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Why prices will continue to fall in the Bay Area/Peninsula


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2010 Dec 1, 3:48am   37,965 views  144 comments

by Hysteresis   ➕follow (0)   💰tip   ignore  

First some facts.

  1. Almost all houses in decent areas on the Peninsula are priced $600k or more.
    Decent Peninsula areas are Millbrae, Burlingame, parts of San Mateo, Foster City, Belmont, San Carlos, Menlo Park, Palo Alto and Mountain View
    On redfin, there are very few houses under $600k in the areas I mentioned: redfin map showing houses under $600k
    On the map we can see most of these lower priced houses (meaning those under $600k) are clustered in 3 areas: redwood city, the lower income east side of san mateo and east palo alto
  2. $600k is the --starting-- price of a small starter home. that's the lowest price you'll likely see to buy in these areas. these starter homes are typically sold to first time home buyers and the younger, lower income demographic.

    if you want a bigger home it'll cost quite a bit more. A decent non-starter (meaning larger) house will start around $800k but can be much more if you want an established neighborhood (anything in Palo Alto).

  3. $600k, with 20% down, 30 year fixed at 4.5% with 1.25% property tax is $3k/month; $36k/year (excludes deductions, insurance and fees)
  4. Working backwards, how much do you have to make to afford a $600k house?
    If a household spends 30% of net pay on mortgage: $120k/year net; $210k/year gross.
    If a household spends 50% of net pay on mortgage: $72k/year net; $120k/year gross
    paycheck calculator
  5. for 2009, from the bureau of labor statistics, the san francisco and san jose mean wage is $61,940 and $66,780.
    san francisco wages
    san jose wages
    looking at the median hourly rate, we can presume median wage is equal to or less than the mean wage.
    meaning half the jobs probably make less than $61,940/$66,780.

    you get paid more in san jose, so let's look at that city.
    the mean wage for all occupational groups in SJ is under $100k, with the exception of: managers, engineers, lawyers.
    there are 888k total jobs in san jose; 74k managers, 83k engineers, 6k lawyers for a total of 163k high paying jobs. that is 18% of all jobs.

    this theory that most people in the bay area make $100k+ is nonsense. roughly 4 of 5 jobs pay under $100k.

Let's summarize the facts.

  • $600k is the starting price of a tiny house
  • you need $120k/year (50% of net pay) or $210k/year(30% of net pay) to afford this tiny home
  • 50% of jobs pay $60k/year or less. 20% of jobs pay more than $100k.

Now the analysis.

50% debt to net-income
you can have 2 people making the mean wage($60k+$60k=$120k); or one person making a high wage(at $120k) to afford a $600k mortgage. although they'll be paying 50% of their net take home for the mortgage+taxes.

but what is important is that there is no possible way (unless you have the mortgage fraud we had in 2005) that a single person with a median income can realistically afford this starter home. you need either two mean wages, or a high income wage at 50% of debt-to-net-income.

30% debt to net-income
if you do the more realistic scenario of 30% of net pay to pay a $600k mortgage; then you need one income of $210k/year or two high income wages (both at $105k/year or some combination) just to afford a starter home.

Conclusion
it's entirely unrealistic, without substantial price appreciation, for two high salaries to pay for a starter home that should be sold to the lower income demographic.

in a sane world, someone earning the mean wage or less would be buying this starter property(which would be priced much lower than $600k).
i'm hoping for people to come to this realization and maybe we'll see a return to sanity.

#housing

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105   chip_designer   2010 Dec 10, 3:26am  

anon says

ch_tah, apparently your brain has shutdown. no point debating when that happens.

that is hilarious.

106   EBGuy   2010 Dec 10, 3:51am  

It seems I post this link about once a year.
In the Bay Area, almost three- quarters of mortgage loans taken out last [2005] year allowed borrowers to delay the payment of principal and, in some cases, interest, according to data from San Francisco research firm LoanPerformance. Our very own CL seems to be one of them; these folks will continue to come out of the woodwork (especially in 2012, which is the last year that Uncle Sam allows mortgage debt forgiveness).
As foretold in the Book of Zelman. Those who can, will refinance. Those who can't will be recast into the lake of underwater homeowners. YMMV...

107   thomaswong.1986   2010 Dec 12, 3:00am  

ch_tah says

Your point about people looking to Sunnyvale instead of PA is questionable at best. Many people would never buy anywhere but PA. Cupertino is a better example of this. People say Cupertino or nothing because of the schools. Anecdotally, I know many people who have paid an extra $500k for a Cupertino house because of the schools. I mentioned Sunnyvale to them; they said no thanks.

