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New housing bubble in Silicon Valley is a Fraud

By Patrick   Follow   Thu, 7 Jul 2011, 7:34pm   8,553 views   34 comments
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The supposed "new housing bubble" in Silicon Valley just does not stand up to close examination.

If we consider asking prices in 33 of the richest zip codes in Silicon Valley over the last year and a half, there is at best a bump around May of this year, and a very short spike more recently:

The graph is rather noisy because it is daily average asking price. Very high and very low prices can make it spike or plummet for the day, but at least I don't lose any data this way.

Here are the zip codes I used and the corresponding cities:

94022 94024 94025 94040 94041 94043 94085 94086 94087 94089 94301 94303 94306 94536 94538 94539 94555 95014 95030 95032 95033 95050 95051 95054 95070 95121 95129 95131 95132 95133 95135 95138 95148

Cupertino
Evergreen in San Jose
Fremont
Los Altos
Los Gatos
Menlo Park
Mountain View
North Valley in San Jose
Palo Alto
Santa Clara
Saratoga
Sunnyvale

This gave me a total of 28,268 asking prices which I used to generate the graph. The data is from my What's It Really Worth? real estate data service.

Most Liked Comments

1. corntrollio Follow Befriend (5) 27 threads 2,073 comments

   1   11:45am Fri 8 Jul 2011   Share   Quote   Permalink   Like (2)   Dislike (1)   mdovell says especially since many of the new companies aren't even located in Silicon Valley (google is in cambridge ma), linked in is in santa monica etc Are you serious? Google is not based in Cambridge, nor is it a new company. The GooglePlex is in Mountain View, CA (and the company was founded in Menlo Park, CA. LinkedIn was founded in Santa Monica (actual quote from LinkedIn's website: "LinkedIn started out in the living room of co-founder Reid Hoffman in 2002."), but is now based in Mountain View. Pandora is based in Oakland, not Silicon Valley. Groupon is Chicago. Zynga is SF. Twitter is SF. Facebook is Palo Alto, but is moving to Menlo Park.

2. Austinhousingbubble Follow Befriend 7 threads 677 comments

   2   10:37pm Sun 10 Jul 2011   Share   Quote   Permalink   Like (1)   Dislike   Solid houses from the 1990s up in the Shaver Lake area were in the low $300,000s then, they're still in the $600,000s now, e.g.: Yeah, but this has way more to do with price propaganda (the manufacture through aggressive marketing of what the 'going price' for something should be) which is helped by the various price supports still presently in place more than it has to do with real supply/demand. In any event, the asking price for the house you linked to is down 100K from where it was when they purchased 2 years ago. You are watching a pot boil...give it 8-10 years.

3. Robber Baron Elite Scum Follow Befriend (3) 48 threads 480 comments Roslyn, NY

   3   7:47pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   Sucker's bull rally. lol It's happening in a lot of markets. Heck - it's even happened in stocks since 2009 low.

4. ¥ Follow Befriend 35 threads 5,700 comments Bellingham, WA

   4   8:01pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   that's what about zillow is showing for 94022, flat for the year, but heading up in this selling season. Down from the bubble values. but still at 2003-2004 valuation.

5. Done! Follow Befriend (4) 159 threads 2,826 comments

   5   9:02pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   Oh sure and the other Bubble was on the up and up. :P

6. ducsingle5313 Follow Befriend 4 threads 206 comments Redwood City, CA

   6   10:27pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   Those news articles were idiotic and misleading. Irrational valuations for recent IPOs (linkedin.com, etc.) do not result in a large number of folks flush with cash shopping for new digs because only a very small number of people actually make money on those deals. It's not like you have to offer stock grants and/or options to rank and file employees when unemployment is above 10% in Silicon Valley. Not to mention most of the folks who benefit the most from those deals already have nice houses in desirable neighborhoods and aren't particularly interested in moving.

7. Cvoc13 Follow Befriend (9) 6 threads 194 comments Dublin, CA Cvoc13's website

   7   10:41pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   There is likely to be a bump up, due to the upcoming Big"Book" IPO and the recent IPO's in tech. But that flood of money will largely only affect the ultra high end then when the next phase of the financial crisis, it will find its natural level.

