Why prices will continue to fall in the Bay Area/Peninsula
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2010 Dec 1, 3:48am 37,975 views 144 comments
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Trivial
2010 Dec 1, 4:22am
you are forgetting the rest of the high paying jobs in medical and financial sectors
your analysis has some truth but it is still far from accurate
Why are you assuming an average income household should be able to afford a average family SFH?
There are other options, like condos and apartments, which can be much cheaper than SFH.
Maybe I missed something, but why are you assuming a $600k mortgage for a $600k starter house? Many people on the Peninsula have at least 20% to put down.
FortWayne
2010 Dec 1, 6:24am
"you can have 2 people making the mean wage($60k+$60k=$120k); or one person making a high wage(at $120k) to afford a $600k mortgage. although they’ll be paying 50% of their net take home for the mortgage+taxes."
That actually would not be affordable. The formula is Income x 3. Not income x 5. So yes, there is quite a long way down still.
I rarely see any transactions closing with a 20% down. The norm seems to be 40%+ down payment. Every transaction I look at usually involves a down payment with several hundred thousands of dollars. Appears the folks that got priced out, and lived at home for all these years saved up a pretty penny.
I also have not seen anyone get foreclosed on that needs pity. They usually walk away with several hundred thousands of dollars in equity. Worse case scenario is they paid 0% down, made some payments, and lose the house.
So there's a whole lot of people with several hundred thousands of dollars to use as a down payment to bring the monthly payment affordable for an average income.
At some point, once you see salaries exceeding the norm, these jobs move out.
The +100K jobs are shrinking given there are alternatives to being located in the Valley.
Â¥
2010 Dec 1, 9:42am
The formula is Income x 3. Not income x 5. So yes, there is quite a long way down still.
The formula needs to change when one income is perfectly sufficient to cover all the household's non-housing outgoes.
$200,000 per year net can cover a LOT more house payment than $60,000 net -- we're talking EIGHT times the debt service power ~$160,000/yr vs. $20,000.
At 4% rates this pencils out to FOUR MILLION vs. $500,000 price points.
The formula needs to change when one income is perfectly sufficient to cover all the household’s non-housing outgoes.
Dual income families have been around for a very long time.
Â¥
2010 Dec 1, 11:00am
Dual income families have been around for a very long time.
But $200,000+ household middle-class incomes and ~4.5% conforming loans up to $730,000 haven't.
B.A.C.A.H.
2010 Dec 1, 11:20am
Alla youguys are looking at it from your own Nuclear Family Values point of view, maybe from the midwest or some other region of North America.
But the pricing in those Fortress places in Santa Clara County is not determined by people who come from that point of view.
You see, compared to places like Hong Kong, Shanghai, Mumbai, Singapore, the worst congested day in the worst congested commute from San Jose (or wherever) to those Fortress Communities seems like the wide open prairie in comparison.
And per sq ft., the Fortress is a bargain for those folks. Half the world lives in China and India, even the small percentage who are wealthy is a massive number of people compared to the number of properties that are sold in the Fortress Communities in the cities of the west coast.
Serpentor
2010 Dec 1, 2:08pm
sybrib... you've been debunked with your "rich foreigner theory" yet you keep repeating the same thing. Whats your obsession with the chindians?
Â¥
2010 Dec 1, 2:59pm
I don't think there's that much debunking to be done. There is indeed a great impedance mismatch between the top 1% of Asia and the available quality housing stock of the Peninsula fortresses.
The top 1% is 25 million people. If 1% of them want to move here that's 250,000 properties of new demand.
Alla youguys are looking at it from your own Nuclear Family Values point of view, maybe from the midwest or some other region of North America.
Sorry, I am strictly a native here!
There are not that many job available today to pay $200K salaries. Public companies are down from 420 in 2000 and 340 in 1994 to low 200s today. Funding for private is dismal. Why would anyone from Asia want to or need to move here. The growth is in Asia, not the Bay Area.
You see, compared to places like Hong Kong, Shanghai, Mumbai, Singapore, the worst congested day in the worst congested commute from San Jose (or wherever) to those Fortress Communities seems like the wide open prairie in comparison.
Force10 to expand India operations
CHENNAI: The California-based Force10 Networks, a global technology leader, on Wednesday unveiled its growth strategy for India including expansion of its operations in Chennai.
Force10's high performance solutions are designed to deliver new economics by virtualising and automating Ethernet networks.
