patrick.net

R&D world wide yes, its not Cupertino only. But R&D can include not only Salary, Benefits, PR Tax employer portion, Corp Allocation costs, but also tons of Inventory pulls and Capital expenditures, and many other costs. I certainly dont have the numbers from Apple, but inventory pulls like so many other mfg companies are very costly and do go against R&D. Also may need to consider any M&A like the A4 which will have "in process R&D" write downs.

With much higher revenues they can certainly afford it. Kodus to them.

I admit that richer families can spend more than 3x their annual income on a house, simply because what they have left over will be larger than what poorer families left over, and their remaining costs are probably not proportionately as large as housing. That is, just because you spend twice as much on a house as you should doesn't mean you will spend twice as much on food, etc. So it's not an entirely linear relationship.

But my main point is that it's not wise to do so when you can rent the same thing in the same location for so much less, with no risk of falling prices. I'm saying it's really dumb to spend that much, because you lose every month and risk losing even more through housing deflation.

Wayne's logic though does point to why there likely won't be a burst in the prime areas like Cupertino compared to outliers like Brentwood. In Brentwood, at the peak of the collapse, when we checked out the area, it seemed like every other house was either in foreclosure or was a shortsale because people had no other option - their mortgage jumped and they flat out couldn't pay. In Cupertino, yes people may not be saving much, may have to make some cutbacks if their mortgage jumps a bit, and may make some other changes, but you aren't going to see a swarm of people getting clobbered all at the same time. These people generally have some ability to draw things out more. So you're going to get a slow hiss of price declines in Cupertino compared to the loud pop in Brentwood. The question then becomes will there ever be wage inflation to eventually drive up the price again.

mthom,

I think it depends on what happens to the stock market and unemployment. These kinds of people are very sensitive to swings in the stock market (wrt to how comfortable they feel about buying) and for existing owners I would imagine nearly all of them need 2 incomes to make their mortgage payment every month. If unemployment jumps we could see sharp drops.

So there's your bet... at best prices go sideways to slightly down for years, at worst prices drop more sharply. Why buy there again?

grywlfbg says

So there’s your bet… at best prices go sideways to slightly down for years, at worst prices drop more sharply. Why buy there again?

False choice anyone?

I admit that richer families can spend more than 3x their annual income on a house, simply because what they have left over will be larger than what poorer families left over, and their remaining costs are probably not proportionately as large as housing

Can, but do they ? 300K goest to 1M... and the 500K goes to $1.5M .. but you look at some of the $1M+ homes and wonder.. "is it really worth $1.5M? What is wrong with this picture?" Many of these home are not what I would call $1M+.

Even the rich families can screw themself just as much as lower end can with inflated prices, your paying more for what is considered alot less.

mthom says

Wayne’s logic though does point to why there likely won’t be a burst in the prime areas like Cupertino compared to outliers like Brentwood.

There are always alternatives, like Almaden Valley. Before the bubble, there was very little distinction between the two and other Cities. For some who lived in the south bay for many many years, the term Fortress Areas is rather odd for natives to understand. There is a life outside these so called Fortresses.

psst...

"330k" is an "Expensive House", and only people/families making 120K and above have any business financing a house for that much.

if people/families making only 140K are paying 900K for a house, then it is a bubble. The house would have never bumped up that high, if not for the Ill fated buyers that put them selves on the razors edge, only capable of sustaining one to two months of being out of work, to totally wipe them out. They should be buying the 250-275 range, that's if they don't plan to save, and trust their future to 401k's and consumerism inertia to keep it all in play for that long.

Why just use Cupertino as the model for this ? And a typical couple making $140,000 combined? That actually seems low for the Bay Area .

Tenouncetrout says

psst…
“330k” is an “Expensive House”, and only people/families making 120K and above have any business financing a house for that much.
if people/families making only 140K are paying 900K for a house, then it is a bubble. The house would have never bumped up that high, if not for the Ill fated buyers that put them selves on the razors edge, only capable of sustaining one to two months of being out of work, to totally wipe them out. They should be buying the 250-275 range, that’s if they don’t plan to save, and trust their future to 401k’s and consumerism inertia to keep it all in play for that long.

