While Oakland's newly elected Mayor appears committed to solutions and learning lessons from places like San Francisco, she is starting the race from behind.

Narratives from landlords and economic data suggest the upside opportunity for builders will remain strong for quite some time.

Oakland, California has become an intense focus of housing market dynamics where renters and buyers desperate for affordability cannot find supply.

"According to city planning data, 11,000 units are in Oakland's construction pipeline, but the city still lags compared to San Francisco. Only 788 units were completed in Oakland last year, with 72 percent of those completions being affordable units that typically require public financing. Another 642 units are currently under construction, with 59 percent being affordable. That means barely any market-rate housing is being built in Oakland." - from "Why Oakland isn't yet the next Brooklyn", February 19, 2015 in the San Francisco Business Times

In 2015, there are three cities that are worse for renters than Manhattan in New York City. All three of these cities are in the San Francisco Bay Area: San Francisco #1, Oakland #2, and San Jose #3. These rankings were compiled by Forbes in "San Francisco Tops Forbes' 2015 List Of Worst Cities For Renters." Oakland represents an important nexus in the affordability and availability problem in the Bay Area. The city is within easy commuting distance of San Francisco and offers much more affordable living, but availability is greatly lacking. Forbes reports that in the fourth quarter of 2014, the vacancy rate in Oakland was worse than San Francisco, 2.9% versus 3.6%, but the average rent in Oakland was much lower at $1,815 (up 10.5% over the previous year) versus $2,802 (second highest among the nation's large metropolitan areas and a 12.8% increase over the previous year). Current residents are of course loathe to move and those desperate to lower their living expenses cannot find the relief that should otherwise be available.

A friend of mine recently wrote about her experience renting out her small apartment next to Lake Merritt in Oakland. She gave me permission to quote her. Her narrative provides a stark example of what happens when pent-up housing demand runs smack into sparse housing supply. I have done some editing for this forum:

"The Oakland rental market? Utterly crazy. For the first time in 4 years, I held a open house for my small apartment and was deluged by calls, emails and more than 40 visitors. At the end of an hour I had 15 applications in hand. Here's what I learned: The Grand Lake area is attracting people from San Francisco, but a surprising number were from Sacramento, Napa, Orange County, New York and Boston. Many, many applicants were in tech with high salaries. Others - grad students, teachers, yoga instructors - also applied. There is such a thing as a competitive renter. They come in with renter resumes - intro letters, written references from landlords, credit reports, bank and income statements in these official binders as if vying for a job. Most of the competitive renters were from SF. SF people are trying to escape a nightmare of astronomical rents - like $2000/room in shared housing and landlords hiking rents by hundreds of dollars. I heard quite a few horror stories. They are willing to do a lot to get out of that. So, a $2200 one bedroom is a steal for them. People are ready to pay 5-6 months rent in advance to get a leg up. Prospective renters from Oakland - trying to relocate from high crime in West Oakland, or noise from North Oakland weren't prepared for the intense competition… I tried to talk to out of towners about the cool diversity and culture of the town. Some got it, but there were a lot of blank stares. It's a new, crueler world. I came to my neighborhood in 1993 after grad school, working a $17K job with kids in San Francisco's Chinatown. The affordable Oakland that was is gone."

My friend's experience was further supported by a recent report on single-family housing in Redfin.com called "Bidding Wars Hit Oakland Amid Tight Supply":

"With too many buyers and too few properties on the market, bidding wars are heating up again. It's particularly bad in Oakland. At the end of January, the city across the bay from San Francisco had only six weeks of inventory remaining…"

Redfin includes a chart showing Oakland last had 6 months of supply at the beginning of 2011; six months is typically considered an indicator of a balanced market. This supply dropped to just over one month by the end of 2012, and it has bounced around this level ever since.

These dynamics are important to keep in mind when interpreting the sales numbers from California which often show rising prices despite sluggish volumes. The chronic lack of supply continues to represent the big opportunity for builders active in the state. These include Lennar (NYSE:LEN) with large development tracts in San Francisco developed through its Lennar Urban brand, Tri Point Homes (NYSE:TPH) with a large concentration in Northern California, D.R. Horton (NYSE:DHI) whose Northern California homes include luxury homes in the hills of Oakland, and even KB Home (NYSE:KBH) which has a large tract south of Oakland in Fremont. Of these, LEN and DHI are the "safer" plays given regional diversification. TPH has the greatest upside potential given its low valuation and high California concentration. I have not yet removed KBH from late October's penalty box but I am watching and hopeful.

The economic fundamentals in he SF Bay Area are strong and drive the pressure on housing: per capita incomes in the Bay Area are at new all-time (nominal) highs, the CPI for renters is on the upward march again - dipping negative for only a brief moment post-recession, and unemployment has returned to pre-recession levels.

Incomes are on the rise again - a fundamental underpinning for strong housing demand

Source: US. Bureau of Economic Analysis, Per Capita Personal Income in San Francisco-Oakland-Fremont, CA (NYSE:MSA) [SANF806PCPI], retrieved from FRED, Federal Reserve Bank of St. Louis, April 18, 2015.

Rents have risen faster in the past, but the current increases have been more relentless than in the past

Source: US. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: Rent of primary residence in San Francisco-Oakland-San Jose, CA (NYSE:CMSA) [CUURA422SEHA], retrieved from FRED, Federal Reserve Bank of St. Louis, April 19, 2015.

Oakland is located in Alameda County where unemployment is now back to pre-recession levels

Source: US. Bureau of Labor Statistics, Unemployment Rate in Alameda County, CA [CAALAM1URN], retrieved from FRED, Federal Reserve Bank of St. Louis, April 19, 2015.

Newly elected mayor of Oakland Libby Schaaf has made housing one of her top priorities. In February, she informally floated the idea of offering Oakland to SF developers looking to meet affordable housing mandates. This is an important idea because an "affordable" home in San Francisco is still about $500,000 based off pricing in Lennar's Hunter's Point development as a reasonable benchmark. In an interview late last year with public television/radio, Schaaf insisted Oakland would not make the same mistakes as San Francisco:

"Schaaf said Oakland has an advantage over San Francisco in keeping housing prices down because it's twice the size with half the population. She also said she would not wait before it's too late to expand the housing supply. "The…mistake that San Francisco made is we are going to be much more aggressive about building new housing so that we can relieve that pressure on our existing housing stock. We have got to stabilize housing prices, and then we've got to use some creative policies that allow affordability to be created where people are already living as opposed to such focus on building new affordable buildings."

Accomplishing that last point on affordability is a bit vague, but the mayor seems to have a good approach: use Oakland's size to increase supply ahead of demand pushing prices to SF-level stratospheres. Clearly though, from my friend's story and others, Schaaf is starting this race from the rear.

From my perspective as a bull on the U.S. housing market, I continue to see the San Francisco Bay Area as a particular hotbed of opportunity. Oakland is just a good example of the intense market dynamics in play with the demand-side literally crying out for practical solutions. This latest pressure on housing supply is still in early stages given the strong economic fundamentals, strong migration and immigration into the area, and the on-going desirability of living in the SF Bay Area (drought issues notwithstanding).

San Francisco looms large over Oakland

Source: Unknown

Disclosure: The author is long TPH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.