8. thomas.wong1986 Follow Befriend 16 threads 4,426 comments

   8   11:51pm Thu 7 Jul 2011   Share   Quote   Permalink   Like   Dislike   ducsingle5313 says Irrational valuations for recent IPOs (linkedin.com, etc.) do not result in a large number of folks flush with cash shopping for new digs because only a very small number of people actually make money on those deals. Can happen because it has happened before, 1998-2000. Question is who is willing to depart with their savings and hand it over to these share holders. But so far Linkedin options holder is much smaller population. Some 4-5 officers hold the majority. Today vs, back in the day, options are expensed and due to the stock option scandal, back dating, controls and awards are much more restricted than in the past. http://en.wikipedia.org/wiki/Options_backdating#Overview_of_options_backdating_scandals

9. rubyrae Follow Befriend (1) 39 comments

   9   5:50am Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   I live on the East Coast (MA). The pricing is still very high. Our assessment are done two years out. So an assessment for 2011 is really based on 2009 values. Almost all homes I see have an asking price dead on their assessment value for 2011 which is really what their home was worth in 2009. Now the market has gone down considerably but we are not seeing that reflected in the pricing. Even more disheartening is that the brokers know that these values are two years out, so why are they over-inflating the prices?? I've been sitting on a chunk of money and would like to buy but not at these prices.

10. StoutFiles Follow Befriend (1) 24 threads 557 comments

    10   6:53am Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   But Patrick, if we don't buy now we could be priced out forever!

11. bubblesitter Follow Befriend (5) 10 threads 2,329 comments

    11   1:36pm Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   APOCALYPSEFUCK is really Iwog says But those 1 billion RICH Chinese and Indians, haven't they been showing up with 55 gallon drums filled with cash and fighting with each other on the lawns of valley homes, running up the prices of every 3/2 on the market? Cool. So you think you are Iwog now?

12. Jim in San Marcos Follow Befriend 1 comments San Marcos, CA Jim in San Marcos's website

    12   2:34pm Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   Hi Patrick One thing you need to take into account, is that rich people buy houses without regard to the economy. The wage earners drop out of the buying in a bad economy. At that point you have nothing but high price homes selling and no low price homes in the mix to bring the average down. The net result gives the appeareance of rising home prices.

13. Misstrial Follow Befriend 243 comments Cupertino, CA

    13   2:54pm Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   Jim in San Marcos says Hi Patrick One thing you need to take into account, is that rich people buy houses without regard to the economy. The wage earners drop out of the buying in a bad economy. At that point you have nothing but high price homes selling and no low price homes in the mix to bring the average down. The net result gives the appeareance of rising home prices. I agree with this, however even in Los Altos, prices have been coming down for over 2 years now - my landlord being a prime example whose residence has fallen over $800k in value. ~Misstrial

14. corntrollio Follow Befriend (5) 27 threads 2,073 comments

    14   3:00pm Fri 8 Jul 2011   Share   Quote   Permalink   Like   Dislike   Jim in San Marcos says At that point you have nothing but high price homes selling and no low price homes in the mix to bring the average down. The net result gives the appeareance of rising home prices. Yes, mix always matters. It is hard to isolate mix without looking at same-house sales like Case-Shiller does. Mix is why medians can show something different than what's really happening. Median data isn't really granular enough.

15. corntrollio Follow Befriend (5) 27 threads 2,073 comments

    15   3:24pm Fri 8 Jul 2011   Share   Quote   Permalink   Like (1)   Dislike (1)   Patrick says What does Case-Shiller say about Silicon Valley lately? I think the "SF" for the 20-city data is SF MSA (5-county), which wouldn't include Santa Clara County, since that's SJ MSA. However, I know the data is available, as First Republic uses it for the "Prestige Index" -- they use an 8-county Bay Area (Alameda, Contra Costa, Marin, Napa, Sonoma, San Francisco, San Mateo, Santa Clara): San Francisco Bay Area properties include a cross-section of luxury homes in Alamo, Atherton, Belvedere, Danville, Healdsburg, Hillsborough, Lafayette, Los Altos, Los Gatos, Mill Valley, Moraga, Orinda, Palo Alto, Piedmont, Portola Valley, Ross, St. Helena, San Francisco, Saratoga, Sonoma, Tiburon and Woodside. I referenced this index earlier on a post where I pointed out that Bay Area ultra high-end prices are back to 2000 when indexed for inflation.

