patrick.net

Adjusted for inflation only worth $225-250K.

Paying $700K was just insane... paying $500K is equally nuts.

$250K @ 4.25% works out to an average housing expense of $800/mo over the next 30 years.

$500K works out to $1500/mo. Doesn't seem out of line. Rents in 30 years will be, what, $6000/mo?

thomas.wong1986 says

Adjusted for inflation only worth $225-250K.

Well by that logic then a 1995 Toyota Camry should sell for $50,000 not $1,800

Troy says

$500K works out to $1500/mo. Doesn’t seem out of line. Rents in 30 years will be, what, $6000/mo?

Perhaps DT will turn in to Melrose Ave for the cool and hip...
But I doubt it ...

Tenouncetrout says

Well by that logic then a 1995 Toyota Camry should sell for $50,000 not $1,800

A properly maintained house lasts forever, at least until an Act of God wipes it out.

And much of the purchase price of a home is actually the land component -- the site value -- which generally does not depreciate at all, though this certainly can should an area's safety, commute to jobs, or other worsening factors impact the assortment of locational advantages that go into site value.

1B Rents in West LA were $700/mo in 1991, now they are ~$1350/mo. This is 1.6X the inflation of CPI alone.

Housing is not a 1995 Camry. If you don't possess a Camry there are millions of other transportation options, and one does not even actually need a car in most areas.

One does, however, need a place to live on this planet, and more specifically in some community, and the supply of living space in any given area is lot more fixed, compared to the used car market.

Since the supply of housing is so fixed, as our incomes inflate ever upwards, proportionally more of our take-home pay is sucked out in rents (and mortgages, as people buy instead of rent).

Houses are not cars.

thomas.wong1986 says

Perhaps DT will turn in to Melrose Ave for the cool and hip…

$6000/mo sounds like a lot now, but my parents were paying $400/mo 30 years ago, about 1/3 what rents are now. Another 3X inflation by 2040 would not surprise me, not in the least.

Troy says

$6000/mo sounds like a lot now, but my parents were paying $400/mo 30 years ago, about 1/3 what rents are now. Another 3X inflation by 2040 would not surprise me, not in the least.

Certainly the case in the last half of the 20th century, but TODAY and going forward other factors such as globalization will depress prices/rents.

House prices rise with wages. Today, prices of houses in many parts of the USA will fall because 1. there are 2 million 90 days behind mortgage payment 2. there are 7 million 30 days behind. ETC.
Interest rates are essentially zero to banks and this must eventually change, which means prices of houses will fall some more.
So, say houses go down another 30% in some locales.
How fast will wages rise to make the prices of houses begin to climb back up?
The last post explains how globalization and offshoring will depress wage growth, as the millions of illegal aliens (no education) do already.
Without wages rising much, house prices cannot rise very much either.
The good old days are gone. My father's 15 room house on 3/4 acre in NYC cost him $125/month mortgage way back when. Now he spends that on his cable tv probably.

clambo says

My father’s 15 room house on 3/4 acre in NYC cost him $125/month mortgage way back when. Now he spends that on his cable tv probably.

What was the minimum wage back then? Yes, house prices have gone higher than inflation rates, but using the "In my day things were cheaper" argument is complete B.S.

Troy says

thomas.wong1986 says

Perhaps DT will turn in to Melrose Ave for the cool and hip…

$6000/mo sounds like a lot now, but my parents were paying $400/mo 30 years ago, about 1/3 what rents are now. Another 3X inflation by 2040 would not surprise me, not in the least.
“Nessuna soluzione . . . nessun problema!„

they have also gone through the inflation when wages kept on rising. Something we aren't going to experience in the economy where our wages have to compete with Chinese/Indian and other countries with low wages.

Troy says

1B Rents in West LA were $700/mo in 1991, now they are ~$1350/mo. This is 1.6X the inflation of CPI alone.

It's actually more like 1.4X CPI (65.9% from 1991 to 2011), although I'm not convinced that your figures are right. I'm fairly certain friends of mine rented a 1BR place in West LA for $1100-1150 about 6 months ago. I doubt it's gone up more than $200 since then. I believe they also got 1 month free, so really it's 11/12 of that in effective rent.

clambo says

The last post explains how globalization and offshoring will depress wage growth, as the millions of illegal aliens (no education) do already.

Perhaps, but immigration reform would allow many more high education immigrants to come here and raise wages. There are many studies on this, and even the Cato Institute agrees that immigration reform would raise GDP significantly. Instead, the powers that be are listening to the protectionist wings.

Immigrants need to have money to come in this country if there broke what good value other than low wage earners can they do for the economy? Keeping your gardening and tree trimming cheap.

