> “My client was maxed out,” Wang said. “He wanted to be self-sufficient: `I’m independent. I don’t want my parents to help me.’ But now he’s realized he’s got to have that conversation with his mother to borrow a couple of hundred thousand dollars, just in case that situation happens again.”
Must be nice to have parents who can just loan you ~$200k to make an offer on a 2 million dollar house in Sunnyvale of all places.
I can't get over how ridiculous the market in the bay area is right now.
>"the median home value is $961,600, according to Zillow."
Being from the Midwest, this is such a foreign concept to me. Looking at Des Moines, $955,000 will get you a 5 bedroom with 3 full and 2 half bathrooms, 1.26 acres, 7037 square feet, and a 5 car garage. And that house has a really nice interior too!
That house in the first picture of the article would probably be $100,000 or so based on its size.
I understand larger cities offer a higher salary, and that the salary can more than offset the cost of living increase, but it would pain me to think about spending that much money on housing (whether renting or buying).
Here's the other thing: Many of these bay area starter homes are located in safe, but characterless suburbs. I don't mean that in an angsty anti-suburban way: they're just poorly planned with poorly made homes.
You mention Des Moines... As a thought experiment: if the hand of god moved the city of Ankeny, Iowa so that it was a 30 min commute to the bay, it would soon be regarded as one of the "cooler" places to live outside of SF, and quickly fill up with millionaires.
Haha Ankeny is already getting filled with people living at or beyond their means and hoping they don't have a housing bubble burst.
I have a family friend who moved there perhaps a decade ago and built a really nice house. Few years later, the house wasn't for sale, but someone knocked on the door and wanted to buy it for $1,000,000. Then they wanted it furnished, so the price went up a bit higher. They probably made at least 250k in a handful of years.
My friend wanted to downsize anyway, so when someone literally arrived at their doorstep and offered 1M+, it was an easy decision.
He bought a model home for 770k about 4 years ago. Someone wanted to buy it off of him in 2015, and he wanted to downsize again, so they made a deal. The purchaser put a large sum of earnest money down, and they would get the house after my friend built himself a new house. The old house sold for 820k about 10 months after the earnest money was put down.
Indeed. On the other hand, median incomes don't decrease very much as you move away from the downtown core of Vancouver, while prices drop significantly; head out to Coquitlam (roughly the same distance as Hayward or Palo Alto are from San Francisco) and that $955k condo turns into a $400k condo.
Metro Vancouver is a curious beast: The City of Vancouver itself is relatively small and very NIMBY, but the suburbs are far more pro-development. Between Vancouver's geography (on a peninsula), residents' opposition to development, and its lack of transportation corridors, I find myself wondering if by 2100 people will be asking "why is the metropolitan area named after a small suburb?"
The advantage is that even with the insane housing costs I'm still able to save significant amounts of money. For example 2 years out of school a developer can command $160k salary at the best companies (and those companies have a lot of positions to fill). Assuming $3600 a month on rent you have about $65k after taxes. (I guestimated most of these calculations in 5 seconds so be easy on my math)
If $160k 2 years out of school is typical, I need to know where you work so I can apply[0]. :P
In all seriousness, that is not a typical salary for the vast majority of people in the Bay Area. Not everyone is a software developer working for a company with money to burn.
That's a humblebrag, don't get baited. :P Yes you can get 160k 2 years out of school if you're a top student and/or have awesome GitHub/sideprojects and performed well at the company to own something, move up the chain, or are a cleverer bear than your average.
You'd be surprised at how close to those salaries you can get in the exact same companies, just not in their main campuses.
I work for one of those, from home, with the same salary as bay area coworkers, but a 200K 4 bedroom house.
There was a recent article here in HN about how Silicon Valley was hiring physicists. Oscar, the main name in that story, is a coworker of mine and he isn't working from the Bay area: he is working from Hawaii.
Living in San Francisco is a legitimate choice, but the whole idea that you have to go live there to get the good salaries and work at the good companies is less and less true every year.
Even Hawaii has a gradient of pricing. General cost of living is more expensive than most places on the mainland because almost everything has to be brought in on a ship, but outside of the major tourist cities prices are more manageable.
Housing is slightly cheaper, but food and utilities are substantially more. All-in -- especially if you're renting -- HI is more expensive than SF proper.
But... you can also get six figure developer salaries outside of silicon valley in places that are significantly cheaper and with far cheaper taxes than California. And they are a lot more common than people I talk to from the Bay Area seem to think. It's almost like there is some sort of group think that believes that there aren't any well paying developer job in nice locations outside of the Bay Area.
Liquidity? You mean as in it is easy to find a different job? I guess that's good if you enjoy that sort of thing. But, I've been working a six figure developer job at the same company for the past 15 years and I'm thrilled that I don't have to worry about the liquidity of the market ;-)
Here is the setup: Literally dozens of companies paying $150k+ (base) for engineers with experience. Upward pressure on wages and working conditions. Cross-pollination of lessons learned between companies.
People always think about startups, but there is an army of engineers at profitable tech companies in the bay area that are well comped for work that generally is free of death-march conditions.