LOL! Irrational Exhuberance raises its ugly head, with kids being the scapegoat.
Can we think back and say buyers overpaid by equal amount in decades past for same reason, I think not! Many old timers would say, these buyers are just insane.

108   Serpentor   2010 Dec 12, 3:42am  

ch_tah says

@Serpentor
I never said prices weren’t inflated in the prime areas by the bubble. History and numbers prove they were. I just don’t think they are going to crash like you do.

Your point about people looking to Sunnyvale instead of PA is questionable at best. Many people would never buy anywhere but PA. Cupertino is a better example of this. People say Cupertino or nothing because of the schools. Anecdotally, I know many people who have paid an extra $500k for a Cupertino house because of the schools. I mentioned Sunnyvale to them; they said no thanks.

Your #2 of “for the 1000x…”: I was responding to Crazy’s point that people won’t be able to refinance because they are underwater. Maybe they aren’t underwater and will be able to refinance was my point.

Your sfgate article is from Sept. 2009. Aren’t we about to enter 2011??? You seem to live in the past. Fundamentals have changed since then. Rates have dropped. Gov’t has intervened. The economy is improving.

right just because you know a few math-impaired idiots that will overpay just to be in the right zip code doesn't mean that what normal people think. That extra few hundred grand will pay for not only private school but also pay for most of college tuition. Try again.

The info in the sf gate article still applies today, mortgages are continuing to explode. Government has intervened and rates are low, but it seems like you don't understand the concept of "RECAST". Apparently you haven't been reading the news, the government "intervention" has only helped the banks, the sheeple loan-owners have all be hung out to dry.

109   B.A.C.A.H.   2010 Dec 12, 10:49am  

Serpent,
Chill out dude. Resentment or anger will eat you up from within. Just because they don't Follow Your Path does not mean that they are idiots. Quite likely, theirs is a different logic where your logic doesn't apply.

110   Â¥   2010 Dec 12, 11:03am  

http://www.mercurynews.com/crime-courts/ci_16842648

getting your purse stolen walking from your car in a million-dollar neighborhood.

what's the world coming to

111   B.A.C.A.H.   2010 Dec 12, 12:08pm  

Troy,
your link
"the woman, in her 40s, described the suspect as an African-American man".

Reinforces The Fortress attitudes

112   Â¥   2010 Dec 12, 12:49pm  

sybrib says

Troy,

your link

“the woman, in her 40s, described the suspect as an African-American man”.
Reinforces The Fortress attitudes

It's also a reality. How much is not getting robbed worth to you?

I think things are going to be getting increasingly hairy here for the foreseeable future.

The pain is only beginning.

113   CrazyMan   2010 Dec 12, 12:57pm  

I agree, sadly. Things will be getting worse and crime will increase.

On the somewhat lighter side (or serious side, really), if you were going to mug people, where do you think it would be the most successful and the most profitable? Palo Alto or Oakland?

yeah, exactly.

114   Â¥   2010 Dec 12, 1:22pm  

http://gizmodo.com/5711252/white-guy-becomes-black-bank-robber-with-super-realistic-hollywood-mask

invert the colors and things are going to get really interesting.

I don't think I've seen a black person on the street in the south bay (Sunnyvale - Cupertino - PA) in months (I'm not that close to the fortress but I enter it often on daytrips).

Now, I don't know how "bad' it's going to get compared to some past baseline, but I don't think we're moving into any recovery model for the bottom 80% of this State. Quite the opposite, I think things are going to resume the downslide.

115   Serpentor   2010 Dec 12, 2:23pm  

sybrib says

Serpent,

Chill out dude. Resentment or anger will eat you up from within. Just because they don’t Follow Your Path does not mean that they are idiots. Quite likely, theirs is a different logic where your logic doesn’t apply.

I don't resent idiots who overpay. I resent the other idiots who worship them.

116   MarkInSF   2010 Dec 12, 6:09pm  

Troy says

sybrib says

Troy,

your link

“the woman, in her 40s, described the suspect as an African-American man”.
Reinforces The Fortress attitudes

It’s also a reality. How much is not getting robbed worth to you?

Yeah, I guess that's part of what you pay for. Reducing your chance of being mugged from 0.1% to 0.01%.

I don't think it's part of any trend. Crime rates are very low, especially considering the state of the economy.

If the wing nuts wing of the Republican party get their way, and end unemployment benefits to let the "free market" work, that will all change. Lots of "entrepreneurs" will notice a mask and a gun has a high ROI.

117   Mark_LA   2010 Dec 13, 4:07am  

CrazyMan says

I agree, sadly. Things will be getting worse and crime will increase.