As Dad told me things roughly double every 10 yrs. It's inflation you can't do anything about.

beershrine says

Immigrants need to have money to come in this country

It sounds like you are agreeing with me. The high education immigrants that I mentioned have money. If you can afford a 4-figure plane ticket to get here, you probably aren't broke.

corntrollio says

Perhaps, but immigration reform would allow many more high education immigrants to come here and raise wages. There are many studies on this, and even the Cato Institute agrees that immigration reform would raise GDP significantly. Instead, the powers that be are listening to the protectionist wings.

I dont see the point of hiring from overseas when you have plenty of people in the states who are better educated, trained and have more experience. Its not like the other nations were the creators of much of the inventions (tech) in recent years.

Its sadly become more of question their need for some social engineering/diversity agenda vs what has always worked in the past, hire quickly, training and mentoring for the next generation of leaders.

thomas.wong1986 says

I dont see the point of hiring from overseas when you have plenty of people in the states who are better educated, trained and have more experience.

That's not what business leaders say. Look at the people getting PhDs here in science and engineering, and tell me we have enough people here in those fields.

As I've mentioned, the studies agree -- here is a quote from the executive summary:

http://www.americanprogress.org/issues/2010/01/raising_the_floor.html

Comprehensive immigration reform generates an increase in U.S. GDP of at least 0.84 percent. Summed over 10 years, this amounts to a cumulative $1.5 trillion in additional GDP. It also boosts wages for both native-born and newly legalized immigrant workers.

Even the Cato Institute agrees on this point, and I never agree with them on anything.

EncinoMan says

they have also gone through the inflation when wages kept on rising. Something we aren’t going to experience in the economy where our wages have to compete with Chinese/Indian and other countries with low wages.

This is my thesis, yes, but I'm used to having my theses shot down by the PTB.

EMan says

Something we aren’t going to experience in the economy where our wages have to compete with Chinese/Indian and other countries with low wages.

The latest sentiment, by the way, is that cheap labor in China for goods sold in America might be a past tense thing in the near future:

http://www.economist.com/node/18682182

Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.

“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.

Hopefully we can get these jobs back to the USA where they belong.

thomas.wong1986 says

Hopefully we can get these jobs back to the USA where they belong.

Yes, although, as I've mentioned before, we are outsourced labor for other countries too. The German car companies make cars here, and so do the Japanese and Koreans. Ford makes some cars in Canada (even though that part of Canada is south of Detroit).

The German model is probably better for us -- what frightens me is our policies and failure to invest in education and innovation often seem more skewed towards having low- or no-skilled labor here as opposed to high-skilled labor for high quality products here. That's not a good thing.

thomas.wong1986 says

Adjusted for inflation only worth $225-250K.
Paying $700K was just insane… paying $500K is equally nuts.

What do you count the inflation since 1996, 1% per year?
Even a nominal 3% would give 273 K.
I sure wouldn't expect a house in San Jose under $100/sq. ft:
you can hardly find that even in the Midwest (major urban areas).

corntrollio says

That’s not what business leaders say. Look at the people getting PhDs here in science and engineering, and tell me we have enough people here in those fields.

Business leaders look out for their business only, their whole strategy is to cut costs. More people competing for jobs means lower wages. There is nothing more to it. These people never look out for anyone other than themselves.

PersainCAT says

Fisk says

What do you count the inflation since 1996, 1% per year?
Even a nominal 3% would give 273 K.
I sure wouldn’t expect a house in San Jose under $100/sq. ft:
you can hardly find that even in the Midwest (major urban areas).

i got the same values 225-250, im assuming i did the same thing
http://www.westegg.com/inflation/
1995 at 155 gives Current inflation adjusted: 219,548.59
1996 at 175 gives Current inflation adjusted: 240,657.71

A 3% inflation per year over 15 years since 1996 makes (1.03 to the power of 15) = 1.558. Multiplying 1.558 by 175 K makes
$ 272,644.

cab says

You can’t say that about US made cars, and partly that’s what corntrollio discusses about unskilled labor.

Actually, that's not true any more. Look at the top of the JD Power lists these days. You'll see Cadillac, Buick, and Lincoln. For example, look at this long-term dependability survey (3 years in):

The study, which measures problems experienced by original owners of three-year-old (2007 model year) vehicles, said that Porsche was the highest-ranking brand with 110 problems per 100 vehicles followed by Lincoln (114 problems) and Buick (115 problems).

The Cadillac DTS is the model with the fewest problems in the industry, with just 76 issues per 100 vehicles. This marks the first time in more than a decade that a model from a domestic automaker has achieved the lowest PP100 score in the Vehicle Dependability Study.

Interestingly, seven of the 10 models with the lowest incidence of problems in the industry are from Ford and General Motors, including the 2007 model-year Buick Lacrosse, Buick Lucerne, Cadillac DTS, Ford Five Hundred, Lincoln MKZ, Mercury Milan, and Mercury Montego.