I ran some pretty extensive numbers on a sub-comment and don't want to repost the entire thing in reply to you.
I estimated at $2,900/month rent in the valley and $900/month in the Midwest. Valley earned 160/year, Midwest at 80/year. My conclusion was that if everything froze and you could save all non-rent money (minus 20k for misc. other expenses), the end result would be pretty close. You'd have to commit to working in the valley fairly for about 4 years to save up for the downpayment (assuming you started at 0).
After the valley developer gets the house, the numbers may swing substantially in their favor, however it's a long timeline for that to happen, and the housing prices have a fair chance of continuing to rise or for the housing bubble to burst.
160k total comp is still pretty early days, though. A senior engineer at Google will end up making about 250-300k. A staff engineer 300-400k. I have heard it can be far higher in the case of a highly valued specialty, or high leadership potential. It will be very difficult to ever command a salary like this as a programmer in the midwest.
You know, there may be a serious upside to living in the valley as a software developer if you stay there long enough. You're right about salaries in the Midwest never reaching that high.
I'm not a developer, but it seems like it's a good gig if you've been there for a number of years. It seems like it would be difficult to get by for non-tech workers, either requiring a really long commute for a somewhat reasonable rent/mortgage or putting a huge percent of take-home pay into housing.
Roughly how many years would it take to get to senior engineer or staff engineer?
It took me I wanna say three years to reach senior and six to reach staff. This is uncommonly fast, but not way outside the ordinary distribution. I don't know what they're paying the kids these days, but I wouldn't be surprised if the entry level comp for a kid right out of school is topping out at $140k.
The salaries at these levels don't start out at the top number. Like many other company, it is a band, so that you can continue receiving smaller raises for a few years after you are promoted.
No it doesn't. As long as you're purchasing not renting, you have a chance of getting that money back out, but it's nuts to me.
I sat next to a SF attorney on a plane a year or two ago. She said she and her husband were putting 75% of their take-home pay towards their mortgage when they purchased their first home. Their incomes rose which made things a bit better. After a few years, they sold it off, made a fair bit of money from appreciation, and got a place outside of SF city limits where they had at least a very small yard.
It's only a matter of time before home prices drop in a bubble and thousands have lost a giant chunk of their net worth which was held up in a single undiversifiable asset.
But the rest of your expenses are not 9x in SV. If you saved 2k a month on housing someplace else, but got paid 48k less, you'd be losing big time, especially since mortgage interest is tax deductible.
The deduction also phases out based on your income, and if your mortgage is over $1,000,000. These are both more likely to be a reality in SV over most other places in the US.
On the surface, you would be missing out with those numbers, but we have to look at the whole picture. There is no equity gained in a house if you're renting while saving up for a downpayment. Let's look at San Jose vs Des Moines and use the overall median downpayment for comparison.
# Assumptions
We'll go a bit conservative here. San Jose developer pay 2k/month more in rent than the Midwest developer.
San Jose developer will earn double the base salary (not a mere 48k/year more as suggested above.)
Outside of housing, the cost of living in both cities is identical at 20k/year. 20k will give you quite a good life in the Midwest as a single person. No idea about the valley.
# Midwest developer living in Des Moines, IA:
$80,000/year salary (about 57k after taxes)
2 bedroom apartment in a safe place can be found pretty easily for under $900/month. 1 bedroom for $750 or so. No roommates. Perhaps a 20 minute commute to work.
Rent = $900/month = $10,800/year
Other Living Expenses = $20,000/year
Leftover money = 2,200/month = 26k/year
18 months of saving at that rate to get to the median down payment (39k).
Money sunk into rent before getting any equity in a house: $39,000
# San Jose developer:
$160,000/year salary (about 105k after taxes)
Rent = 2,900/month = 34,800
Other Living Expenses = $20,000/year
Leftover money = $4,183/month = $50,200/year
46 months until you have the $192,000 down payment ready, assuming housing prices stay the same.
Money sunk into rent before getting any equity in a house: $133,400
# Result
When the San Jose developer buys a home (assuming the median downpayment didn't go up in those almost 4 years of waiting), the Midwest developer stopped paying rent (11k/year) and was paying down their mortgage with that 11k and the leftover money of 26k/year, totaling 37k/year.
Neglecting mortgage interest because I don't want to calculate that, the Midwest developer put 86k towards the 192k house after the downpayment.
Total equity for Midwest developer: 86k+39k = 125k.
Total equity for San Jose developer: 192k.
Yes, the San Jose developer has more equity in the end, but we also assumed:
* Identical cost of living
* The housing prices in both cities stayed the same until San Jose developer had their 192k. That will be pretty true in the Midwest, but may not be in SV.
San Jose may not have a huge commute, but other areas of SV would. We didn't even look at the fact that the Midwest developer isn't spending 1-2 hours each way going to work (numbers I see cited here frequently).
You also have to add into that the fact that almost everything is in fact more expensive in SV. Not 9x more, but groceries are nearly double what they would be in the midwest. Restaurants are more than double for similar quality. So the other living expenses being the same would not be the case I think.
