patrick.net

Also, if you look at the income distribution of the Bay Area, it peaks at the 100k – 150k level with 18% of the population at that range. Then it dips to 7% at the 150k to 200k range with another 7% at 200k or more. So that’s 32% of households earning 100k or more. I’d imagine many with the means to do so buy multiple properties in highly desirable. Finally, the Bay Area still has lots of high paying jobs left and many people with ample savings accounts.

SF vs US Income

Bobby,

There's a nuanced symantic in that reference about household income. In my working class neighborhood, the households can have as many as four or even more adults working in the same household. parking their vehicles all over the place.

In the richer neighborhoods there is a preponderance of those households with two working parents, childcare bills, and other expenses they feel they need to keep up appearances, they may have a high income but that doesn't mean they're not strapped.

Read "The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke", by Elizabeth Warren, she discusses the Beautiful People mainly on the other coast who may have high household income but on the balance sheet appear to be the working poor.

thomas.wong89 says

Much of this wealth came from the stock bubble of the late 90s.
There was very little talk of ‘wealth’ before that.

exaccoly. The IPO bubble was essentially minting millionaires by the hundreds if not thousands. Not that many houses in Atherton for all these millionaire types, LOL.

Doesn't matter if the dotcom was a bubble since all the smart money cashed out.

thomas.wong89 says

Troy, who do you define as ’smart money’?

Industry professionals who took the dotcom money and ran. I personally know many semi-retired MSFT and GOOG millionaires living the good life in the MP->LG corridor. How much valuation did the dotcom stocks have on Jan 1, 2000? A trillion? Ignoring the VC contingent, how much of this valuation did the worker bees cash out? 5% maybe?

Thats $50 billion dollars, 100,000 dotcom winners @ $500,000 each. Seems about right, if anything a bit low. Anyhoo, this money flow can be directly measured by the California state budget surpluses of the time. The smart money banked the money into their house and is now living off the interest like good capitalists.

Having poked around for contract programming jobs in the last few months, I can tell you for sure that salaries are down dramatically. I got offers that were HALF of what I used to make, and just had to laugh. The best one was 82% of my old rate. The high unemployment rate makes employers think you're desperate and will take anything. I'm not there yet, but I know people who are, and I have to compete with them...

Mass unemployment is good news though, since it means that housing prices will keep falling! When even one spouse in those two-salary couples gets laid off, they'll have a very hard time getting the same rate in their new job.

Population doesn't pay the rent, j-o-b-s do.

Granted, welfare disbursements DO pay the rent. Conservatives who rail against the welfare state simply do not understand how much these transfer payments end up in landlords' pockets. The ones who do go radio silent on this issue, LOL.

Guys, I think you can objectively cite objectively collected objective statistics till Kingdom Come, to make your points. It **IS** your ***SUBJECTIVE*** incites that you "subject" to the stats that add value to the discussions.

So many enterprises here like the Central Pacific railroad and YouTube and much've everything between would've busted with backward beancounting bent "objectivity" which necessarily lax vision and creativity.

California has the greatest opportunity compared to any other state which is why people will continue to come here and smart people will continue to come here.

The really smart people will visit. Southwest flights are cheaper than rent.

When you punish capital, it goes away.

Austinhousingbubble says

When you punish capital, it goes away.

Capital is not wealth. We could reinstitute Eisenhower-era taxation and not be one iota less wealthy.

The funny thing is I personally think taxing capital before land is wrong, wrong, wrong.

The greatest inherent virtue of land value taxation is that rentiers can't move the land anywhere.

California is not wealthy due to its capital but due to its labor --all capital comes from labor.

Troy,

are you saying that california is "NOT WEALTHY" because of its labor costs or are you saying that california "IS WEALTHY" regardless of its capital?

Regardless, you and Austin could consider another perspective of wealth that was enunciated by professors Stanley and Danko in their 1990's book "The Millionaire Next Door": an alternative measure of wealth is the money (or wealth) in RESERVE to sustain one's expenses without getting any wages. In that measure some bubba living in a trailer in the boondox outside of Austin could be a whole lot wealthier than a Hip and Cool Beautiful "millionaire" in the Hip and Cool Bay Area. Think about it. With our GDP per person in the USA you'd think we're one of the richest nations, but if you look at the balance sheet you'd say we're broke.

sybrib says

With our GDP per person in the USA you’d think we’re one of the richest nations, but if you look at the balance sheet you’d say we’re broke.