Addressing presspersons here on Wednesday, Ebrahim Abbasi, Executive Vice-President, Corporate Business Development, Engineering and Operations, said Force10 Networks India Pvt. Ltd., a subsidiary of Force10 Networks, would increase its workforce to more than 200 from 120 in engineering, customer support and related functions by the end of 2010. It would also relocate to a state-of-the-art, 43,000 sq. ft. development lab and data centre in Chennai.
Perhaps Oregon is more suited than the Bay Area... oh thats rich! so Oregon is now calling itself "Silicon Forest". What will those marketing people think of next....
Some reason to believe Intel could be expanding Ronler
http://blog.oregonlive.com/hillsboroargus/2010/08/some_reason_to_believe_intel_c.html
Still, there are signs Intel is ready to move. Earlier this year, Intel and Washington County announced they were triggering the next round of tax deferrals in the Strategic Improvement Program, which gives Intel property tax breaks on equipment used at its six Tualatin Valley campuses, which employ 15,250 people. About a third of those work at Ronler Acres.
Intel had until 2013 to move into the new program.
And, the company is hiring. MacKenzie couldn’t provide specific numbers, but said the company has stepped up its nationwide recruitment of college graduates.
Intel has five microprocessor manufacturing facilities, called fabs, in the United States, two of which are in Oregon. The speculation in the Oregonian hinged on the notion that a third fab would be built at Ronler.
Hillsboro Mayor Jerry Willey said he’s heard nothing beyond the published reports about the possible expansion.
“It’s pretty exciting news, but I don’t think anybody’s going to the bank,†he said. “Generally, they clue us in just before they go to the media.â€
I also have not seen anyone get foreclosed on that needs pity. They usually walk away with several hundred thousands of dollars in equity.
Um.... if you have equity why wouldn't you just sell, and move?
there's a lot of people lacking common sense and living in a cocoon of perpetual denial.
i'm not going to argue further why prices will fall. it should be obvious to anyone with half a brain.
it boils down to people needing to be able to make their mortgage payments which is tied to income.
it's really that simple.
time will tell.
prices have been falling since 2007 in the bay area and i suspect, while they may not crash quickly, there will continue to be a long drawn out price decline. that's just how the housing market works. slow and (sort of) steady. i figure at least another 5 years of up and down, but mostly down prices. housing bubbles take years, sometimes decades(japan) to deflate.
prices took a major dump in november in both sj and sf - precursor to a crash? probably not. it's just a short-term blip:
http://www.housingtracker.net/asking-prices/san-francisco-california/
http://www.housingtracker.net/asking-prices/san-jose-california/
i do expect prices to rise in spring, as they always do. however, long term, prices will fall.
toothfairy
2010 Dec 1, 10:43pm
how much is it to rent one of those starter homes in a decent area?
Your affordability argument should hold for rents too. Last time I checked many of those starter homes
were renting for 2-3k per month.
4 br house in menlo park $5400 per month
http://sfbay.craigslist.org/pen/apa/2086345731.html
I also have not seen anyone get foreclosed on that needs pity. They usually walk away with several hundred thousands of dollars in equity.
Um…. if you have equity why wouldn’t you just sell, and move?
Years of paying no mortgage payments or HOA fees can really add up to a nice nest egg, not to mention all the money pulled out of the house when prices were high- you know, the money which paid for fancy cars, designer goods and vacations.
anon, you seem to have your mind made up since you've ignored many points made above as to why some of your analysis is flawed. I have a question for you and other permabears. What if prices do drop 20% from here, and now your $600k starter home is $480k, would you buy then even if the average income is still only $100k? Are you really waiting for this $600k starter home in Mountain View or wherever to drop to $300k? What will it take for some of you to buy?
PasadenaNative
2010 Dec 2, 12:05am
I know a couple who recently bought their first home in Marin. It's an Eichler, 4 bed. 2 bath, for $700K with 3.5% down. Hell, I wouldn't have done it.
I also have not seen anyone get foreclosed on that needs pity. They usually walk away with several hundred thousands of dollars in equity.
Um…. if you have equity why wouldn’t you just sell, and move?
I guess what I meant to say was, I have personally never seen a situation where one has made a down payment, lost their down payment & the house. They all have some cash-out refi's to take our their down payment + several hundred thousands more. Then they walk. They are earning more than a full time job just by walking away.
there’s a lot of people lacking common sense and living in a cocoon of perpetual denial.