You mean DECREASE, like it has in 2008 and 2009, during the peak of the great recession?

One White woman getting mugged doesn't mean that crime is increasing. It just means one white woman got mugged.

118   thomaswong.1986   2010 Dec 13, 5:26am  

Troy says

http://gizmodo.com/5711252/white-guy-becomes-black-bank-robber-with-super-realistic-hollywood-mask
invert the colors and things are going to get really interesting.
I don’t think I’ve seen a black person on the street in the south bay (Sunnyvale - Cupertino - PA) in months (I’m not that close to the fortress but I enter it often on daytrips).

Not any different than in prior decades. I dont see any difference today vs 20-30 years ago.
But you will see black professionals in the hi-tech work place today as was in prior decades: Marketing, Accounting, Engineering, Lawyers, Doctors. However the term 'fortress', is certainly a more recent alien concept.

119   chip_designer   2010 Dec 23, 3:36am  

good analysis.

but, MOST of the executives mgmt level, the wealthy families, the elite are living in these areas. Needeless to say, they are not dependent on two income or even just one income to pay the mortgage. Compare this with an engineer who makes >100K, but paying $1500 rent.
So the people above makes at least $500k/year or have at least $1 million savings, paying at least $3k mortagage.

your analysis is just for those two income families, dreaming to live there. I know some people, who lives in a very shabby palo alto home, just because it is in PA. Go figure.

120   Serpentor   2010 Dec 23, 5:08am  

whats the income distribution of Palo Alto again? I don't think majority there makes anywhere near $500k. Median HOUSEHOLD income is more like $100-130k (City data, zillow, plenty of other sources). Wealthy, but not enough to justify 1.2M price of an avg home. I'd be willing to bet the higher income residents are old money and have been living there for decades.

121   pkowen   2010 Dec 23, 5:32am  

Serpentor says

whats the income distribution of Palo Alto again? I don’t think majority there makes anywhere near $500k. Median HOUSEHOLD income is more like $100-130k (City data, zillow, plenty of other sources). Wealthy, but not enough to justify 1.2M price of an avg home. I’d be willing to bet the higher income residents are old money and have been living there for decades.

Exactly, I've generally stopped arguing with those who just make up stuff about incomes. Certainly there are some big earners but: Estimated Palo Alto median household income in 2009: $123,732.

Read more: http://www.city-data.com/city/Palo-Alto-California.html#ixzz18yLc04xG

The question in my mind is mainly about capital. So someone's family income is say $150k. Do they have a huge amount of capital and are they willing to put it down on a house in PA, Woodside, Atherton, etc.? This will prop up values/prices somewhat but how much? This is perhaps the most important question when considering what prices might bottom out to. That, and how much outside pressure from money that wants to move in. Hard to say - how crappy of a structure are they willing to buy just to be on the peninsula? I am still astounded by the low quality of CA housing compared to the rest of the country when looking areas with similar demographic.

122   pkowen   2010 Dec 23, 5:38am  

Even Atherton, second highest in the nation is only $240,651 for 2009

http://www.city-data.com/city/Atherton-California.html#ixzz18yO9Emw6

But again, reported income versus real capital. I am confident Meg Whitman does not need a mortgage. Neither does Charles Schwab (Both are Atherton residents last I heard).

However "the peninsula" is much broader than this tiny enclave.

123   chip_designer   2010 Dec 23, 6:41am  

Serpentor says

whats the income distribution of Palo Alto again? I don’t think majority there makes anywhere near $500k. Median HOUSEHOLD income is more like $100-130k (City data, zillow, plenty of other sources). Wealthy, but not enough to justify 1.2M price of an avg home. I’d be willing to bet the higher income residents are old money and have been living there for decades.

you got it! establsihed neighboorhoods, folks who bought homes in 70s, and still living there, and or pass to their offsprings. All these public data does not tell you the real story. Nobody wants public to know how much they make, they just give a low ball figure. Do you think business owners voluntarily and honestly tell how much they really make or they rather keep quiet?

124   Serpentor   2010 Dec 23, 7:03am  

Lol why is it that you always go back to theories that theres no data? rich foreigners, secret incomes, gold egg laying dragons, lol. Fantasy

Do you think only palo alto residents under report their incomes?

125   Serpentor   2010 Dec 23, 7:09am  

Pop quiz, if most of the high income families have already lived there for decades. How does that skew the income distribution for people who bought during the bubble years?

126   pkowen   2010 Dec 23, 9:21am  

That's a new one - housing prices are high because of tax evasion. Love it.