This is because our economy is structured to require nearly everyone to run the rat race to pay for housing.

Show me a person that has their house paid off and I'll show you a comfortably positioned family.

You'd think that after occupying this country for more than 400 years (and California for 5 generations) we'd have the land paid off now, yet home equity is the lowest ever, with around $11T borrowed against homes currently. In 1990 this was $2.5T.

If rents were 50% lower we'd all be a lot wealthier, no? Why are rents so high??? The sticker on the microwave in my apartment says made in 1988. This apartment should be halfway depreciated by now, yet the rent is 3X what it was in the late 80s.

E-man says

My wife and I currently have $1.3 million in debt. All at 4.75% to 5.375% at 30 years fixed. Our home mortgage and property tax are currently being paid by our tennants. Beautiful isn’t it? Good debt is your friend.

But gross rents in the Bay Area are generally lower than 5%. So you must have a net cash flow loss on a monthly basis because of taxes, maintenance, and insurance. Or maybe your rentals are not in the Bay Area, and gross rents are higher than 5% where your rentals are.

These posts are making me laugh! Lets get real? When the next stock market crash---claims its next victims by a drop of 2-3,000 on the NYSE than we shall see what happens!

I hear lots of people are preparing for an unraveling of the social fabric. If you have an office job and are OVERHEAD, you better prepare for a pink slip. I just can't see Concord as anything other than what it REALLY is. The Naval Weapons depot! It may have changed names, but their are TONS of NUKES stored in those hills. It is NOT Beverly Hills! Hopefully they dont' have ANOTHER port Chicago disaster. I met people who SAW it. They believe to this day ---WHAT THEY SAW. Google it. No one in Government wants to talk about what happened. And you want to live there?

E-man,

You assume you can refi in 6 months. What if prices drop and you can't get an apprisal then your stuck with that heloc loan. No?

Big Man,

Your tenant is getting gouged.

I rented in that neighborhood before, even though I had a good job at Lockheed at the time, so save some cash for other things. On a Sunday afternoon while my roommate was at the beach and I was out playing golf, some thugs literally busted the front door off the frame to get in, ripped us off of our gadgets, rifled through my roommate's fiance's lingerie, busted up a bunch of stuff in the house and even deficated on the floor. And nobody in the neighborhood saw anything. Yeah right.

We were out of there very soon after that, and it was the landlord's problem.

I moved into another rental not too far away. The next door neighbor, also a renter had pitbulls. Both landlords of these adjacent properties could not care less about the fence being in disrepair, even though I told them both in certified letters putting them on notice that if those dogs did anything to hurt my family I would not bother with their tenant instead I would sue their asses. But the tenants were the kind of "unsavory" people who I think the landlord was afraid of, so he did the only thing he thought he could do at the time without the tenant coming after him: he sold the property, probably at a loss.

Happy landlording,

sybrib

E-man.
225K/1700, 330K/1300, and 360K/1700... $4700 rent income looks like negative cash flow to me. Hope nothing bad is gonna happen to your property, otherwise we may be seeing another "help us keep our home" website in the future.

E-man says

Have you ever considered of borrowing money from credit cards to buy investment properties?

I've got $15,000 from US Bank at 2.9% fixed that I put in the stock market Oct '08. . .

I fully agree that playing the investment property game is the way to make a lot of money in this world.

Being a Georgist I find it the most immoral, socially parasitical if not outright slimy economic activity imaginable, but no one can deny that the PtB have stacked the deck to encourage the permanent enslavement of the lower classes by their social betters. 'twas ever so, except perhaps for the 30-40 year window where the Homestead Act was in operation (but even then homesteaders were under the thumb of railroad barons and NYC financial manipulators).

I'm fully convinced that we as a nation lack the collective IQ to perceive the malinvestment into real estate., the counter-productive nature of bidding land values up, and the totally ignored tax base that is the $20T real estate basis.

We're immersed in site value like fish in the ocean. It influences us completely, yet we do not really sense it, nor can we. Only the sharks among us know the secret.

The mistakes of 2002-2006 will be repeated, just as the mistakes of 1926-29 were.

Ugh.

Wise was the man who said that if every whiz who bloviated about the markets was really as slick as they fancied, they'd be in a Chateau screwing twins instead of playing # crunchy grab-ass on internet forums.

