patrick.net

Makes sense, the denser a city gets, the more likely there will be highly paid professionals who will take up the land nearest to the city center. Further away, is a ring of the next wealthiest. With a mix of some poor neighborhoods, but essentially to get the same quality of home, a person needs to move further and further out as they drop down the totem pole of pay.

Santa Clara County
Year Labor Force Employment UnemploymenUnemp. Rate
1990 852,800 818,900 33,900 4.0%
1991 841,000 792,800 48,200 5.7%
1992 846,800 788,400 58,400 6.9%
1993 847,400 788,300 59,100 7.0%
1994 852,300 798,600 53,700 6.3%
1995 860,700 818,400 42,300 4.9%
1996 892,400 859,600 32,800 3.7%
1997 929,900 901,200 28,700 3.1%
1998 953,300 922,300 30,900 3.2%
1999 958,600 929,300 29,300 3.1%
2000 940,700 911,600 29,200 3.1%
2001 939,500 891,800 47,700 5.1%
2002 891,600 816,900 74,700 8.4%
2003 850,100 779,200 71,000 8.3%
2004 824,900 771,700 53,200 6.4%
2005 819,900 776,000 43,900 5.4%
2006 829,900 792,700 37,200 4.5%
2007 852,300 812,300 40,000 4.7%
2008 879,900 827,200 52,700 6.0%
2009 891,600 791,400 100,200 11.2%

If the 100,000 cant find jobs, they leave for other parts. After all our major employers in SCC only employ a small percentage locally the rest are spread nationally and global. The two dimensional argument of supply and demand is outdated.

Every company has employees here, and often those ones that are left here are higher end ones, not a token person. Managers need good people around them that they can talk to, and get a good handle on things. Having a good employee in Boston isn't the same as having a good employee locally, where you can watch their mannerisms and what not. Everyone things the world is ending for employment here, but the employment numbers you showed above show that it's been pretty good. It took awhile after the major dot.com crash to fix things up, but any *good* person that I've worked with, has always had a job.

There are plenty of burger flippers from 1998, who managed to get 100K html jobs, who think they're still worth 100K with the limited experience they've gotten, and they're often the ones holding out for a the next 100K job, instead of looking for their burger flipper job that they're qualified for.

The 100K probably aren't all living up close to the city either. So the end result is about the same. Some people leave, some come from other parts of the country where it's even worse.

Eventually prices will fall back to reality as was the case between 1991-1997.

I'm actually not a bull. Nothing I would like more than to walk into some million dollar neighborhood and buy a house for 300k.
but I think some people are too bearish. I'm hoping that reports like this help people realize why it costs a million dollars to stake a permanent claim in one of the nicer parts of the bay area.

So where are the $350K/year salaries going to come from? If we want million-dollar houses to be the new normal, then the middle class is due a big wage increase.

toothfairy says

I’m actually not a bull. Nothing I would like more than to walk into some million dollar neighborhood and buy a house for 300k.
but I think some people are too bearish. I’m hoping that reports like this help people realize why it costs a million dollars to stake a permanent claim in one of the nicer parts of the bay area.

Well first off.. the $1M neighborhoods were a mear $300K neighborhood to begin with. So its not unresonable that one would really offer sane rational price vs irrational bubble prices of $1M.
Else its catching a falling knife!

>>Most areas in the bay area are already quite affordable as the cost of owning is already cheaper then renting.

Sigh. Another thread were property owners with too much time on their hands dream out loud about prices that only go UP-UP-UP.

E-man says

Actually now is a really good time for property owners to add to their portfolio. They haven’t had an opportunity like this for at least 10+ years. Property owners don’t necessarily want home prices to go UP and UP. Recessions offer opportunities. Fortunes are made during recessions. Too bad, I don’t have the $$ to capitalize on it.

This is quite true.
Because home price is getting cheaper and they still can get positive flow of of homes, from the begining of bubble burst till now is a good time for investors. Losing little bit of equity is not a big deal as long as there's positive flow and you're not going to sell them any time soon. The thing is that the window of chance is rapidly closing as time goes by and the market is still not clear enough to call it predictable. That's why investors are bullish even in crisis, watching market like hawks.

For the primary home buyer, you don't need those craps. You set your price range and timing, then you go.

So where are the $350K/year salaries going to come from? If we want million-dollar houses to be the new normal, then the middle class is due a big wage increase.

No, no, no. You're speaking as though common sense were actually a mitigating factor when it comes to financial policy (maybe in the next world, Vicente). The fact is, the dollar is a relative matter -- highly malleable and surprisingly yielding to suggestion and gimmick. It could be that some new normal emerges in the coming years.