127   Cvoc13   2010 Dec 23, 10:04am  

Man, I can't see it, how some of you think that Housing is going to sustain upwards pricing, and even rents are going to have to come down, in my outlook. I am not looking for sudden crash (dah that happened) While we could get a fairly big BANKING Crisis II (smaller chance) but still, our economic health is in need of an, the state is broke, the fed is running a trillion plus deficit, yet they still have to BAIL out all of these Bankrupt local governments all over the USA... Holy cow, we are going to at best a rough ride for a few more years, and then the big unknowns are so big. NOT IN ORDER OF Trouble, just some of the biggest issues I see heading our way.

1) Aging and retirement of the baby boomers (large % have ZERO in bank to retire with)
2) Energy prices going to spike way way up
3) Food possibly going to get very much more expensive.
4) Healthcare Costs going to eat major parts of the now used for housing home budgets.
5) Large term structural unemployment over 9.2% for years! and in Ca. over 11% (U6=15-18% LONG TERM)

128   thomaswong.1986   2010 Dec 23, 2:26pm  

Serpentor says

whats the income distribution of Palo Alto again? I don’t think majority there makes anywhere near $500k. Median HOUSEHOLD income is more like $100-130k (City data, zillow, plenty of other sources). Wealthy, but not enough to justify 1.2M price of an avg home. I’d be willing to bet the higher income residents are old money and have been living there for decades

Old is in how many years back ?
Last 20-30 ... not likley.

Most came to wealth from stock options over the past 10-12 years. As it turned out someones gain was another persons big time loss. That is how long we had a housing bubble way back then. Spent it like drunken sailors, because "it was free money".

http://www.paloaltoonline.com/news_features/real_estate/fall2000/2000_09_22.lowmarkt.php

Publication Date: Wednesday, Sept. 20, 2000 & Friday, Sept. 22, 2000

Breaking into the market
Yes, Virginia, it is possible to buy a first home in this area--if you're willing to make compromises
by Jocelyn Dong

So you're looking to buy your first home in Silicon Valley. How do you get into the market?

"Stock options," says real estate agent Chuck Atwell dryly. "Being a multi-millionaire."

He's speaking only partly tongue in cheek, of course. Atwell, who specializes in the Mountain View housing market, is familiar with today's real-estate maxim that those who have the most money win. But first-time homebuyers who haven't cashed in on the high-tech boom can take heart. While $2.5 million properties grab newspaper headlines, more modest deals can still be had for a half-million dollars or less.

129   Serpentor   2010 Dec 24, 5:34am  

yep... the height of the stock options feeding frenzy was in the late 1990s/early 2000s... Those were good times!

130   LAO   2011 Feb 16, 11:10am  

vain says

So there’s a whole lot of people with several hundred thousands of dollars to use as a down payment to bring the monthly payment affordable for an average income.

By "WHOLE LOT OF PEOPLE" you really mean... less than 5% of the population under the age of 40. That is the reality of the situation! Not enough people to move markets...

131   American in Japan   2011 Feb 16, 11:28am  

@Cvoc13

>1) Aging and retirement of the baby boomers (large % have ZERO in bank to retire with)
>2) Energy prices going to spike way way up
>3) Food possibly going to get very much more expensive.
>4) Healthcare Costs going to eat major parts of the now used for housing home budgets.
>5) Large term structural unemployment over 9.2% for years! and in Ca. over 11% (U6=15-18% LONG TERM)

Very good points. I am not yet sure if 2) and 3) are long term or short term (1 year), but the other points will last for years/decades.

132   B.A.C.A.H.   2011 Feb 16, 11:42am  

AIJ and CVOC13:

pricing for item #2 and #3 will be based on demand outside of the USA. Leaves less money for stuff that's not in demand outside of the USA. Like, housing inside the USA.

133   thomaswong.1986   2013 Nov 23, 10:55am  

egads101 says

@thomaswrong

Hey, post an answer, how much did hom prices fall since november 2010, when you posted this????

the correction is still in play for SFBA all thanks to the govt hand outs...

either prices fall, or we will see many more jobs get shipped to other states...

you want to news clip of that ?

134   thomaswong.1986   2013 Nov 23, 10:56am  

egads101 says

The median price paid for a home last month was $256,000, down 3.4 percent from $265,000 in September, and down 0.4 percent from $257,000 for October a year ago. The year-over-year decrease was the first in 12 months.

Hey how much did bay area home prices fall, since 2010 when you posted this, thomasWRONG?????

you are using the press release of ALL CALIFORNIA prices and stating it was SFBA prices.. which even by California standards SFBA are STILL over inflated over priced and need to correct...