Where can I find a house for 330k ? I'd love to find a house for 330k ! 250- 275 even better ! You are right about someone making pnly $140k and buying a 990,000 house but that is not as bad as someone making 14k and buying a 750,000 house - now THAT is even more of a bubble

marko says

Why just use Cupertino as the model for this ? And a typical couple making $140,000 combined? That actually seems low for the Bay Area .

140,000 is the median income. 22% makes 100k-150k, and 38% makes more than that.

140K, 100k,150k whatever. Silicon Valley is not exactly a Fortress of Job ( /Income) Stability. It is the reason today's Fortress buyers don't just rely on their income to prop up The Fortress Prices. They are either already very wealthy from family money, or a stock windfall, or building a business over time.

sybrib says

140K, 100k,150k whatever. Silicon Valley is not exactly a Fortress of Job ( /Income) Stability. It is the reason today’s Fortress buyers don’t just rely on their income to prop up The Fortress Prices. They are either already very wealthy from family money, or a stock windfall, or building a business over time.

I am not sure what is meant by a fortress area but if you mean upper wealth areas then I have seen something interesting during the past year. Lots of For Sale signs in upper-do areas like Alamo/WalnutCreek Hills or Aptos Hills. Not sure what to make of it but it looks just like the beginning of our currently argued crash. Just a different area

grywlfbg says

mthom,
So there’s your bet… at best prices go sideways to slightly down for years, at worst prices drop more sharply. Why buy there again?

In the last housing crash, some places' houses dropped from 400k to 100k (and according to Patrick's formula, they are good to buy at 100k), but Cupertino's house hardly dropped. What do you think price can drop more sharply in the future?

If price go sideways, let's see what happens to Patrick the renter and Wayne the buyer:

1. every month Wayne pays about $1300 more than Patrick (assumes the house rents at $2856)

2. in Wayne's house, the equity in the house increases about $1100 every month

After some time, say, 5 years, Wayne paid 1.3kx60=78k more than Patrick, and Wayne's mortgage principle reduced by $1.1kx60=66k. Assume at that time, the Cupertino median income and rent finally increased (due to inflation or good economics) to a level that makes buying a house a reasonable choice for Patrick.

Since Patrick's bank account now has $78k + the down payment saved 5 years ago, he can borrow 78k less than Wayne. At the same time, Wayne's mortgage is reduced by 66k. So Patrick's mortgage is 12k less than Wayne.

Assume interest rate is as low as today at that time, Patrick is 12k ahead of Wayne. However, Patrick will probably lose to Wayne if any of the following happens:

1. interest rate is not as low as today's rate (which is very likely if we have inflation or economics recovered)

2. house price increases by more than 12k or 1.2% in the five years

Patrick will win way ahead of Wayne if house price crash after or during 5 years. However, if house price didn't crash in Cupertino when it crashed 75% in other area, when and why it will crash?

WayneinCA says

grywlfbg says

mthom,

So there’s your bet… at best prices go sideways to slightly down for years, at worst prices drop more sharply. Why buy there again?

In the last housing crash, some places’ houses dropped from 40k to 10k (and according to Patrick’s formula, they are good to buy at 10k), but Cupertino’s house hardly dropped. What do you think price can drop more sharply in the future?
If price go sideways, let’s see what happens to Patrick the renter and Wayne the buyer:
1. every month Wayne pays about $1300 more than Patrick (assumes the house rents at $2856)
2. in Wayne’s house, the equity in the house increases about $1100 every month
After some time, say, 5 years, Wayne paid 1.3kx60=78k more than Patrick, and Wayne’s mortgage principle reduced by $1.1kx60=66k. Assume at that time, the Cupertino median income and rent finally increased (due to inflation or good economics) to a level that makes buying a house a reasonable choice for Patrick.
Since Patrick’s bank account now has $78k + the down payment saved 5 years ago, he can borrow 78k less than Wayne. At the same time, Wayne’s mortgage is reduced by 66k. So Patrick’s mortgage is 12k less than Wayne.
Assume interest rate is as low as today at that time, Patrick is 12k ahead of Wayne. However, Patrick will probably lose to Wayne if any of the following happens:
1. interest rate is not as low as today’s rate (which is very likely if we have inflation or economics recovered)
2. house price increases by more than 12k or 1.2% in the five years
Patrick will win way ahead of Wayne if house price crash after or during 5 years. However, if house price didn’t crash in Cupertino when it crashed 75% in other area, when and why it will crash?