For instance, in Amsterdam, a mortgage is typically 7-8 times the annual income of the borrower, and there is rarely any down payment remitted; indeed, any initial renovation costs can also be rolled into the total amount of the loan. It could be that we go a similar route in this country. One thing is clear: the myopic view of the government and many popular economists is that a normalization in real estate is not good for the welfare of the American public.

You property sharks are quite an entertaining bunch. Real Estate is about the last or second to last pit you should be throwing your money in right now. Then again, given enough time and enough vested interest, I am sure I could contrive a rather elegant rationale for sitting on a fire ant hill without any pants.

what is a Fire Ant ? I dont think we have those in the Bay Area. We've got a bunch of weirdos from the midwest and other places, but no fire Ants. So if you are ever around here, you dont need to take off your pants, for ants.

thomas.wong1986 says

Eventually prices will fall back to reality as was the case between 1991-1997.

1991- 1997 was a very bad economic time in the Bay Area. That was when the Navy pulled out and subsequently cost the Bay Area close to 50,000 jobs. Similar to Nummi these days. Doesnt matter if the house price dropped to $1.00, if your income is zero you cant buy.

The Urban Land Institute Terwilliger Center for Workforce Housing said the severity of the problem threatens the region’s future economic viability and, unless serious policy changes are made, new home development will leave significant unmet demand, leaving thousands of working families priced out of housing options.

This compares with between 50 and 60 percent in many of the Bay Area’s peer metropolitan regions. Every county in the Bay Area ranked as being one of the least affordable in the country, the report added, with only New York City being ranked less affordable."

So where are the Dual Income families people keep harping about. Not to mention the highly paid tech jobs to support home buying ?

Between 2010 and 2030, the Association of Bay Area Governments projects that the Bay Area will add more than 500,000 households.

What happened to... 'there not making any more land' argument?

marko says

1991- 1997 was a very bad economic time in the Bay Area.

We certainly lost more with mfg tech jobs vanishing as well. Today is no different
then back then... maybe alot more worst. Since it took $100B to fund new growth,
which turned out short lived 1998-2001 and created a new bubble.

what is a Fire Ant ? I dont think we have those in the Bay Area.

Clearly, you are not an entomologist.

Those of you who predict the end of real estate should remember that history is an efficient killer of currency. In some ways, land is the ONLY real wealth in the world. Everything else is a consumable.

Land is a liability. Houses are, in fact, durable consumer goods. Both land and houses require maintenance and there are taxes and insurance to think about, not to mention utilities for the latter. Stop making your installments on either, and then see how much land you own.

As far as things to invest in, I can think of much better investments that not only hold their value but are also divisible and are not annually taxed. And no, I'm not referring to rare metals.

marko says

We’ve got a bunch of weirdos from the midwest and other places

Now that made me laugh--someone from the Bay Area calling a Midwesterner weird...

Vicente says

So where are the $350K/year salaries going to come from? If we want million-dollar houses to be the new normal, then the middle class is due a big wage increase.

Well you dont need to make $350k if you have a sizable down payment. you figure someone who's owned a house since 1995 could easily have $500k in equity that could be rolled into the million dollar purchase.

Austinhousingbubble says

Land is a liability.

Not much of one thanks to Props 13 and 58 here in California. My mom's land costs are now $150/mo, and that includes the gardener. She's got another $100/mo or so for maintenance of the improvement, for a $250/mo outgo on the housing good, $1500 or so under rents in the area.

At 4% after-tax yield, it would take nest egg of around $450,000 to throw off a similar amount of income.

What you buy when you buy land is the Grant Deed giving you a perpetual, exclusive, transferable, and leasable rights to inhabit and develop the given plot of ground, subject to zoning &c.

Land is the source and sink of all our wealth. It has enriched many, and impoverished many. Often the same people.

>Foreclosures will delay the rebound for many years but will not cause prices to slide further from these level.

Tax levels & interest rates are the jokers in the deck here. Interest rates are 200bps or more lower than in 2000. Upper middle class is paying a bit less in taxes now than in 2000.

This can very well change, and will have to once OASDI becomes a net seller of treasuries. OASDI looks to be at break-even for FY09 when the $100B/yr interest is netted out! Break-even was supposed to hit in 2018!

We can get inflation, but without wage inflation it's my thesis that general inflation can actually put downward pressure on rents and land values. Something's gotta give, and the marginal cost of land is very, very low.

I agree though that the fortresses are the fortresses. People will pay any premium for safety of person and property.

