Yesterday a friend reached out to me. She asked my advice about how to deal with her landlady over a broken bathroom sink. Something snapped and water sprayed out everywhere. Someone was sent by to look at it, turned off the faulty tap, and said they’d be back in a few weeks to fix it. She thought that was an unreasonable response. Why couldn’t the sink be fixed right away? My friend knows I used to be a renter and that I’ve also been a landlord for many years. If you squint I might be described as an impartial moderator with slightly dark pragmatic tendencies. I walked her through her options. None of them were especially satisfying, but she understood the dynamics at work. Then the conversation drifted…
She lives in a spacious first floor flat in a century old duplex in a desirable neighborhood: formal dining room, big living room, high ceilings, bay windows, multiple bedrooms… She’s been there for some time and enjoys the benefit of rent control. Her landlady lives in the flat upstairs. I noticed the back garden has gradually declined from a pristine carefully tended space to something that’s weedy and neglected. The landlady who once prided herself on her beautiful garden is now too old to care for things as she used to. Her son, now of retirement age himself, lives elsewhere and is the reluctant caretaker of the property. When we were done talking about the broken sink I asked my friend where she planned to live after her landlady passed.
So… my friend is well educated, highly paid, well travelled, and in every respect a competent and successful person. But she’s also deeply in denial about her housing situation. Sooner or later her landlady will shuffle off this mortal coil and before her body cools the house will be sold off to the highest bidder. Rent control or no rent control. Tenants rights or no tenants rights. She’s going to be out one way or another. She said she understands she won’t be living there forever. But when I asked about her plan for when the inevitable day arrives I got a long uncomfortable silence. She knows all the alternatives are really bad and she just doesn’t want to think about it.
I had this same exact conversation a couple of years ago with a different friend in a similar situation. She had been living with rent control and various tenant protections for years in a huge flat for very little money. Then her elderly landlady died and the new owners carefully threaded the needle of legal procedures. The simplest option was to pay people to leave. It was a three unit building and each of the three tenants were offered $100,000 to depart voluntarily. But everyone had to sign the papers in unison and move out promptly and on schedule.
Of course, $100,000 isn’t enough money to buy a dog house in San Francisco. It’s not a down payment on anything. At best it’s seed money to help ease the transition to someplace far away. And no one received the full $100,000 anyway. Everyone had lawyers who each got a big slice of the pie and the government taxed the transactions, etc. And in my friend’s case she had been spending a tiny bit more money every month than she had been earning – and she’d been doing that for most of her sixty odd years on earth. Her creditors got whatever was left.
We had a falling out on her last day in the apartment. I was there to help her pack her belongings while contractors and designers were busy measuring the place for renovations. She had a breakdown. I grabbed her by the shoulders and told her to get a grip on herself. She lashed out. I left and we never spoke again. Last I heard she was living in a friend’s spare bedroom in Maine.
Here’s what her old building looks like now. Investors bought it, hired an architect and construction crew, transformed it, and sold off the units to people who paid cash. Each unit sold for between $2M and $3M. The buyers weren’t paying with funds earned from hourly labor. Their money came from capital gains, stock options, and other financialized digits hallucinated from the ether of quantitative easing and zero interest rates.
Okay. Let’s go back to my friend with the broken bathroom sink. The landlady and her late husband bought the property in 1967. As a landlord myself I have a lot of sympathy for the fact that the prevailing market rent is some multiple of what my friend pays. But I appreciate the fact that my friend wouldn’t be living there – or likely anywhere in San Francisco – without rent control since property values and rents are so astronomically high these days.
However, rent control is counterbalanced by Proposition 13. In 1978 (one year earlier then rent control) Prop 13 passed and was enshrined in the California state constitution. From that moment on all property taxes were based on the day a building was purchased rather than the current market value. So my friend’s landlady is still paying property tax as if Jimmy Carter were president. Then in 1986 and again in 1996 California voters passed Propositions 58 and 193 which extended these unnaturally low property taxes to heirs who inherit property. So when my friend’s landlady dies her son will not only own the duplex, but will continue to pay the old 1979 tax rate forever.
Another friend recently purchased a condo for north of $1.8M. It’s a comfortable place in a good location. But that’s a lot of money and reflects the highly constrained market. Her property tax bill is $22,260 a year. That’s $1,855 per month just in taxes. A quick search on the real estate websites valued the duplex with the broken bathroom sink at between $1.8M and $2.2M. So the new condo provides a rough comparison and a glimpse into what the landlady would be paying without Prop 13 protection. It’s highly likely that she’d be forced to sell and either radically downsize or (more likely) leave the city entirely.
Of course, without rent control she’d be able to charge the full market rate for the downstairs flat. Similar units routinely rent for north of $5,000 per month. But there is Prop 13 and there is rent control… Politically neither bits of legislation are going anywhere soon. So both owners and renters are in a death grip to retain what they have at the expense of each other. And new arrivals to the city will continue to absorb all the externalized costs.
What’s the endgame here? San Francisco will experience a series of setbacks over time. There are deep structural problems with the financial markets. It’s a janky house of cards. It can’t continue forever. Sooner or later the underlying mountain of bad debt is going to be defaulted on one way or another and the economy will have no choice but to reset back down to a level that’s in keeping with external reality. That’s going to be a messy and painful process.
The present tech economy is already maturing as all industries do. There was a curve that turned Buffalo, New York from a dynamic innovation hub and the City of Light in 1900 to a sleepy irrelevant backwater. Detroit was the undisputed industrial powerhouse of the world in 1950, but became a semi abandoned husk of its former self. Electricity didn’t go away. Cars didn’t go away. But the mojo always fades. Tech will be no different. It just takes a few decades.
And we’re due for an earthquake. Or more likely according to the ancient geologic record we’re probably going to see a “season” of earthquakes. Instead of one massive Hollywood style event the region will be slowly rattled for thirty or forty years as long pent up pressure is released from the earth’s crust in fits and starts. The cost of repeatedly rebuilding damaged infrastructure and compromised structures will exceed the willingness or ability of people to adapt. History shows it’s easier to move to a better place than fix what’s wrong with a chronically ailing city. Time will tell.
What advice have I offered my friend? She needs to get her ducks in a row ahead of events. She needs to identify the place she wants to live after she moves on. She needs to keep out of debt. She needs reserves on hand to manage threats and opportunities. And she needs to be prepared to navigate the unexpected.