> [...], but those might not be expected to appreciate enough to attract their interest.

I don't understand how that is supposed to work. I can see how a restricted housing supply in San Francisco can lead to us reliably anticipating that the prices there in, say, five years, so in 2030, will be high. I'm with you so far.

Also assume that we can reasonably reliably anticipate housing prices in Ohio in 2030.

But if the buyer is smart enough to figure that out, why wouldn't the seller be? For San Francisco's housing prices to _appreciate_ more than those in Ohio, today's seller needs to accept a bigger discount (compared to reliably estimated 2030 prices) for San Francisco real estate than for Ohio real estate. Ie SF housing prices need to be comparatively lower.

Why would the seller be so nice for SF but not for Ohio? Are current SF land owners less interested in money?

By default, current prices (should) anticipate market consensus expectations of future prices.[0]

> People have different levels of risk tolerance, and different resource levels.

Yes, but they all buy and sell in the same market, don't they?

Your hypothetical 'investor' is (A) risk seeking enough to willing invest in single undiversified properties and return seeking enough to go for SF over Ohio (assuming there's more of a return there, I don't know if that's true). And simultaneously (B) risk averse enough to even contemplate having tenants, and uninterested in returns, too, as long as they are barely above government bonds?

What kind of weirdly split personality creature are we dealing with here? (And where can I find them? I suppose I could try and sell them the Brooklyn bridge.)

Are you sure there isn't something else going? Perhaps some other weird law, or perhaps some weird tax dodge (or even status game?) that leads some investors to leave properties empty? What proportion of those properties are even empty? What proportion would we expect from purely profit seeking risk-neutral investors? (That null-hypothesis proportion is most likely less than 0. If even just because of tenants moving in and out.)

> That's assuming you can diversify the risk. If someone wanted to invest in, say, San Francisco real estate, they could diversify across multiple properties, but then they'd all be affected by some new law there preventing evictions.

You can at least buy an SF REIT, so a single bad tenant has less of an influence. And, new laws are unlikely to affect both commercial and residential renters the same way, so you can diversify across that dimension.

Even without tenants, an SF REIT with only empty properties makes more sense for diversification than a single property. After all, tenants and city wide regulations aren't the only thing affecting the prices of a single house.

[0] As a caveat to what I wrote above: if one asset class is considerably more risky than another, we can expect today's buyers to demand / today's sellers to offer a bigger discount on future prices. Ie on average returns on risky assets can in theory be higher. Risk vs reward.

But that explanation doesn't work for the picture of the hypothetical investor you sketched in the rest of your comment.