It seems that the metric of "unaffordable" doesn't take into account what people are willing to do to buy. Unaffordable by normal metrics yes. But obviously many people have bought and can afford their payments, minus the people who got into those teaser loan deals.

But spending almost all of your income on a mortgage + super low rates + 45 year mortgages...

People can afford them. The problem is, the cost of affording these homes is more than most of us would bear culturally. Others have decided it's worth forgoing vacations and savings, and what not to have a home.

People always live at their absolute means. No matter what people are offered they will try and get the most out of it, and push the boundaries. It will always be unaffordable here because people will always be willing to push their incomes to the maximum and thus push up all housing around here.

SF ace says

Can a case be made that 2010 is reality and 1991-1997 was the “dream”?

LOL! You really needed to show at least 5 years of stable employment and 20% down to qualify for a loan. 1991-97 was when your typical employee understood their job was not immune to recessions.
It was far more sobering period.

SF ace says

Just like insurance, school tuition and the many costs in things we care about,

Who are "We" you are talking about? You think I or many others have some responsibilty (or care about) paying for your childs education? Frankly thats your responsiblity, and not mine.

SF ace says

there is no going back to 1997.

There is a word for that.. its called Deflation. For most of the US History, we had deflation in our economy. Inflation has been a more recent trend.

SF ace says

Do you say school costs and health care should go back down to reality too, what is the differnce?

School costs were funded by Taxes/Debt and will adjust accordingly pushing the burden on those who benefit from the services.

Your confusing free markets and goverment programs funded by tax payers or higher debt!

SF ace says

Do you say school costs and health care should go back down to reality too, what is the differnce?

The difference is that existing housing has a minimal ongoing cost of production.

In economic terms, quasi-rents from the housing sector are still relatively high.

It's built, most of it is going to last another 100 years without much maintenance.

The education and health sectors are more labor-intensive, with better guilds controlling wages and competition. Rents are high here too, but they're a lot harder to crack than real estate rents.

The Bay Area may or may not be the only major job center N. California's got, granted. That alone will keep residency levels from deteriorating too terribly much.

But when taxes go up, housing rents will go down. Energy goes up, housing rents will go down. Food goes up, housing rents will go down.

LLs generally have deep pockets, enjoy location monopolies in many areas, and are willing to wage guerilla war to maintain their revenue, but at the end of the day rent has to come out of J6P's surplus after-tax wages, and I don't see anything positive in this area coming for the foreseeable future.

pkennedy says

People always live at their absolute means. No matter what people are offered they will try and get the most out of it, and push the boundaries. It will always be unaffordable here because people will always be willing to push their incomes to the maximum and thus push up all housing around here.

I'm calling you out on your bullshit here... Successful people, responsible people do not always live at their absolute means. Especially once you reach a certain level of income. I personally can attest to the fact that when my fiancee recently lost her job (she found another one thankfully this past month.. less pay of course), that we were very happy we didn't push "the boundaries of our means'. We were saving her entire income, so when she lost her job it only affected us psychologically.... My salary covered all our expenses and then some.
All the temporary job loss did was make us tighten up our budget even more and made us realize we only want a mortgage that can be afforded on my salary alone. We were looking at a $500K "dream" home last Fall... With both our incomes we could have stretched and afforded it. I'm almost thankful for my fiancees job loss at that time as a sort of wake up call for us.
We'll be renting for most likely a few more years in L.A. ...probably more. The downside risks in housing are FAR FAR greater than any upside potential over the next few years. And if we can be saving thousands a month while renting we'll keep doing it. We'll most likely be renting a 2 bedroom vs. the 1 bedroom we currently live in post-wedding this spring... But that will only cost us at most another $100-200 a month..
I think a lot of people will learn to live well under their means... Recessions do that to people...

SF ace says

These are fuzzy facts, as my parents did in fact get a fixed rate loan based on stated income in 1993 @ 10x annual income. So i know that statement is nonsense.

Actually Alt-A lending was very rare -- insignficant -- until 2004. During the bubble Alt-A became an affordability measure for people to stretch into more house than traditional underwriting would allow.

http://research.stlouisfed.org/publications/review/10/01/Sengupta.pdf

Table 1 shows that Alt-A loan volume 2004-2006 was 10X the Alt-A loan volume of 1998-2000.

Figure 4 shows full-doc Alt-A fell from 40 ~ 50% prior to 2001 down to under 20% in 2007.

