patrick.net

SF ace: maybe I am missing something here, but I don't think the median net worth of Atherton residents is anywhere near $20M. I don't see how median net worth could be that high, and median income still be around $200,000. Assuming the $20M were invested in low-performing assets, earning a paltry 2% per year, that would still generate an income of $400,000, or, over time, capital gains at the same rate. That $400,000 in income from interest, capital gains, dividends, whatever, alone would be double the median income of $200,000. I guess what I am saying is that median net worth cannot be that high if median income is only $200,000.

Good point re the 75th percentile - - probably well over 500K.

I've noticed that myself. It seems to be a straight function of house price. The more expensive the house, the less it makes financial sense to buy it, because you could rent an identical expensive house much more cheaply.

I think John Talbott's books about the housing bubble explained it pretty well:

Expensive houses are a status good. No one needs to live in a posh area. It's all about getting other people to admire your success. No one would admire you for living in a rental (except Patrick.net readers!).

Average income in Atherton is believed to be higher -- some estimates say over $1M, although the realestate.com link below disagrees:

http://blogs.wsj.com/wealth/2007/12/13/californias-wealthiest-zip-codes/

Part of the reason is Prop 13. Many of the older residents bought for much much lower than their current housing value. The newcomers in these neighborhoods have far higher incomes than the people who bought many years ago. Prop 13 means that those older residents have little incentive to move (and neither do their kids/grandkids since they can inherit the tax basis). This makes the number of transactions artificially low.

This is true in many parts of the Bay Area, including large parts of San Francisco.

I'm not sure if the average net worth of an Atherton resident is $20M (this data strongly disagrees that it's anywhere near that: http://www.realestate.com/CA/Atherton/local-info.aspx), but it could be if the newcomers are skewing it way upward. This link suggests it's not even 1/10 of $20M: http://www.clrsearchblog.com/2010/03/top-10-highest-average-net-worth-zip.html

I work in an engineering office with a lot of high earners and I see a lot of them stretching themselves very far. I think part of it is that once you make over a certain amount it all really becomes discretionary income. It's a lot easer for someone to go above the suggested 28% recommended mortagage payment when the amount left over is still above the national average income.

But that's all anectdotal and personal theory...

@Shawn: I agree with your point. As income goes up, so does the ability to afford a mortage that is an increasingly greater percentage of one's income. Paying 36% of your after tax income to a mortage is a heck of a lot easier if you make $1M than if you make $60,000.

In theory, an income of $400,000 (after taxes $240,000) could support a mortgage payment of $10-11K per month, so long as the owner were willing to cut in other ways. $10-11K a month with get you into a $2M home, so a 5x ratio is doable here. Perhaps one could buy into Atherton or Hillsborough on a $400K income, but I don't think it could be done for less than that unless substantial other assets are available to the buyer.

Maybe the new people buying into these areas are richer than the current residents, since no estimate puts the median (not average) income anywhere near $400,000 in either cities.

I used to work in the Menlo Park/Palo Alto/ Atherton area. I live in the east bay. My uneducated observation is that there's simply a bigger pissing contest in those areas. Since its "The best" area in the Bay Area according to a lot of people- with the "best" schools, the best this or that, plus it has this reputation for where are the super rich and smart people live, people are seemingly more happy and willing to stretch themselves to even more ridiculous levels than those in less glamorous areas- like the east bay. Living in those areas means "You've made it". You have made it to the top. Want proof? You live in Palo Alto! When I worked there the whole area reeked of snottiness. Not necessarily because of the wealth but because there was definitely an air of superiority.

I personally can't stand those areas and at the end of the day was always glad to get out of there. It felt so stiff, stuffy, and for the most part the area was somewhat uninteresting and artificial. It really was a fortress- a good term to use.

SiO2 says

Patrick, some would say that Menlo Park is a pretty posh area, unless you're in the part by EPA. I assume you have reasons to live there other than prestige

Yes, my neighborhood is pretty rich and I don't apologize for wanting good schools, safety, places to WALK to rather than drive to, etc.

But you can get all that much cheaper as a renter, which I do. Sure, there's the hazard of being forced to move by your landlord, and the appliances are not great (though we bought some of our own, which are nice).

I'm pretty sure a main driver for high prices in those areas is indeed status-seeking.