Sybirb is likely and fairly unnerved by the fact that somehow, in some way, a portion of your potential investment losses have a very good chance of coming out of his pocket at some point in the future, or perhaps his kid's pockets -- especially if any of those loans are FHA insured. Maybe it'll be during the next downturn? In any event, speculative/real estate wealth strikes me as one of the most unimaginative smash-n-grab wealth building schemes there is. Wealth for the sake of wealth. It advances nothing.

E-man says

My tenant offered me $1,700/month. I thought it was reasonable and agreed.

Yup, while the LL tenant relationship is rather asymmetrical once established (moving is a colossal hassle for most people), when it starts it's strictly a free market.

That e-man was able to steal a rentable house on the courthouse steps isn't his problem. I'd be doing it too if I could. Put that $215,000 balance on a 15 year loan at 4% -- that's $700/mo in credit expense.

Just like individual, decentralized actions can collectively benefit society -- Smith's Invisible Hand orchestrating supply to meet demand -- individual actions that maximize profit can also be an eventual detriment to society -- the Tragedy of the (Unmanaged) Commons. Sharks looking for free money buying up the housing stock is a long-standing example of this. Winston Churchill on this, 100 years ago:

"I hope you will understand that, when I speak of the land monopolist, I am dealing more with the process than with the individual landowner. I have no wish to hold any class up to public disapprobation. I do not think that the man who makes money by unearned increment in land is morally a worse man than anyone else who gathers his profit where he finds it in this hard world under the law and according to common usage. It is not the individual I attack, it is the system. It is not the man who is bad, it is the law which is bad. It is not the man who is blameworthy for doing what the law allows and what other men do, it is the State which would be blameworthy were it not to endeavour to reform the law and correct the practice. We do not want to punish the landlord. We want to alter the law." (Speech here)

As for term life, I have no idea how to crunch those numbers. Better to be overinsured than underinsured I guess.

We do not want to punish the landlord. We want to alter the law.

Laws aren't handed down from Mt. Sinai, they're created by men. Is it not reasonable to assume that some of these legislators have a vested or proxy interest in maintaining a rentier state when it comes to land?

I hear this same argument with the banks -- how we should be focusing only on the policy that allowed and continues to allow them to gig the system, not on the banks themselves, who simply took advantage of some well laid loopholes. With all due respect, (and few figures command it as much as Mr. Churchill), I find this to be something of a red herring. Focus on one side and not the other, and you run the risk of losing the bigger picture.

Austinhousingbubble says

Is it not reasonable to assume that some of these legislators have a vested or proxy interest in maintaining a rentier state when it comes to land?

Turns out the House of Lords shot down land tax reform in the UK 100 years ago, yes.

The middle class has been co-opted by Prop 13 and other homestead protection laws to favor preserving their real estate investments, however small in the scheme of things. This is political cover for the big boys who own everything else. It is a crock but I don't see anything changing in my lifetime, alas. Any attempt to monkey with Prop 13 to exclude commercial property would meet the mother of all BS strategic communication campaigns.

Term life, is the most expensive Life insurance you can buy. Just compare the amount you pay, to what you would have earned, with that same money, invested at 5% over your lifetime, say to age 85. If you started at age 35, for 1 million death benefit, say for 20 yrs, if you don't die, you lose hundreds of thousands over your lifetime. Your plan has to work whether you die young or live long. Term is only good to use, as a short term coverage, to be converted to whole life, as soon as possible.

Sounds like you are making all of the right moves E-man.
I'm just starting on the same path you're on. One rule of thumb I'm using lately is to not get bogged down in the numbers.
People talk about cap rates of returns and all this nonsense. I dont pay attention to any of that.

I remember my first house I was extremely meticulous. My checklist looked something like the front page of Patrick.net :D
Now I use rough guesstimates. I've gotten plenty good at eyeballing deals in my local area. I just use other properties I own as a reference point.

The good thing about real estate is it's fairly forgiving in the long run. If you get close enough to the mark the situation will correct itself given enough time. This is especially true for the bay area.

I guess you kind of have to know what you're doing to get to that point. The main things I look at now are location, property potential, and whether or not I can keep it rented. The actual numbers I use are rough ballpark figures. Just wondering what your thoughts are on this.

I suddenly become curious about the definition of millionaire in the article.