You can also look at the JD Power Initial Quality Survey, which looks at new cars:

http://www.jdpower.com/autos/articles/2010-Initial-Quality-Study-Results/page-5/

There are American nameplates here. People just don't realize it because they cling to old ideas. Japanese manufacturing used to be known for being quite crappy -- it caused some funny throwaway lines in Back to the Future. Times change, and they have for American cars too.

cab says

The German and Japanese companies that make cars here are only producing the cars for the American market. Their cars for domestic sale in Germany/Japan are made in their own countries.

That's not necessarily true or isn't exclusively true. For example, the BMW Z3 and the first generation BMW Z4 were made in South Carolina only. The first generation X3 was made in Austria, but the second generation is made in South Carolina as well. X5s are made in South Carolina or Mexico generally, although I believe there is some work done in Russia too.

Nonetheless, it shouldn't be surprising that some of the production in the US is only for the US market. We drive different cars here than in Germany and Japan. The typical German or Japanese customer buys a car that is smaller, more fuel efficient, and that has a smaller engine. Sometimes they don't even sell the same models here -- e.g. the new VW Jetta and Passat for North America, the former of which is made in Mexico, and the latter in Tennessee.

Fisk says

What do you count the inflation since 1996, 1% per year?
Even a nominal 3% would give 273 K.
I sure wouldn’t expect a house in San Jose under $100/sq. ft:
you can hardly find that even in the Midwest (major urban areas).

Use this:

http://www.usinflationcalculator.com/

44% since 1996 according to CPI. There are other measures of inflation you can use too, of course.

Some people argue the Bay Area underwent a change in fundamentals due to the dotcom boom. I'm not sure how you prove this. However, it's notable that some houses are now below their inflation-adjusted 2000 price, particularly those in the upper price ranges.

Jobs coming back from China myth is probably put out there by democrat economists paid by white house to project a rosy rosy employment picture in the future (and thus a rosy federal tax revenue picture).

Its BS. Vietnam and other country's will get any jobs that China gives up.

clambo says

House prices rise with wages. Today, prices of houses in many parts of the USA will fall because 1. there are 2 million 90 days behind mortgage payment 2. there are 7 million 30 days behind. ETC.

So, say houses go down another 30% in some locales.
How fast will wages rise to make the prices of houses begin to climb back up?

Without wages rising much, house prices cannot rise very much either.
The good old days are gone. My father’s 15 room house on 3/4 acre in NYC cost him $125/month mortgage way back when. Now he spends that on his cable tv probably.

The problem with the housing price/income ratio does not take into account foreign investment/cash buyers. China is buying left-n-right.
Moreover, in the past 40 years, there has been a great change in the division of wealth. The middle class is slowly disappearing. In Silicon Valley, you now have a heavy concentration of millionaires, even ex-dotcommers are still buying and distorting the housing market.

PockyClipsNow says

Jobs coming back from China myth is probably put out there by democrat economists paid by white house to project a rosy rosy employment picture in the future (and thus a rosy federal tax revenue picture).

Did you even bother reading the article I sent? The prediction was made by Boston Consulting Group in a report they wrote. Furthermore, the article was in the Economist, which is classically liberal (essentially libertarian), and has absolutely nothing to do with the Democratic party -- if anything, they think a lot of the Democratic's party's ideas are bunk.

PockyClipsNow says

Its BS. Vietnam and other country’s will get any jobs that China gives up.

Again, take a gander at the article. It mentions particular supply chain issues that moving somewhere else in Asia doesn't necessarily solve. Not everything is about simply labor costs. You have to look at the holistic picture of a supply chain, and if production in Asia requires you to keep massive amounts of inventory because a disruption could be catastrophic, that needs to go into the calculation.

PockyClipsNow says

Jobs coming back from China myth is probably put out there by democrat economists paid by white house to project a rosy rosy employment picture in the future (and thus a rosy federal tax revenue picture).
Its BS. Vietnam and other country’s will get any jobs that China gives up.

There were cheap labor countries before China modernization, there
are others now, and there will be. But none has or will ever have the scale, which is what allowed PRC manufacturing and imports such an impact here. In that sense, PRC is unique.
Just like US in the 20-th century has made an outstanding impact on word economy and politics by COMBINATION of its political/ economic model and scale. There were democratic market economies (like Dutch) before, but they didn't have the scale. There were other huge countries (like USSR, PRC, or Brazil), but they didn't have the model.

Fisk says

But none has or will ever have the scale, which is what allowed PRC manufacturing and imports such an impact here. In that sense, PRC is unique.
Just like US in the 20-th century has made an outstanding impact on word economy and politics by COMBINATION of its political/ economic model and scale.