Page 64:

First, most Alt-A originations have FICO scores above 680. At the same time, the share of low-doc originations in this market has almost never been below 50 percent. While this has been the principal characteristic of Alt-A loans, the market witnessed a significant relaxing of credit standards both in terms of a greater share of low- documentation loans and high-LTV originations between 2000 and 2006. Perhaps more significantly, the share of borrowers using Alt-A prod- ucts to extract equity in their homes has almost doubled between 2000 and 2006.

while I think 1991-1997 was the exception (that homes are underpriced and corrected itself by 2000)

There is no "normal". There are booms and busts, and these can follow in any sequence and any severity. It could be all downhill from here for the rest of our lives.

i know cause the bay bridge cost $1 and SF and OAK bart is 1.20. in your eyes, everything inflate except housing?

YES! YES! YES!

As a thought experiment, what would happen to East Bay housing if the toll bridges charged $20?

Would rents and home values go:

a) UP in response.

b) DOWN in response.

c) STAY the same?

If you can answer this question correctly you have a reasonable grasp of basic economics.

Housing is different because Land is the fifth element of our economy. Unlike every other form of essential good, we bid rents and land values up to the point of unaffordability since demand so horribly outstrips supply (we'd all like a house on 10 acres, no?). But what can be bid up this way can come down!

Here's what Winston Churchill said in a speech 101 years ago:

"Some years ago in London there was a toll bar on a bridge across the Thames, and all the working people who lived on the south side of the river had to pay a daily toll of one penny for going and returning from their work. The spectacle of these poor people thus [penalized] of so large a proportion of their earnings offended the public conscience, and agitation was set on foot, municipal authorities were roused, and at the cost of the taxpayers, the bridge was freed and the toll removed. All those people who used the bridge were saved sixpence a week, but within a very short time rents on the south side of the river were found to have risen about sixpence a week, or the amount of the toll which had been remitted!"

Land value and rents are simply the sponge that soaks up ALL excess buying power in the system.

This is why this nation has had a land boom/bust cycle every generation or two. Economic conditions change and the people who tapped themselves out in the boom go BK. Land speculation wiped out the richest men in the colonies -- William Penn, who owned AN ENTIRE STATE, and Robert Morris, the man who financed the Revolution, was thrown into debtor's prison at the turn of the 19th century after a failed land deal in Western NY. Daniel Boone too at that time got wiped out in Kentucky.

Again I ask in full due respect, why housing should go back to some come of 1991-1997 basis. Why not 2000, since you already reference that easy loan creation started in 2000 without the simplistic dot bomb year.

I don't pretend to know where land values will end up this decade. It depends on immigration/emigration, pressure on housing stock, area employment and wage levels, interest rates, access to credit, income tax burdens, higher priority outgoes like the cost of transportation to work and health insurance.

THAT'S A LOT OF VARIABLES!

It is true that SF is built out and thanks to Props 13 and 58 turnover is low in the fortresses.

I don't expect prices to crash, and wouldn't be surprised to see them higher in 2020 than now. But we have the counter-example of Tokyo to keep in mind. Normal people have to pay the mortgage out of after-tax income, and while housing is the dominant expense there are others like basic food, transportation to work, education, and health care that compete with housing for our money.

Effectively with b you are saying if tuition rise, textbooks would go down, or if housing costs rise, then the bridge toll goes down

The relationship is not necessarily symmetric. But yes, if tuition rises then students would have less money for books and publishers would find themselves losing pricing power and might find themselves forced to cut prices to maintain net revenues to recapture sales lost to students finding substitute goods (used books, copying, sharing).

Publishers do enjoy high profit margins with textbooks so the push-pull of pricing does seem to trend downward in a higher-cost environment.

Bridge tolls don't respond to the economy very much since they're set outside of market forces, and are rather nominal to begin with.

@rmm221

When anyone says the population, or everyone, there are always abnormalities. We only need a good portion of the population to live at their absolute means and keep pushing it, to keep things going. For every person like yourself, there are probably 15-20 who are more than willing to rack up their credit cards at 25%.

Rarely do people set aside a good portion of their income and live well below their means. Personally I live well below my means as well, but I prefer to have options and flexibility in life.

Also, as an person/economy becomes more secure in their ability to acquire stability, they spend more and save less. Just look at 3rd world countries where savings are like 30% of their income in many cases (assuming they're not dirt poor, and middle class or better). They do this because a loss of job could take years to replace. Here, we have lots of options. Credit cards for temporary loans, spending a little less, finding a new job decently quickly. We're decently secure in our abilities to recover from a financial melt down in our own little lives. So we spend to our absolute limits.

SF ace says

Which is beside the point that, as you seem to think that 1991-1997 was normal while I think 1991-1997 was the exception (that homes are underpriced and corrected itself by 2000) My parents will not be able to get a loan today but was accessable in 1993. That is an elementary school answer and not even close to convincing.