135   thomaswong.1986   2013 Nov 23, 11:16am  

egads101 says

Me sorry. Me immigrant, me ingles no too good.

thez translate to "I completely fucked up 3 years ago, and my predictions were all dead ass wrong! I am a fucking idiot when it comes to real estate!"

you Messter thomas, iz the native... iz that true meaning of words?

you want to explain that to the other posters as well ?

really now.. you think im the only one who thinks SFBA prices are not back to norm?

You give me too much credit ...

136   thomaswong.1986   2013 Nov 23, 11:17am  

egads101 says

iz that true meaning of words?

you be a good boy buggah.. and go back to playing with your houses..

137   thomaswong.1986   2013 Nov 23, 2:29pm  

egads101 says

YOU said prices would go down. 3 years ago, 2 years ago, 1 year ago.

Instead, they have gone up, and gone up alot.

THAT IS THE DEFINITION OF BEING WRONG.

Are you always such a liar? just admit you were completely wrong in your predictions. Completely wrong.

that's it.

Everything else you write, makes you a LIAR.

Sure.. corrections happen and still pending in the SFBA

Oh dear.. a vested RE investor called me a LIAR...

Gone up alot ? go back to bubble prices... so there will be no further correction in the future???

138   SFace   2013 Nov 23, 5:13pm  

thomaswong.1986 says

Sure.. corrections happen and still pending in the SFBA

If the correction has not happened for 33 years (back to the mean), you should just shread the damn thing and figure out that it is a "you" problem.

Here's some hint?

* why is the base case 1980, and not 1990?

* The world is not linear and not all locality are created equal, what are the transformative changes? interest rates, supply/population, taxes, etc.

* Based on that graph, you would buy in Vallejo/Stocton in 1997 and not buy in San Jose/San Francisco. Well that is a million dollar mistake based on your same revision to mean theory. lol

139   hanera   2013 Nov 23, 5:55pm  

Reversion to the mean is an interesting theory. What if the mean is misrepresented? Inflation as represented by the green line may not be as indicated in the graph. There are many debates as to whether the inflation is correctly measured. How come the inflation is so low when people in SFBA felt that the house prices and rents have skyrocketed? Thought one of the component in inflation is shelter.

140   thomaswong.1986   2013 Nov 23, 6:17pm  

SFace says

Here's some hint?

* why is the base case 1980, and not 1990?

* The world is not linear and not all locality are created equal, what are the transformative changes? interest rates, supply/population, taxes, etc.

* Based on that graph, you would buy in Vallejo/Stocton in 1997 and not buy in San Jose/San Francisco. Well that is a million dollar mistake based on your same revision to mean theory. lol

and maybe it is.. or is it different now...

141   thomaswong.1986   2013 Nov 23, 6:24pm  

perhaps you can provide reasons why SF Prime wasnt higher say mid 90s...it took nearly 15 yeas for prices to double since 1980 and than on a dime they doubled from 1998 to 2000 and doubled again, no such prior example for similar price inflation.

http://www.nytimes.com/1997/04/27/realestate/live-work-law-for-artists-roils-san-franciscans.html

A report released this month by the National Association of Home Builders put San Francisco's median residential price for 1996 at $285,000. With prices beginning at $175,000 to $200,000, lofts are the cheapest nonsubsidized units on the market, according to David Becker, a broker with Ritchie Commercial Real Estate. They are, nonetheless, still too expensive for the artists for whom they were intended, Ms. Hestor said.

142   thomaswong.1986   2013 Nov 23, 6:34pm  

hanera says

Reversion to the mean is an interesting theory. What if the mean is misrepresented? Inflation as represented by the green line may not be as indicated in the graph. There are many debates as to whether the inflation is correctly measured. How come the inflation is so low when people in SFBA felt that the house prices and rents have skyrocketed? Thought one of the component in inflation is shelter.

yet Shiller will show we are back to normal prices be it Vegas Miami or even So Cal...

http://www.dqnews.com/Articles/2013/News/California/Southern-CA/RRSCA131112.aspx

143   SFace   2013 Nov 24, 1:04am  

thomaswong.1986 says

yet Shiller will show we are back to normal prices be it Vegas Miami or even So
Cal...

It is in Vallejo, Stockton, Vegas, Miami and whatever, but not in San Francisco, San Jose, Virginia, etc. Revision to mean theory are junk because the underlying theory (when it is all said and done, bottom line) is everything/everywhere are constant.

144   thomaswong.1986   2013 Nov 24, 4:52am  

SFace says

Revision to mean theory are junk because the underlying theory (when it is all said and done, bottom line) is everything/everywhere are constant.

its no theory since its been documented by sales data across several decades.

only the RE interest on pnet are disputing Shillers data and conclusion.

Your disagreement will not change anything...

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