16. SJ Follow Befriend 16 threads 157 comments

    16   6:58pm Sun 10 Jul 2011   Share   Quote   Permalink   Like   Dislike   Yeah housing prices in SV are still way out of wack with reality. I walked around Mountain View today and saw an open house where the seller wanted 900k for a small 3 bedroom 1 bath old home with 1 car garage and tiny yard. Renting is WAY cheaper than buying now.

17. ¥ Follow Befriend 35 threads 5,700 comments Bellingham, WA

    17   7:15pm Sun 10 Jul 2011   Share   Quote   Permalink   Like   Dislike   Renting is WAY cheaper than buying now. $900,000 loan 20% down 4.25% = $3200/mo carrying cost starting out: Interest & Property Tax (less tax credit): $2259/mo Ins, Utils, Maintenance, Opportunity cost = ~$900/mo Over 30 years: Total interest paid (net tax credit): $360,000 Total property tax paid (net tax): $220,000 Total other costs: $164,250 Total cost of ownership: $743,000 Average cost of ownership: $2100/mo What are rents going to be in 2020? 2030? Higher or lower than $2100? When you pay $900,000 that's what you're locking your housing expense at (not counting the opportunity costs). People can get 5/1 ARMs at 3.25% rates now, and if they pay them off in 10 their interest expense can be rather small.

18. SJ Follow Befriend 16 threads 157 comments

    18   8:39pm Sun 10 Jul 2011   Share   Quote   Permalink   Like   Dislike   Troy, You forgot to take into account that I can invest the down payment on 900k which would be $180k into different investments to keep up with inflation. As for rents going up, salaries must also go up otherwise rents will remain flat. Rents were not much less 10 years ago in Silicon Valley. Not to mention the added repair costs and time to spend fixing the house. I value free time outside of work to travel, exercise and do things besides fixing the house. Everyone I know who owns spends all their free time and money fixing or repairing something in their home! I can still get a business tax break for using part of the rental as a home office so the mortgage deduction really is not that big of a deal. If I were to buy, either bay area real estate must drop or I will eventually buy in a cheap place like Texas, Arizona, or Florida and relocate/transfer for job or find one there.

19. Austinhousingbubble Follow Befriend 7 threads 677 comments

    19   9:15pm Sun 10 Jul 2011   Share   Quote   Permalink   Like   Dislike   Troy -- I always like your posts, but trying to get a bead on your thinking sometimes is like trying to bite down on a tomato seed. Are you just playing devil's advocate, or are you somehow trying to convince yourself that life with only one kidney really isn't as bad as people make out? Framing opportunity costs in parenthesis like you have here seriously downplays things. Right off the bat, you've sunk nearly 200K in liquid cash (which you'll never ever see again) into a modest SFH. From an investment perspective, you'd be better off buying a copy of Spider Man # 1 or an Abraham Lincoln toenail clipping or putting a down payment on a Stradivarius, or even just starting a small business somewhere. If the big idea is to lock in living costs, you could try to figure out how many durable and consumer dry goods you will need to replace over the coming three decades and lock those in, too; 200K will buy you more tube socks and Ivory soap today than it will in 2041. BTW I'd take the rent vs own idea one step further: it is MUCH cheaper to buy a Southwest ticket and visit whatever part of California it is that makes your heartstrings zing, and then retreat back from the Twilight Zone once you've had your fill. I've never lived in California, but I'm there for one reason or another about half a dozen times a year and this sampling is more than ample enough for imbuing my sensibilities with just enough of the good stuff that California has to offer -- which is mostly its' coastline and its' architecture. RE: 5/1 ARMS: This assumes a buyer's financial standing remains at least at parity for the first ten years: No personal scandals; no divorces; no deaths; no illnesses; no pay cuts; no job losses; no economic downturns...bascially, no allowance for chaos. This strikes me as quite a gamble.

20. thomas.wong1986 Follow Befriend 16 threads 4,426 comments

    20   10:36pm Sun 10 Jul 2011   Share   Quote   Permalink   Like   Dislike   Troy says People buy in PA to work in SV, where all the jobs are. People live all around Santa Clara County and work in SV. Where you work during your career, isnt predictable. It may be PA or Fremont or down to South San Jose. In my three decades, I never worked/lived in PA, did I miss something ?