No, the declines from peak of 89 downward was the correction. The factors that drove price inflation was private investments into Tech Spending, to the tune of $150B for the years 1998-2000. Such anomoly is unlikely to reappear. The second factor was cash out of IPO shares on highly inflated stock prices by local employees. Would you be willing to pay for Yahoo stock which was priced at $350/share but actually worth 90% or less? The anomoly of 1998-2000 is unlikely to reappear again. So the year 2000 is a double wammy bubble in stock and real estate prices in the Bay Area. Hence there was no correction in 2000.

SF ace says

There is no deflation between 1997-2010 therefore why do you have that strong belief anyway. i know cause the bay bridge cost $1 and SF and OAK bart is 1.20. in your eyes, everything inflate except housing?

Go to your local Electronics store and buy a flat panel TV which prior cost was $10K now under $1K or those jiffy Netbooks for $300 vs $1500... last we forget how much it cost back in 1990s to surf the web... $1-2 an hour by your ISP like AOL, now its a flat fee, or buy an actual Web Browswer from Netscape for $50 now free.

SF ace says

There is no deflation between 1997-2010 therefore why do you have that strong belief anyway. i know cause the bay bridge cost $1 and SF and OAK bart is 1.20. in your eyes, everything inflate except housing?

On occasions we certainly have seen BART/Muni workers on strike demanding higher pay/benefits. The result is higher public fees. When was the last time you saw Silicon Valley workers unionize as a collective workforce demanding salary/benefits/job security? Not a single year!

SF ace says

these things fully funded without tax attachments are outpacing the pace of inflation as well so effectively you answer without trying to answer.

UC Berkley gets 33% of it funding from the state. That is correcting and loading the burden on those who benefit from the education.

SF ace says

With effectively no single family home added in San Francisco for the last 30 years and likely ever, why would it be more affordable than 1997? Rents for the most part are at 2000 levels, not 1997. Interest rates are a lot lower as well, probably around 300bp

Over the past 10 years you had a boom in contruction pretty much all over the city. It doesnt take much to see all the new construction that went up in near Mission Bay. Not to mention all the high rises that went from one end of Market St to the other end, and the old factory buildings converted to spacious lofts. And plenty of other examples thourgh out the city. Surely you recall the South of Market lofts that were selling for $150-160K in the mid 90s now selling for over $750K. Did the builders under price their sales to the point of going bankrupt ?

No! new contruction inventory actually went up in SF and pretty much rest of the Bay Area!

Troy says

Land value and rents are simply the sponge that soaks up ALL excess buying power in the system.

This is why this nation has had a land boom/bust cycle every generation or two. Economic conditions change and the people who tapped themselves out in the boom go BK. Land speculation wiped out the richest men in the colonies — William Penn, who owned AN ENTIRE STATE, and Robert Morris, the man who financed the Revolution, was thrown into debtor’s prison at the turn of the 19th century after a failed land deal in Western NY. Daniel Boone too at that time got wiped out in Kentucky.

This quote by Churchill is very interesting... It works both ways... Land value and rents dry up when there isn't any excess buying power to soak up. Which is the situation for a lot people at the moment and moving forward for years to come.

When / if prosperity returns to America... The sponge of housing will rise soaking up the excess buying power. I just don't see American's buying power increasing much this decade.

thomas.wong1986 says

Over the past 10 years you had a boom in contruction pretty much all over the city. It doesnt take much to see all the new construction that went up in near Mission Bay. Not to mention all the high rises that went from one end of Market St to the other end, and the old factory buildings converted to spacious lofts. And plenty of other examples thourgh out the city. Surely you recall the South of Market lofts that were selling for $150-160K in the mid 90s now selling for over $750K. Did the builders under price their sales to the point of going bankrupt ?

Yeah we've got huge luxury condo eye-sore a few blocks down the street from where I currently live... on Hollywood and La Brea. It's was called Hollywood Madrone.. (the website appears down.. http://www.urbanlivingcondos.com/cal/hollywoodmadrone.html)
It's a gigantic deserted 3/4 finished EYE SORE now... It was suppose to be opened in Summer of 2007 if you can believe it. Fast forward to Winter 2010.. and the $500K they were asking for small Studio Apartments is laughable.
It's structures like this, and numerous half-empty yet completed Condo projects that make me weary of buying ANY condo in L.A. for years to come.

I don't agree...there is a massive amount of outsourcing in the past decade...it has a negative ripple effect on local residents income levels