com­mu­nity. There are many other com­mu­ni­ties that are not San Fran­cisco but have more com­mu­nity char­ac­ter than the newer de­vel­op­ments,” Kroll said. An­other is to “buy a big­ger place and take in ten­ants.”

Amy Os­borne / Spe­cial to The Chron­i­cle

Trevor McNeil gets his twins, 8 months, ready for bed. He and wife, Sarah Mon­toya, also have a 2-year-old.

Photos by Amy Os­borne / Spe­cial to The Chron­i­cle

Top: Sarah Mon­toya and hus­band Trevor McNeil im­pro­vise at din­ner­time in their cramped kitchen, where Mon­toya helps their 2-year-old daugh­ter and McNeil tends to the cou­ple’s 8-month-old twin boys. Above: McNeil reads a book about San Fran­cisco to his daugh­ter. The cou­ple, who make too much to qual­ify for low-in­come hous­ing but can’t af­ford homes in San Fran­cisco, don’t want to leave the city.

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