I also think alot of people are in denial that hundreds of thousands, if not millions of others have several hundred thousand bucks sitting around doing nothing. They're likely waiting for prices to fall further. The ones that do not have a ton of cash will have to wait another few years for the next group to shift forward from further price drops. Once that pool of money gets depleted in about 20 years or so, you may buy at 1998 prices. By then, interest rates will probably be much higher, and you end up paying the same monthly payment. Let us know how the waiting game goes.
anon, you seem to have your mind made up since you’ve ignored many points made above as to why some of your analysis is flawed. I have a question for you and other permabears. What if prices do drop 20% from here, and now your $600k starter home is $480k, would you buy then even if the average income is still only $100k? Are you really waiting for this $600k starter home in Mountain View or wherever to drop to $300k? What will it take for some of you to buy?
most of the points i've ignored because they can be refuted with a little common sense or they're the same old arguments getting rehashed so there's really no need to repeat what's already been said.
there's 2 major problems with my analysis but no one has mentioned either of these two flaws yet.
one is fairly obvious, the other less so i believe.
i'm not a permabear.
house prices are very reasonable in other parts of the bay area. oakland, parts of fremont and parts of san jose. even san bruno and daly city are somewhat sane.
but the cities i mentioned on the peninsula are ridiculously overpriced; you'll find more $1.5M+ houses than sub-$500k houses (too lazy to link to redin map). does this make any sense? no. makes no sense. it should be the other way around, there should be way more sub-$500k houses than $1.5M+ houses. in fact i claim the $1.5M+ house should be relatively rare as that requires an income of roughly $400k+/year. but these super expensive houses are the rule, not the exception.
this is the problem with the perma-bulls and perma-bears they can't distinguish good from bad. to them it's either all good or it's all bad. the trick is to identify which areas are cheap, which are expensive and which are in between.
the title of my post was referring to a very particular region of the bay area that is severely overpriced.
the pensinula will certainly see lower prices. other bay area regions have already corrected (some have probably over-corrected).
anon, you seem to have your mind made up since you’ve ignored many points made above as to why some of your analysis is flawed. I have a question for you and other permabears. What if prices do drop 20% from here, and now your $600k starter home is $480k, would you buy then even if the average income is still only $100k? Are you really waiting for this $600k starter home in Mountain View or wherever to drop to $300k? What will it take for some of you to buy?
most of the points i’ve ignored because they can be refuted with a little common sense or they’re the same old arguments getting rehashed so there’s really no need to repeat what’s already been said.
there’s 2 major problems with my analysis but no one has mentioned either of these two flaws yet.
one is fairly obvious, the other less so i believe.
i’m not a permabear.
house prices are very reasonable in other parts of the bay area. oakland, parts of fremont and parts of san jose. even san bruno and daly city are somewhat sane.
but the cities i mentioned on the peninsula are ridiculously overpriced; you’ll find more $1.5M+ houses than sub-$500k houses (too lazy to link to redin map). does this make any sense? no. makes no sense. it should be the other way around, there should be way more sub-$500k houses than $1.5M+ houses. in fact i claim the $1.5M+ house should be relatively rare as that requires an income of roughly $400k+/year. but these super expensive houses are the rule, not the exception.
this is the problem with the perma-bulls and perma-bears they can’t distinguish good from bad. to them it’s either all good or it’s all bad. the trick is to identify which areas are cheap, which are expensive and which are in between.
the title of my post was referring to a very particular region of the bay area that is severely overpriced.
the pensinula will certainly see lower prices. other bay area regions have already corrected (some have probably over-corrected).
Did you correct the issue that you assumed a $600k mortgage for a $600k house when no one puts 0% down anymore and realistically in the areas you are describing people put 20% if not 40% (per Vain) down? That changes your numbers completely, particularly the monthly payment that you seem most concerned about.
What would it take for you to purchase in one of your areas? In the better part of MV (94040), a starter home right now is probably going to cost around $900k or a little more. What does that have to get down to for you to buy? Even if it drops 20%, that's still $720k.
CrazyMan
2010 Dec 2, 6:11am
So, you think that median income earners (~60K) really have 20-40% to put down on a 600K starter home?
Really?
That's really the catch, isn't it.
So, you think that median income earners (~60K) really have 20-40% to put down on a 600K starter home?
Really?
That’s really the catch, isn’t it.