So what they're buying with a high price is partly the social advertisement that they were able to pay a high price.

Um because it has always been.

It's called "Location Location Location" for a reason.
High end means high end. In the past, people that were not "High End" candidates, knew damn well they weren't and didn't give the prices of high end property a second thought. Other than an occasional whistle at all of those zeros.

Geesh I'm really amazed at people worry Assing over the price of upscale real estate and more dumbfounded at the media making a big deal out of it.

Sit down, this will come as a shock to you, you're a poor schmuck just like the rest of us. Now cross the causeway and just be glad you don't live on the other side of the tracks, or near the interstate. Those guys marvel at mid range neighborhoods with the same profound wonderment.
To which I'll remind them too, "location location location"

Patrick: Are they also buying, in addition to high-status, a greater degree of protection from downside investment risk? Here we are, 5 years into the housing crash, and the Palo Alto, Menlo, Atherton area has remained relativly untouched. Meanwhile, even the "posh" areas of the East Bay (Alamo, Orinda, etc.) have taken a beating.

Tenouncetrout says

Geesh I'm really amazed at people worry Assing over the price of upscale real estate and more dumbfounded at the media making a big deal out of it.

I think its because if you look at just what a million bucks buys you in those areas- a 1960's, working class tract home, it's ridiculous. Sure- there are rich areas where rich people live in rich people houses. But rich people buying former working class houses makes no sense and that's why sites like this exist- to sort of mock the buffoonery of it all.

tjjenkins says

Patrick: Are they also buying, in addition to high-status, a greater degree of protection from downside investment risk? Here we are, 5 years into the housing crash, and the Palo Alto, Menlo, Atherton area has remained relativly untouched. Meanwhile, even the "posh" areas of the East Bay (Alamo, Orinda, etc.) have taken a beating.

True, the East Bay fell much more. Though prices did fall in Palo Alto and Menlo Park too, just not as much. And poor areas really got clobbered, even East Palo Alto and East Menlo Park.

I think a lot of that is because the bubble inflated much more in the poorer areas, because it was all driven by lending there, and lending has really dried up. Around here, some of it was driven by dot-com money, and that money is still around.

edvard2 says

But rich people buying former working class houses makes no sense and that's why sites like this exist- to sort of mock the buffoonery of it all.

I agree. It's just silly when people in Palo Alto are proud about how much they paid for what is essentially a wooden tent. Especially Eichlers. Yuck.

So are people here of the view that housing prices in places like Atherton, Hillsborough, Los Altos Hills, etc., are due for a major correction?

Patrick: Sorry, I did not see your response before I posted my last comment. Since the dot com money is still around, do you think prices in those areas will hold up?

edvard2 says

I think its because if you look at just what a million bucks buys you in those areas- a 1960's, working class tract home, it's ridiculous. Sure- there are rich areas where rich people live in rich people houses. But rich people buying former working class houses makes no sense and that's why sites like this exist- to sort of mock the buffoonery of it all.

Well that's not High end, that's something all together different and you are free to rage and ridicule. It's about all you can do.

Though if it's any consolation to you, those buyers are almost destine to lose in the long run. Sure if they are in and out while the Market is hot, they may be unscathed. But for those that are living today's economy, and will spend the next ten, fifteen, or twenty years in a million dollar home, that was only worth a million dollars because employees of a timed industry of that area afforded a million dollars for a 1700 sqft shack.
Will end up sucking hind tit, when today's technology paradigm goes the way of Detroit auto plant workers, technicians, and plant managers and other specialist.

I mean ask a high paid auto union worker in Detroit in 1985 about job security, they would have rattled off a thousand reasons while they will always be King.

Tenouncetrout: While I do not disagree, just to provide a contra point, I would note that a resident of the Upper East Side during the 40's, 50's 60's etc. would also have rattled off dozens of reason why a home on the Upper East Side near Central Park would always command a high price, and, well, they would have been right about that. Same can be said of Mayfair in London, Beacon Hill in Boston, etc.

Tenouncetrout, the question is not why can't I afford high end, I know that answer. A million dollar house is out of my range.

The quesiton is how do the residents support the prices of the homes in the area? If the median incomes and home prices are way out of wack someone, or a lot of someones, have to be really stretching their lmits.