Depends what you mean by crash. One thing Cupertino has is a good proximity. I could see why people would want to live there. Within an hour of work easy. Other areas 1 1/2 hours automobile dependent - not so easy

If we're talking about a $1M+ house, Wayne loses at least $60k to the "Stealtor" when he tries to sell it. House appreciates to say $1.5M at some point, and he'll cough up some $100k to the cartel. Oh, and where does the money fit in to the model above to pay for say a new water heater, a fixed fence, a broken fridge, and also the $1k/year in landscape maintenance (which most landlords pay for)...?

It's all about time delays related to lock periods for Option ARMs and the ability of prime borrowers to survive longer on credit. The lower your credit score, the shorter your lock period. Subprime people had 2 year locks. Prime people had 5 or even 10-year locks. A whole lot of people are paying LESS than the interest owed on their houses. Once those loans recast into fully amortizing loans their payments will jump (those with regular ARMs have done well so far as rates have remained low, but w/ Option ARMs it's not the interest rate, it's the switch from less than interest to fully amortizing - recast vs reset). So prime areas are just now beginning to show the strain. Also, prime people can live longer on credit/savings so it has taken longer for their spendthrift ways (or one spouse losing a job) to catch up to them.

As to your math comparison, that is the question we are all asking. I have a decent downpayment so for me I welcome higher interest rates. This will lead to lower prices (people can afford less house for a given payment) which means lower property taxes and an easier time selling in the future should I need to. I can also always refinance if rates drop. As for your point 2, if you think prices are only going up from here as some folks think then you should buy now. As I said in my post, I don't see a single reason that the fundamentals will improve in the next couple of years which will keep prices down or flat at best. So your math with flat prices means it's better to rent. With falling prices it's better to rent. WIth rising prices it's better to buy. But if you know the answer to that question you'll be a rich man.

SanMateoRenter says

If we’re talking about a $1M+ house, Wayne loses at least $60k to the “Stealtor” when he tries to sell it. House appreciates to say $1.5M at some point, and he’ll cough up some $100k to the cartel. Oh, and where does the money fit in to the model above to pay for say a new water heater, a fixed fence, a broken fridge, and also the $1k/year in landscape maintenance (which most landlords pay for)…?

Good point on maintenance and don't forget property taxes - on a $1M place that's another $10k/year.

marko says

Depends what you mean by crash. One thing Cupertino has is a good proximity. I could see why people would want to live there. Within an hour of work easy. Other areas 1 1/2 hours automobile dependent - not so easy

Highly questionable since people change jobs very often and choices for only Cupertino jobs are limted. And many employers do move around time to time.

Some of my contacts over the years previous employed with Apple.
1983 for 18 years. HR function...lives in Morgan Hills
1989 for 13 years. HR function... lives in So SanJose
5 years back in the 90s. Accounting/Finance..lives in Fremont
3 years back in the 90s. Financial Planning/Cost...Lives in Almaden Valley
Since 2003, Tax Manager, lives in Belmont.

and plenty of others over the years who worked at Tandem(dead), Pivotal(dead), Symantec etc but dont live in Cupertino.

grywlfbg says

SanMateoRenter says

If we’re talking about a $1M+ house, Wayne loses at least $60k to the “Stealtor” when he tries to sell it. House appreciates to say $1.5M at some point, and he’ll cough up some $100k to the cartel. Oh, and where does the money fit in to the model above to pay for say a new water heater, a fixed fence, a broken fridge, and also the $1k/year in landscape maintenance (which most landlords pay for)…?

Good point on maintenance and don’t forget property taxes - on a $1M place that’s another $10k/year.