That is true. Another thing to note is that China has had a demographic advantage, just like the US where its workers have been in the right age range for high productivity and growth. This advantage is starting to disappear because China is aging like the U.S. The one-child policy is partly to blame too. Again, in the classically liberal (i.e. Libertarian, essentially) Economist:

http://www.economist.com/node/18651512

eastbaydude says

In Silicon Valley, you now have a heavy concentration of millionaires, even ex-dotcommers are still buying and distorting the housing market.

If your sitting with say $10-20M earning a tiny 1-2% $100-200K ,10% will go to State Taxes. If you know of any x-dotcom people you will find many have left CA for NV,CO and FL. Some stayed and moved North to Eureka or South to SLO. They are not the kind to crave attention.

Fisk says

There were cheap labor countries before China modernization, there
are others now, and there will be. But none has or will ever have the scale, which is what allowed PRC manufacturing and imports such an impact here. In that sense, PRC is unique.

Japan, Taiwan and what has been called "Asian Tigers" nations have been doing so for decades. There isnt anything unique about it. Did we in the past see a influx in foreign buyers of SV property. Nada...

thomas.wong1986 says

If your sitting with say $10-20M earning a tiny 1-2% $100-200K ,10% will go to State Taxes. If you know of any x-dotcom people you will find many have left CA for NV,CO and FL. Some stayed and moved North to Eureka or South to SLO. They are not the kind to crave attention.

1) If you are stupid enough to be earning 1-2% on $10-20M, I have a lot of other choice words for you too. If you have that much money and you don't know what to do with it, you should find a flat-fee financial adviser to help you.

2) If you have $10-20M AND you are stupid enough to think that moving outside of California is a worthwhile endeavor merely to save $10,000-20,000 on taxes, then I also have a lot of choice words for you.

Either of those two things signals amateur hour. Couple them together, and wow.

A lot of Silicon Valley dotcom-ers who actually made money (a number far fewer than people commonly think) are still here, trying to create another start-up. That's what most of them do (excluding Google's masseuse or whatever).

corntrollio says

trying to create another start-up.

Few who think they are Einsteins stick around, but not many. Too young and naive, thinking they can do it again.

Sure you can get more than 2% and more risk but they DO have enough not to work rest of their lives.

These folks already did their 20-30 year stunt at SV Tech companies by 1999. I know a couple myself. Today, they live in a different world and mindset than many here. Everthing changes when you have that much and your not bound by location.

California tech billionaire finds Nevada move 'taxing'
Monday, July 17, 2006
By George Anders, The Wall Street Journal

Read more: http://www.post-gazette.com/pg/06198/706480-28.stm#ixzz1QtJXM8cq

thomas.wong1986 says

Sure you can get more than 2% and more risk but they DO have enough not to work rest of their lives.

These folks already did their 20-30 year stunt at SV Tech companies by 1999. I know a couple myself. Today, they live in a different world and mindset than many here.

Are you talking about bona fide retirees? If so, that's different. A retiree may move just to save on cost of living, which may include taxes, although I feel like taxes are the least of your problems in Silicon Valley. That's why you're saying Eureka and SLO too -- much cheaper to live there.

There are all kinds of things you can do with $10-20M that still are low risk and can preserve sufficient capital and hedge against inflation. Again, a financial adviser can help out here. People who have that much money have different financial options than mere mortals like you and I. I'm not even talking about hedge funds. There are simple things like Treasurys, Munis, and AAA corporate bonds that earn more than 1-2%.

Look, I definitely agree that the influence of dotcom-types who won the IPO lottery is lower than people perceive it to be, but suggesting that these people can be encompassed by any one description is similarly difficult to sustain.

thomas.wong1986 says

He spent $50 million on a lakeshore estate and started a Nevada property-development business. What’s more, by taking a big chunk of his wealth to Nevada, Mr. Duffield expected to save millions on taxes.

Have you followed up on this guy since 2006? How'd his property investment business go? I have seen other people like him who were executives in huge tech companies who are getting their properties foreclosed and are filing for bankruptcy too. Lots of them thought they'd invest in property during the real estate boom!

Also, keep reading:

Now Mr. Duffield works in Walnut Creek, Calif. -- within 10 miles of PeopleSoft's old offices -- seeking customers for Workday Inc., a business-software firm with about 60 employees. He is negotiating to build a new home in Alamo, Calif., near his new offices. Incline Village now is just a summer vacation home. "The winters were too cold for us anyway," Mr. Duffield said.

HE MOVED BACK! If you read the tenure of the article, it also sounds like he was playing residency tricks -- e.g. staying in California while pretending his residence was in Nevada. It's not clear he ever really moved to Nevada.