Whether or not you believe you'll ever be in the market for one of these neighborhoods it's still interesting to look at. It gives an idea of how much bubble mentality is still in the market. Signs are indicating there are still areas that will face large corrections in the future.

I decided to check the census webpage for official data from the most recent census for median/mean income for various places in the Bay Area. This information is for households. Median is on the left, mean on the right.

Alamo: $163,117/218,071
Atherton: $185,000/349,716
Hillsborough: $202,292/314,457
Los Altos: $155,466/201,199
Los Altos Hills: $218,922/315,616
Orinda: $160,867/219,826
Piedmont: $167,014/220,769

Interesting that although the median income in places like Atherton, Hillsborough and Los Altos Hills is only about $15-50K higher than the posher sections of the East Bay, the mean incomes in these places are $95-130K higher. It appears that some really high earners are bringing up the averages down there.

simply because you have to pay a premium to live in those areas. If homes could be afforded by the average K-mart worker then it wouldn't be as exclusive.

tjjenkins says

Patrick: Sorry, I did not see your response before I posted my last comment. Since the dot com money is still around, do you think prices in those areas will hold up?

My guess is that prices in Palo Alto, etc, will drift downward over the years as that money is dissipated and lending remains tight. But prices could also lurch downward if we have a surge in interest rates, or a big earthquake. Just a guess.

"I am wondering if anybody has an opinion as to why the median income to median house price ratio is even more out of whack in the really high-end areas of the Bay Area, such as Atherton and Hillsborough, than it is in other places?"

The Fortresses are terminal neighborhoods, once you buy in you do not leave except in a box.

As mentioned above, Prop 13 protects older buyers. I have a friend who stretched in 1990 to get a fixer in Los Altos for $400,000.

After the 20 years of paying the mortgage he'd owe $150,000 on it and could refi that into a 15 year loan for peanuts. His property tax is $800 a month, less than Section 8 in the hood. He could work p/t at In n Out and keep this house!

If Patrick is looking for a project he should take the real estate database and do a heat map or other visual diagram on the last sale year. Plenty of houses in the Fortress are effectively off the market now, not for sale at apparently any price.

One thing that is not mentioned here (even though more relevant to houses in the $700-900k range) - the effect of low interest rates in the last few years which has helped prop up the prices in the higher end areas. In 2006 - the move-up from a reasonably OK area with respect to schools (elementary school good, middle & high school so-so) to a very good (all 3 level schools competitive) would have been $200k (then $700k house to $900k house). Now the same move up costs $300k (now the same houses are $475k and $775k). However - the interest rate then was roughly 6.75%+ (probably closer to 7 as it would have been jumbo then). Now it is around 4.25% (2/3rd) & called conforming jumbo. So effectively - montly payment wise the move-up difference is almost the same. Also the same difference for the first time buyer - who would probably opt for the costlier house because of this. The move-up is more tricky due to the lost equity however unless the older place is rented out & the mover has sufficient reserves to come up with the 20% for the more expensive house.

See the numbers for a 20% down:

2006 difference = $1040:

House A:
Price = 700K, loan amount = $560k, monthly payment = $3632
House B:
Price = 900k, loan amount = $720k, monthly payment = $4670

2011 (now) difference = $1180:

House A:
Price = 475K, loan amount = $380k, monthly payment = $1870
House B:
Price = 775k, loan amount = $620k, monthly payment = $3050

trust fund babies! there are tons of them and many of them don't make productive lives themselves but have tons of money. it is what it is.

I agree. It's just silly when people in Palo Alto are proud about how much they paid for what is essentially a wooden tent. Especially Eichlers. Yuck

I certainly agree... and such buyers ego quickly shrinks when they realize prior buyers from pre-bubble years paid a very small fraction compared to the inflated bubble prices.

whoosh says

One thing that is not mentioned here (even though more relevant to houses in the $700-900k range) - the effect of low interest rates in the last few years which has helped prop up the prices in the higher end areas.

Certainly was not the case when you look at 1988-1993 as rates fell fell .. prices fell as well and didnt pick up until late 90s. And in the cases of SoCal, the regions most "affluent' fell the hardest because they rose the most. Other SoCal regions didnt fall, becuase they never had inflated prices.