My calculation has taken property taxes into account. I didn't include maintenance. But my main point would still be valid: the extra money buyer paid more than renter is primarily become equity in house. So if price stays flat or go up, buying is better.

In general, buying is about the same as renting even in Cupertino when taking into account mortgage interest deduction and principle payback.

If prices are flat/down, the buyer will lose a little.
If prices and rents are up, the benefits exceeds the costs exponentially. Classic cost/benefit play.

Cupertino is a family town where family stabiity is a huge premium so people prefer to buy vs. rent everything else being equal.

average income is a horrible measure of affordability in a town where people are retired or works at Apple. Throw out the bottom 50% and top 10% of the household and that will give you a better idea what true average incomes are.

SF ace says

Cupertino is a family town where family stabiity is a huge premium

50% family the other 50% single... but so are many other alternative towns.
Apple has been around for a long time. Almost went under and would have not made it.
Still, many in years prior to the bubble, didnt go gaga over Cupertino homes.
The retires sold and left the region... no sense sticking around and being reminded of the rat race.

thomas.wong1986 says

SF ace says

Cupertino is a family town where family stabiity is a huge premium

50% family the other 50% single… but so are many other alternative towns.
Apple has been around for a long time. Almost went under and would have not made it.
Still, many in years prior to the bubble, didnt go gaga over Cupertino homes.
The retires sold and left the region… no sense sticking around and being reminded of the rat race.

50% of households with kids under 18 is a huge number in current time, #1 in Santa Clara County and tops in the entire bay area which proves the point that Cupertino is a kids town.

Ten years ago, family households were around 40 percent in an environment where birth rate is around 1%. You only reach that number by having more young family move in than moving out.

Apple is Cupertino icon, realistically, people who live in Cupertino probably works for Intel, Cisco, Google, Oracle, HP, Lockheed etc. as well. For an engineer, the second tier company pays more than the fortune 100.

http://www.bayareacensus.ca.gov/cities/cities.htm

How can it be possible that buying a $1.5M house that you can rent for probably about $4k are equivalent costs? How can you also not include the suck of 6%+ off your top line when you sell. On the $1.5M example, that's close to $100k cash out lost to commission.

Play with this: http://www.nytimes.com/interactive/business/buy-rent-calculator.html
and put in the numbers above ($4k/mo, 1.5M price, 20% down, 5.5% loan). Note that the ability to deduct mortgage interest and property taxes is accounted for in the calculation. Note also by the way that apparently property tax is not deductible if one is paying any amount of AMT.

The calculations show that renting is always economically better. The only way to get buying better than renting is to get the property to appreciate at 5%+ per year, every year. And then you break even in 10 years. All of this includes rents going up at 3%/year. Now I have a fixed rent for the next three years, but even with it going up, the calculator is showing a net benefit to renting with these figures.

Of course one thing that could affect all this would be major inflation. And in that scenario, I could see the dynamics changing. But $4k/mo for a $1.5M house is not an economic equivalent.

Conversely, a buyer should be able to pick up a cupertino home that rents for about 4K for 1.1M to 1.2M. 30 year jumbo conforming (up to730K or so which is the likely profile of the buyer) is 4.75% 0 points 0 fee with 20% downpayment.

A jumbo may be on the 5.25% range.

SF ace says

50% of households with kids under 18 is a huge number in current time, #1 in Santa Clara County and tops in the entire bay area which proves the point that Cupertino is a kids town.

With Kids the number drops to 25%. We have much fewer under 18 than when I went to High School. SoBay school disctricts closed many schools down early 80s and no new schools have been built since. As for 10-20 years ago, many people left CA all together.

SF ace says

Apple is Cupertino icon, realistically, people who live in Cupertino probably works for Intel, Cisco, Google, Oracle, HP, Lockheed etc. as well. For an engineer, the second tier company pays more than the fortune 100

Tandem, Measurex, Varian ring a bell ? They too were icons at one time.
If you think this was big, just think how big we were back inthe 80s/90s ?
Today what you see is a small fraction to what we had around here.

Did you see prices double/triple back then even when we employeed more people locally and had more employers in the 80s/90s?
we bearly exceeded 68% by 1988. We had companies working 24 hours a day 6 days a week, 3 shifts daily in mfg alone trying
to keep up with demand.
--- Think about that !!!