No. I don't think the median income earners will be buying a home unless they are selling a home they bought 10+ years ago and can use the equity from the sale of their previous home. The other people buying homes are those making much more. Median income earners are either going to rent or buy a condo/townhouse.
Is the $60k median you used for SJ? If so, that's not a fair comparison. anon was talking about the most desirable areas of the peninsula. Los Altos' median is $150k, Cupertino's median is $120k, Palo Alto's is over $100k; I imagine the other areas, particularly if you take out their less desirable sections would be very high too. If the median is $120k in Cupertino, what's the top 10% or 20% making? $250k? $300k? Those are the ones buying. With rates this low, $1M are not hard to imagine. You have to remember too, lots of people bought a long time ago and are sitting in million dollar homes where they now have little or no income. Prop 13 is keeping the supply nice and tight, particularly in these areas.
Â¥
2010 Dec 2, 7:09am
Also, the median income is only important for home BUYERS not home owners in general -- thanks to inflation and Prop 13, and soon Prop 58 as the boomers start dying off en masse.
I'd love to be a kid standing to inherit a $1.5M house with a $700/month tax bill, though having those numbers be an order of magnitude less is good enough.
Just to randomly show some sales in Mountain View, CA:
267 Bonny St - Sold on 11/23/10 for $380k, cash.
1772 Vassar St - Sold on 11/5/10 for $490k, 25% down.
875 Washington - Sold on 11/23/10 for $525k, cash.
330 Velarde - Sold on 11/4/10 for $905k, all cash offer.
1610 Yale - Sold on 11/19/10 for $1 million, 27% down.
I randomly pulled these 5 sold properties and 3/5 are all cash offers.
I don't see when you will ever get the luxory of paying a low price, and use a 20% down. The money doesn't seem to stop coming in there.
Serpentor
2010 Dec 2, 10:41am
I don’t think there’s that much debunking to be done. There is indeed a great impedance mismatch between the top 1% of Asia and the available quality housing stock of the Peninsula fortresses.
The top 1% is 25 million people. If 1% of them want to move here that’s 250,000 properties of new demand.
why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Education for kids? there are plenty of areas outside of CA with much better education. Prestige of Silicon Valley? puhlease! people think where they live is the center of the universe. get over yourselves.
I've repeated this many times. The real majority of the immigrants in the Bay Area come here though H1B visa and worked their way to green card and citizenship . yes they work hard and save money fast, but they do not have unlimited pockets.
Â¥
2010 Dec 2, 10:48am
why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.
Serpentor
2010 Dec 2, 11:01am
why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.
right.. in Chindia, life is way worse because in the US, you can hire a team of servants to tend to your every need for $1/day and health care is dirt cheap if I get sick. On wait, its the other way around! Oops!
do you think a billionaire chindian grandpa is going to want to move to a middle class house in CA and have to do his own dishes and laundry? Picture this old guy who is used to living like he is the mutherfuckin MAN in India and he moves out to CA and he can hardly speak the language, has to do everything himself, and can't go anywhere because he's always had a personal driver to take him anywhere.
Do you have any idea what a million dollar can buy you outside the big cities in Chindia? You can buy multiple villages for a million dollars.
you’ll find more $1.5M+ houses than sub-$500k houses (too lazy to link to redin map).
There you go again, insisting that only HOUSES are valid places to live. You do know redfin has options for condos, townhouses, and multifamily? It makes absolutely no sense to look at the income level of the population as a whole, and then insist a SFH is their only housing option for purchase.
What you say is FLAT OUT FALSE when you consider all housing options available for purchase.
Here is a link in the region for under $500K..... http://tinyurl.com/2c7kjov
(edit: meant http://tinyurl.com/29whum3)
1760 listings
Here is a link in the region for over $1.5M.... http://tinyurl.com/2c7kjov
294 listings.
B.A.C.A.H.
2010 Dec 2, 11:07am
Just to randomly show some sales in Mountain View, CA:
267 Bonny St - Sold on 11/23/10 for $380k, cash.1772 Vassar St - Sold on 11/5/10 for $490k, 25% down.
875 Washington - Sold on 11/23/10 for $525k, cash.
330 Velarde - Sold on 11/4/10 for $905k, all cash offer.
1610 Yale - Sold on 11/19/10 for $1 million, 27% down.
I randomly pulled these 5 sold properties and 3/5 are all cash offers.
I don’t see when you will ever get the luxory of paying a low price, and use a 20% down. The money doesn’t seem to stop coming in there.