If it means a person who's total asset including house is $1M and over, many people meet this criteria even if they only have a couple thousand dollars in hand. If the millionaire is a person who's total net asset after all debts/loans paid off is over $1M, then how many they will be in the area?

Not really unnerved by that. The Big Man is not doing anything near as nefarious was President Bush's friends in Wall Street or Enron. And at least he's keeping the money here in the region.

It's the cocked sure snattitude about how to make easy money. If someone is really onto something good, they don't brag how they gamed the system to do it. The quietly stay under the radar.

Besides, I don't think being a landlord of that district of San Jose while living well within the environs somewhere like Milpitas is such a safe idea. I was a decent tenant, when I was renting in that neighborhood, the landlords I associated with got flak from me, my moving out on short notice because of the crime, then two other landlords getting a (reasonable) threat from me when they ignored my request to make sure my family was safe from that neighboring tenants' pit bulls. Of the three landlords, the owner of the first property that had the door busted off the frame for the burglary lived in Utah and couldn't care less, but my roommate was able to get back our deposits from him. The landlord of the tenant with Pit Bulls, he lived somewhere nearby, Berryessa I think, I had met him before. I think he was right to be afraid of those tenants.

That's the kinds of wildcards you have to deal with being a landlord in neighborhoods like that. Not exactly something to boast about. I have a few friends who have slowly built up rental empires; Yuppie type places they own still have headaches of being a landlord but they don't worry about gangsters coming after their families if the tenant-landlord relationship goes awry.

I suddenly become curious about the definition of millionaire in the article.
From the article:
The study defined millionaires as having $1 million worth of "investable assets," which exclude things like their primary residence, collectibles and consumables.
Hmmm... I guess it includes vacation homes and investment properties.

EBGuy says

The study defined millionaires as having $1 million worth of “investable assets,” which exclude things like their primary residence, collectibles and consumables.

Hmmm… I guess it includes vacation homes and investment properties.

Thanks EBGuy for the info. I think I need to work little hard for becoming one of them. :)

I think the chance of prices correcting downward another 20% in places like Lafayette and Atherton is about nil.
Set the wayback machine to June of 2009. Foreclosures (NODs, NOTS, bank owned) in Lafayette stood at 61; today foreclosures total 90 homes. IMHO, as long as the pent up supply increases, prices will continue to fall...

E-man says

What do you guys think?

There are two futures. One where the worst is behind us now, and one where the worst is ahead.

Will interest rates be 2% in 2015 or 12%?

Worst comes to worst, the Fed starts monetizing everything. Our per-capita external debt would need to double to get to Denmark's, or triple to get to the UK's. That's around $12T of funny money available, or 6 -10 years' worth of Helicopter Ben monetizing deficits like the Japanese do.

Funny thing, when I hit the Sunnyvale Costco I can be damn near the only white guy in the joint, depending on the time of day, with 20% hispanic, 40% Chinese, and 40% Indian being the norm. I see this trend continuing, as the employment base increasingly goes lowerwage immigrant. Will the salary flow continue into the region or will it begin to migrate back to India and China?

Wage inflation? In n Out pays $10/hr now. Will this be $11 in 2011, $12 in 2012 etc? Maybe.

If the tea partiers and Paultards get their way, the balloon would pop and we'd return to 1983-level GDP. Will the world as we know it end in November, 2012?

Federal spending will be $3.5T in 2010. Peak Government or not? Will Mr Bond acquiesce or will there be pushback? The State of course is one step away from blowing its bond rating again. The state basically has to cut spending and/or increase taxes, neither of which is conducive to the general economic health of the region.

Gasoline? Last decade it ranged at $2 - $3 mostly. This decade will it stay under $4 or will it even stay in single digits?

Has the IT revolution been run? Can't we just live off of used hardware and GPLd code from here on out? Will the economy just center around ORCL, GOOG, AAPL, INTC, and CSCO? Not bad engines for any economy to have, but is their Bay Area footprint at maximum now or not?

Is the $100K worker bee wage the base going forward, or will it be driven down towards $50K, like it was in the early dotcom 90s?

The baby boomers are entering their 60s now. Will our economy devolve into centering on their needs?

My crystal ball for this decade is rather murky. This past decade was a disaster in terms of capital formation and good governance, job and wage growth, though we did get iPods out of it so it wasn't all bad.

Chances are things get worse, not better. But I thought the same in 1992 and missed the mother of all candy give-aways for twenty-something CS types.