Software has much greater wealth production per worker than mfg.

thomas.wong1986 says

SF ace says

50% of households with kids under 18 is a huge number in current time, #1 in Santa Clara County and tops in the entire bay area which proves the point that Cupertino is a kids town.

With Kids the number drops to 25%. We have much fewer under 18 than when I went to High School. SoBay school disctricts closed many schools down early 80s and no new schools have been built since. As for 10-20 years ago, many people left CA all together.

You just ignored the link but anyway let's put this matter to an end.
2006-2008 ACS, Cupertino, CA

Total households 18789
Family: 14,954 79.6%
Family with kids under 9,237 49.2%

Again I challenge you find a town that has more family with kids as a % under 18 in the entire bay area.

Troy says

Software has much greater wealth production per worker than mfg.

Someone forgot to tell that to Lotus Development, Ask Computers, Borland, Netscape, Digital Research, SCO, NeXT, BeOS and several others. They too were great cheerleaders, believing in their own hype... then crap happens!

Then again it did produce wealth for employees who sold their pre-ipo shares in Ariba, Commerce One, Agile during the B2B Boom some 10 years ago... certainly some of the buyers of the stock actually believed the company was worth $300-600/share and they too were going to reap gains. Im pretty sure! some their early employees cashed out and bought mega mansions in Palo Alto and did well. I certainly one cant say the same for the buyers of the stock, who lost 90% of their stock wealth!

I hope your not including this B2B bubble with inflated market capitalization as some sort of "legitimate wealth" creation.

Thomas,

Due to some family responsibilities, in recent weeks I have had to give up the lightrail/bus combo and start driving to work again.
Damn, the traffic is getting a lot heavier in the afternoon/evening commute time. Some routes remind me of the bad' ol' good ol' days of the dotcom era.

I don't know who all these people are or where they are going but I imagine they're not cruising in the logjams for fun. Maybe they are commuting from crappy rentals to crappy jobs, but they are commuting to something.

Judging from the commute traffic, I'd say the glass is half full.

WayneinCA says

My calculation has taken property taxes into account. I didn’t include maintenance. But my main point would still be valid: the extra money buyer paid more than renter is primarily become equity in house. So if price stays flat or go up, buying is better.

That was the whole point of my post. I don't dispute that if house prices stay flat to up that over the long term (to amortize the transaction costs) it's better to buy. But my contention is that the fundamentals (wages, jobs, boomers retiring, etc) are pointing to flat prices at best but most likely continuing falling prices. So in my case there is little risk to waiting and a lot of potential gain if prices keep dropping.

OP: You posit that prices are sustainable with the mortgage eating 72% of the family's take-home, and that's after putting $200k down - the equivalent of 3 years of the family's take home pay.

How many people do you know who make $140k who have $200k in cash in the bank (plus another $25k at least in reserve after the down payment)?

How many banks do you know of who will finance a house that consumes 3/4 of the family's take home income?

How many families do you know who are able and willing, outside of bubble environments, to spend 3/4 of their income on the mortgage, even if a bank would give it to them?

Not realistic IMHO, there's a reason that home prices have tracked incomes at around 3x and not at 7x as you suggest, the Bay Area is very much bubblicious, though falling in places piece by piece. Oh, and in your math, you left out car payments, insurance, etc.

JimAtLaw says

OP: You posit that prices are sustainable with the mortgage eating 72% of the family’s take-home, and that’s after putting $200k down - the equivalent of 3 years of the family’s take home pay.
How many people do you know who make $140k who have $200k in cash in the bank (plus another $25k at least in reserve after the down payment)?
How many banks do you know of who will finance a house that consumes 3/4 of the family’s take home income?
How many families do you know who are able and willing, outside of bubble environments, to spend 3/4 of their income on the mortgage, even if a bank would give it to them?
Not realistic IMHO, there’s a reason that home prices have tracked incomes at around 3x and not at 7x as you suggest, the Bay Area is very much bubblicious, though falling in places piece by piece. Oh, and in your math, you left out car payments, insurance, etc.