Interesting to read the surnames of the purchasers.
Serpentor
2010 Dec 2, 12:00pm
and I have said for the Bay Area fortress people to get over themselves. Bay Area fortress is desirable but its not world class. Paris? London? yeah right.
you are comparing upper middle class suburbs to a metropolitan city? are you freaking kidding?
Â¥
2010 Dec 2, 12:31pm
The Peninsula has the best doctors and other professionals you'll find anywhere.
I'd be perfectly happy living in Los Altos 'til I kick the bucket. Happier than Bellingham I think. The fortress areas are just nice places to live unostentatious upper middle-class lives.
SF is a 40 minute blast up 280, a freeway basically built to take fortress people into the city.
Serpentor
2010 Dec 2, 12:35pm
wrong, I work in the medical industry. The best doctors (world renowned) are in the Midwest, South, and East Coast. if you are talking about Standford Hospital being the best you are uninformed.
any other myths to bust?
Serpentor says
why would the top 1% want to move HERE? jobs? if they are so rich why would they need jobs?
Be close to their grandkids. Plus life in the fortress is 1000X better than life in China or India.
Once they move here, they are no longer connected to Uncle Ho, who sits on the Central Committee, and can no longer benefit from the Chinese economic boom. Its like a founder of Google walking off the job to settle down in Brazil. Its just not gonna happen. The Chinese, or more correctly former natives from Hong Kong, you see in the Bay Area are the ones who fled BEFORE the 1997 hand over to mainland by the British. They moved here many years earlier.
most of the wealthy people I met in Shanghai has 0% interest in buying a home outside of Shanghai…
If any did they most likely purchased it in Australia. Spend a Chinese winter vacation during a warm Aussie summer. And it only takes half a day flight time.
Of course since when can any Chinese citizen move currency (illegally smuggle) funds out of the country. The most they can carry outside is $5,000 and only for business reasons.
LOL! anything higher would risk the firing squad. I dont know why people keep missing the last point on currency restrictions.
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First some facts.
Decent Peninsula areas are Millbrae, Burlingame, parts of San Mateo, Foster City, Belmont, San Carlos, Menlo Park, Palo Alto and Mountain View
On redfin, there are very few houses under $600k in the areas I mentioned: redfin map showing houses under $600k
On the map we can see most of these lower priced houses (meaning those under $600k) are clustered in 3 areas: redwood city, the lower income east side of san mateo and east palo alto
if you want a bigger home it'll cost quite a bit more. A decent non-starter (meaning larger) house will start around $800k but can be much more if you want an established neighborhood (anything in Palo Alto).
If a household spends 30% of net pay on mortgage: $120k/year net; $210k/year gross.
If a household spends 50% of net pay on mortgage: $72k/year net; $120k/year gross
paycheck calculator
san francisco wages
san jose wages
looking at the median hourly rate, we can presume median wage is equal to or less than the mean wage.
meaning half the jobs probably make less than $61,940/$66,780.
you get paid more in san jose, so let's look at that city.
the mean wage for all occupational groups in SJ is under $100k, with the exception of: managers, engineers, lawyers.
there are 888k total jobs in san jose; 74k managers, 83k engineers, 6k lawyers for a total of 163k high paying jobs. that is 18% of all jobs.
this theory that most people in the bay area make $100k+ is nonsense. roughly 4 of 5 jobs pay under $100k.
Let's summarize the facts.
Now the analysis.
50% debt to net-income
you can have 2 people making the mean wage($60k+$60k=$120k); or one person making a high wage(at $120k) to afford a $600k mortgage. although they'll be paying 50% of their net take home for the mortgage+taxes.
but what is important is that there is no possible way (unless you have the mortgage fraud we had in 2005) that a single person with a median income can realistically afford this starter home. you need either two mean wages, or a high income wage at 50% of debt-to-net-income.
30% debt to net-income
if you do the more realistic scenario of 30% of net pay to pay a $600k mortgage; then you need one income of $210k/year or two high income wages (both at $105k/year or some combination) just to afford a starter home.
Conclusion
it's entirely unrealistic, without substantial price appreciation, for two high salaries to pay for a starter home that should be sold to the lower income demographic.
in a sane world, someone earning the mean wage or less would be buying this starter property(which would be priced much lower than $600k).
i'm hoping for people to come to this realization and maybe we'll see a return to sanity.
#housing