Troy says

Chances are things get worse, not better. But I thought the same in 1992 and missed the mother of all candy give-aways for twenty-something CS types.

Mass insanity is a hard thing to predict, but is something that is guaranteed. You know there will be another bubble, but when and in what?

From the article:
For the Merrill report to be correct, the region's rich would have had to demonstrate a prophetic ability to shift their investments into safer asset classes at the right time or have enjoyed a miraculous bump in earned income that doesn't appear to be in evidence, the economists said.
I tend to side with the critics; although, I suppose, the rise could be attributed to an E-man times 12,500 phenomena...

Eman, toothfairy and other RE investors:
How much cash do you keep available for those just-in-case times? For example, property 1 needs a new roof; Property 2 not rented for a month, etc. I remember reading that you are supposed to keep a certain amount, but I'm curious about real world experiences. It seems like there's a balance between using your cash to leverage and buy more properties and keeping enough in reserve so that one little hiccup doesn't cause the whole thing to fall apart. Thanks.

E-man says

I just came up with an idea to acquire 2 condo’s in the range of $150k/each in the 95123 zip code. It will cost me a total of $10k out of pocket for both deals. So I will be borrowing $145k/each condo.

This is interesting. BTW, Where do you get these kind of loans? Do you borrow hard money or through banks? If its a 30 yr conventional loan, I think this is a sweet deal.

This past decade was a disaster in terms of capital formation and good governance, job and wage growth, though we did get iPods out of it so it wasn’t all bad.

Ah yes, shiny slivers of vastly inferior sounding compressed music (even to cassette) with the added feature of built-in obsolescence. It is an appropriate gadget for our times -- slick looking packaging with an overemphasis on convenience, but with not much inside and totally disposable. A quantum step backward in terms of advancing fidelity.
b

Nobody discusses one thing: landlording/slumlording will kill your soul. A small thing perhaps, all things considered, but it WILL disease you.

http://www.newsweek.com/id/201838

I also don't see how the rents are sustainable, even for San Jose, considering the median incomes for the area. Somebody posted an address up above of a really dismal looking hovel. No offense to you, but my honest take away was, 1700 bucks a month??? For that?

I have been to San Jose numerous times, (about twice a year over the last six or seven years) and other than the fact that you are about an hour and a half away from Carmel, I simply do not get what all the fuss is about.

Austin, these guys here seem to be doing it themselves, but if it got too bad, you could always just hire a property manager. You lose a little $ but save mentally.

All of the other benefits aside, jobs are what is so nice about SJ. I know unemployment may be high right now, but you still have 3 major cities and plenty of small cities within about 50 miles of each other. I don't think that exists anywhere else in the US. And if it does (NY, Philly and Northern NJ is the closest thing that comes to mind), their prices aren't exactly cheap.

The guy featured in the article I pasted above had a property manager, but his property was still a monkey on his back -- and despite the rents being higher than his mortgage, the repairs and missed rent were sending him into the red. My takeaway was that easy money is rarely not a misnomer.

As for SJ, I think the Bay Area is a great place to visit, (particularly the coastal areas), and I think if the Bay Area was anything like it was 40 years ago, it would be a no-brainer to want to live there. But it just isn't. I've been all over this country, (including the impoverished, cruddy bits), and there are numerous beautiful cities with their own unique landscapes and homespun character. As for places with loads of jobs, there's always Texas, Montana, Washington, Idaho (parts of), Utah, etc. Also, when you live in a good city that isn't particularly easy to live in (meaning, for instance, inclement weather -- NOT high prices/usurious tax rates/overcrowding), you typically get people who really WANT to be there, which likely contributes to a sense communal solidarity, rather than the highly atomized society you have there in the BA. That seems like a good thing.

Not comparing the two at all. Very distinct creatures. Sort of. SJ is mostly boring-looking neighborhoods with outrageously priced, hyper-average looking homes (outside of Palm Haven) and the same congestion/strip malls as any average American city has. Austin has mostly ugly neighborhoods and growing congestion, (better radio and food), thanks in part to equity vultures and the nerd bird diaspora over the years. What a drag.

Can't we just put all of the major tech employers in the middle of some centralized shitpit state where nobody would want to live (rural Missouri anyone?) and let everyone remote VPN or use Virtual Presence from wherever they choose to live?