I see more and more families are paying more of their income toward their mortgage just to stay in much desirable areas. I don't see anything wrong with it. But then they are at the mercy of their continuing high paying jobs, for e.g here in Socal Boeing folks and Apple,Google etc. in Bay area. All it will take a one more strike of economy hitting them to bring tremendous pressure on prices of homes in this area(for e.g. sudden drop in defense spending could mean disaster for Boeing, may be 2012? 2016? - end of Iraq/Afghanistan war - most will agree that we cannot stay there forever). Remember the last slump in Socal when Boeing was hit hard? So one of the reasons why some of the Socal areas are holding ground is due to companies like Boeing.

grywlfbg says

I don’t dispute that if house prices stay flat to up that over the long term (to amortize the transaction costs) it’s better to buy

One thing that I was recently educated on here was that the stock market did very well 1980-2000. Doing the barest of market-timing would have given you some pretty impressive compounding gains, making the rent vs. buy decision a lot more difficult when looking at actual history. Of course, the 1980s is a lot different to now. . .

How many people do you know who make $140k who have $200k in cash in the bank (plus another $25k at least in reserve after the down payment)?

What percent of the bubble market is turning over every year? 2%, 1 out 50 homes?

Los Altos shows 400 sales over the TTM, Cupertino ~300 (east of the 85). There are what, 20,000 AAPL and GOOG employees now? Add in the doctors, lawyers, etc. and I don't see the fortress as over-bought.

When I was working at Apple I wanted to buy closer, and so did my manager. He's still there with probably $20M in stock so it's safe to say he's not making the commute from Morgan Hill any more.

Part of what I thought was keeping the bubble aloft was the class divide between those who already owned and those who didn't, the former being able to leverage while the latter being "priced out forever".

It turned out there was more fraud and outright silliness involved that could support 2005 prices, but there is something to be said for the effect that there's not enough supply to meet the demand, at least in the nicest 20% of the housing stock.

That was the whole point of my post. I don’t dispute that if house prices stay flat to up that over the long term (to amortize the transaction costs) it’s better to buy.

But that's NOT the point of MY post. Look at the NYT calculator and play with the math there. Even if a house price goes up with inflation (say 3%), current market rents make buying more expensive over the long term. I put in $4k rent and a $1.5M house price (which I've found to be pretty common on the mid-peninsula the past few years), 20% down and 5.5% mortgage (which might not even be available for such a large loan), and both house and rent going up 3%/year. Renting is always cheaper. After 30 years, you'd have paid $616k more for buying, not including any major, unexpected maintenance, higher property taxes, etc.

I don't dispute there are various reasons for buying, and if we get major inflation (which is probable) then having debt in nominal dollars will be a great deal as the cost of debt goes down. But when rents are so much lower than relative buying costs, and it's clear prices will be flat, at best, for the next few years, there's certainly no rush and a lot of risk to buying right now.

Besides, the significant money you can save by renting right now completely insulates one from any housing cost increases just in case that actually happens over the next few years. Not likely...

JimAtLaw says

OP: You posit that prices are sustainable with the mortgage eating 72% of the family’s take-home, and that’s after putting $200k down - the equivalent of 3 years of the family’s take home pay.
How many people do you know who make $140k who have $200k in cash in the bank (plus another $25k at least in reserve after the down payment)?
How many banks do you know of who will finance a house that consumes 3/4 of the family’s take home income?
How many families do you know who are able and willing, outside of bubble environments, to spend 3/4 of their income on the mortgage, even if a bank would give it to them?
Not realistic IMHO, there’s a reason that home prices have tracked incomes at around 3x and not at 7x as you suggest, the Bay Area is very much bubblicious, though falling in places piece by piece. Oh, and in your math, you left out car payments, insurance, etc.

Exactly. This is the mentality that fueled much of the bubble. "See, we can make it work and
appreciation will make us rich.". 70%+ of take-home for housing?? Seriously? This is what fueled the bubble in large part, but it in no way translates to "there is no bubble".

