Courtesy of Alex Harrowell, here is an interview Larry Page gave to the Financial Times. The interview is full of a lot of blather and show Page’s resolute determination to avoid thinking about the negative consequences of technological unemployment. Most of the interview should make you a little angry, even if you agree with his contention that there is not enough innovation around making cheaper goods and physical services.
But not all of the interview is content-free. At one point, Mr. Page says: “Even more than technology, he puts this down to policy changes needed to make land more readily available for construction. Rather than exceeding $1m, there’s no reason why the median home in Palo Alto, in the heart of Silicon Valley, shouldn’t cost $50,000, he says.”
Alex asks, “Does anyone know what Larry Page means by this?” In comments, Alex adds, rightly, “He’s [Larry Page] confusing incremental and order-of-magnitude changes, which is actually a very un-codery thing to do.”
That’s true, but Page isn’t being crazy. He’s off-base, likely by a factor of two, but acceptably so for an offhand comment in a general interview. Consider:
Imagine the city allowed as-right floor-area-ratios above ten for the whole city, with no setbacks other than the sidewalk right-of-way and no parking requirements. Multifamily 4-7 story housing in the less-regulated parts of the Sunbelt costs about $150 per square foot. In suburban Miami, basic modular construction (no frills, but in code) can go as low as $100. The reason construction costs are higher in California is not fully understood but much is due to the cost of planning delays — you need to line up financing in order to get a building permit. The more uncertain the planning, the higher the costs. So also imagine that the planning delays were gone.
In Brooklyn in the 1980s the Nehemiah Housing fund put up 1150-square-foot rowhouse for a cost (in 2013 dollars adjusted using the average wage index) of $93,100 ... that’s about $81 per square-foot for a block-long row of small homes. That gets you a small apartment for $50,000; one upstairs and one downstairs. Later houses went up in Brooklyn for about $110 which is the ballpark for the $133 all-in unsubsidized cost for housing that went up in East New York in 2009.
Assuming a cost of $150 gets you a 300-square-foot efficiency for $50,000. (At $81 you get 625.) You could push the cost down to $80 by building to five stories and eliminating elevator requirements. For example, I was a teenager in a 670-square-foot three-bedroom one-bath apartment in a Manhattan walkup. You could build a similar unit pretty cheaply today. It would just happen to be illegal.
Land costs are an issue for Palo Alto and there are overhead costs. Land runs north of $3.9 million per acre, or $90 per square foot. Google bought land for $75 per square foot. At a floor-area-ratio of five (e.g., five-story buildings covering the entire lot) that’s about $18 per square foot of interior space. And then there’s financing, sales cost, and profit … that will boost costs by 24% above development costs.
The total comes to $80 (construction) + $18 (land) + $23 (overhead) = $119 … or one small 420 square foot efficiency for $50,000. Assumes external staircases and corridors. Not a pretty building, no, but remotely possible.
Now, I doubt that there’s enough demand to cover downtown Palo Alto with cheap five-story modular walk-ups filled with tiny efficiency apartments. So the claim that average costs in Palo Alto should be $50,000 is silly. But the claim that you should be able to buy an efficiency for $50,000 within a short commute is not. And you could cover Palo Alto with East New York-style rowhouses at a cost of $264,000 per unit for two 800-square foot units, including land. ($207,000 for the 2,321 square-foot lots; $133 per square foot construction for 1,640 square feet of building; 24% overhead.) Not bad. Hell, not bad at double that cost and maybe even doable for $202,000 at $80 construction cost and half the profit margin.
Eventually you can build this:
Which would look like this as you sped past on Highway 101 in your robocar:
That is completely awesome! I would live a couple blocks from that. Wait, I live Friendship Heights in D.C. near the city line with a certain part of Bethesda ... I do live a couple blocks from that! Too bad the local governments keep the development bottled up even where I live.
Am I wrong? Did I make a math mistake? If not, a cheap Bay Area is possible! Hell, it’s easy. $50,000 efficiencies, here we come!
But I am a pessimist and doubt that it will ever happen. No two-story rowhouses, no five-story buildings. Be prepared for America’s first gilded metro area!