If you are banking on a $990k Silly Valley house to seriously appreciate - well, good luck! This mentality only occurs in places like this and the only question in my mind is how much this will continue to fuel itself. In the vast majority of America, no one, and I mean NO ONE would think this made sense. I guess "it's different here".

pkowen says

70%+ of take-home for housing??

No, 10% of takehome for housing and 60% for the investment in land.

SanMateoRenter says

$1.5M house price

With those numbers I get a $4760/mo average cost over the life of loan.

Interest averages $2250/mo (a bit low since this principal is over the $1M limit on deduction which I'm not accounting for)

Property tax is $1000/mo

Other costs are $1500/mo and include the lost $700/mo in opportunity cost on the downpayment.

So in 2040 having paid $1.7M in TCO you'll own a $1.5M house free and clear.

I don't know if the last 30 years are going to be like the next 30. Does anyone?

If Japan's ZIRP is the model then we're in for 20+ years of stagnation and slow price decay.

If 70's style inflation comes back then buying now will be awesome.

It's difficult modeling this, but the basic deal is, assuming 3% rent increases and 4% yields over the next 30 years:

Total cash outgo with rent: $2.4M
Total cash outgo buying: $3.3M

In addition, the renter saves the compounding interest of each year, which also collects the monthly savings from renting. Thus the renter's cash pile increases from $300,000 in year 1 to $2.4M in year 30 (renting saves $2900/mo in year 1 and $600/mo in year 29).

So with these numbers, which would you prefer? Renting for the next 30 years and having $2.4M more in cash, or owning what is now a $1.5M home free and clear in 2040?

With 4% yields, I'd go with buying, though with these numbers in 2040, the interest on the cash savings would in fact cover 80% of the rent (which would be $9800/mo).

Going with 6% yields, then renting looks a lot better since in year 30 you'd have $4M in the bank and the interest would cover TWICE the rent ($9800/mo).

$1.5M might as well be a moon house for me so that's all the analysis I'm going to do : )

bubblesitter says

But then they are at the mercy of their continuing high paying jobs, for e.g here in Socal Boeing folks and Apple,Google etc. in Bay area. All it will take a one more strike of economy hitting them to bring tremendous pressure on prices of homes in this area(for e.g. sudden drop in defense spending could mean disaster for Boeing, may be 2012? 2016? - end of Iraq/Afghanistan war - most will agree that we cannot stay there forever). Remember the last slump in Socal when Boeing was hit hard? So one of the reasons why some of the Socal areas are holding ground is due to companies like Boeing.

It seems many dont recall the historical facts you listed. Decline in defense spending in Socal hit home prices hard as was the case with Japan imports of Hight Tech products kicked Silicon Valley pretty hard as well. These factors come into play very quickly and there is little or no warning when they happen.

Troy says

Los Altos shows 400 sales over the TTM, Cupertino ~300 (east of the 85). There are what, 20,000 AAPL and GOOG employees now? Add in the doctors, lawyers, etc. and I don’t see the fortress as over-bought.

As with any large organization, many people, lots of segregation of duties, means little responsibility and little pay. Google is known for not paying much for their people today Google = Gilded Cage .
The younger they get them the less experience they have and are less marketable to other companies. Skills in Advertising/traffic acquisition revenue/costs does not transfer as a skill to mainline HW/SW companies in the valley.

The original assumption of average salary and average house is flawed.

1) average salary represents sum of Cupertino households
2) average household includes apartments/rentals which is about 33% of Cupertino housing. In San Francisco, your average resident is a renter. In Cupertino 1/3 of the households are renters.

3) Average house price and affordability is quite misleading. Half the homes are purchased before 1989, meaning half the residents already locked in a cost that may be less than 500K equilvalent. Perhaps if you pooled every households debt on their home accounting for when it was purchased, it's probably in the 500K range, not 990K. If you layer in the fact that homeowners make 175K and renters 110K in Cupertino, then salary to cost is not out of whack.

An average salary is not gonna be enough to buy a SFH in Cupertino, that's just the way it is going to be. IMO, it takes about 250K gross income to buy a house and raise a family of 4 in Cupertino. This town attracts plenty of 200K+ households so median salary will be pushed up even in with the great recession.