You can put 3% down. You get PMI for 2 years at the minimum but you can pay more to get to 20% down and then PMI is based on the value of the loan. In the Midwest this turns out to be very cheap. So you don't have to rent for very long.. if at all. That being said it may be difficult to get significant appreciation on your house like one gets in SV.
9x? the richest buyers in silicon valley have 90x the income and 900x the wealth, and they're the ones defining the prices.
hint: they're not local engineers. buying a house like this is like going down to the porsche dealership and buying a couple of cayennes as graduation presents for the kids.
It would pain you just to pay the taxes on a nearly-million-dollar house. Even with the property tax cap in SF you're going to pay over $900 plus special assessments every month on a $961k house.
Probably more in Des Moines, but at least you're living the lifestyle you'd normally associate with a house that expensive.
Born and raised in the South Bay and it's really hard for me to justify spending even 1M on a house in Sunnyvale. Wages are higher, yes, but it's still a huge shock. I imagine if you grew up elsewhere in the USA it's even more unbelievable (aside from NYC).
edit: looks like I got a downvote - did I break a rule? Didn't mean to offend anyone. Sunnyvale is a decent area but when I think 'one million dollars' I don't think Sunnyvale :)
Oh and access to great surfing? And quick access to excellent skiing? Oh and an award winning, internationally renowned wine country?
Now you guys do have cheaper maple syrup, that's probably worth it. And the fog in the summer here definitely ruins those awesome summer evenings that are so plentiful in NY.
(Btw, these are the things I repeat to myself to be ok with the cost of living here)
Maybe you're being facetious about kale chips, but NYC is the world center of hipster gastronomy, if that's your thing (it's not mine, but some people like it).
NYC's also got great skiing and the wine is nothing to scoff at. Really, the only thing missing is surfing and "internationally renowned" wine.
I've had NY wine, my parents still live there, and we go out to some of their local wineries... they're better than I expected, but I love Zin, and CA is it's home.
NYC's got Skiing, yes, but it's nothing like Tahoe... Not even Vermont, though Mad River Glen, will always have a place in my heart; the Paradise trail and it's little frozen water falls to jump off, great memories there.
NJ/NY transplant here, currently living in SF. I went skiing regularly as a kid in the Adirondacks in upstate NY (~4-5 hour drive from NYC). And fantastic Quebec skiing is another 2-4 hours past that.
Valid on the surfing and wine country, but there is skiing in the East :)
I wouldn't want a million-dollar home in Sunnyvale either. It would be in a terrible part of town or incredibly small. A decent place in Birdland or Ortega Park or Cherry Chase is more like $2M.
And while Sunnyvale is mostly an also-ran of Silicon Valley cities, it's actually closer to the new Apple spaceship than most of Cupertino, it has Apple's new campus at Wolfe & Arques and while Sunnyvale/Tech Corners is arguably the least popular of Google's local campuses, hey, at least Sunnyvale has Google offices.
It's part of the Pacific Ring Asian hot-money bubble. Same as in Vancouver and Sydney. /r/vancouver has some good investigatory articles
$2 trillion left China illegally, and this is where some went
This doesn't end well, by the way. Neighborhoods turn into ghost towns because "renters damage property". Great businesses close. Vancouver had something like 30 empty multimillion dollar houses burn down last year.
Bay Area has a housing affordability issue for people who are in non-tech sectors.
For those in the tech sector, there is no affordability issue, only entitlement issue
If they are married, both in tech, their salary will be in the 300k-400k range, that's about 25k - 33k/month before tax, or about 15 - 20k/month after tax. with today's interest rate, $1MM house will need a monthly payment $4k - $5k/month including property tax. The couple will still have about 10k/month left after paying the mortgage.
Assuming they are renting and are fiscally responsible, they should be able to save about 70 - 100k on 300 - 400k income/year. which means they will just need 2 years before they can save up for the down payment.
So where is the issue? The issue is they jumped their league - Sunnyvale, Palo Alto, Mountain View, SF are the 'major leagues' - foreign cash buyers, tech execs or, more commonly , average Joe who sold their first house with $500k+ gain in tax free equity - (not hard to do in the bay area btw). First time home buyer will have a tough time competing in this league.
Try the minor league instead, try east bay, dublin($900k), livermore still in the $700k - both good schools but 60min+ away, or how about places like Newark or Union City, still in the $700k, both within 30 mins drive (but so so schools).
If they are struggling to buy a $2MM home because they have to buy in these neighborhoods. it's an entitlement problem, not an affordability issue.
Absolutely! I definitely feel for the plight of those making <$80k or so here. But if you make more than that, I can't bring myself to have too much sympathy. You can afford a 2br apartment, to max your 401k, to feed and clothe yourself, and to take a few decent vacations a year, which is more than most Americans get.
Separate bedrooms are not a human right, especially for children. Hell, my brothers and I slept in the same room for a long time even after our parents were able to afford a house with extra rooms.
I don't think 90k/year in the bay area is nearly enough for even a couple (and you mention children?!). A 2br apartment will go for $2500/month with a long commute. I presume you're talking pre-tax 80k.
2br in Sunnyvale can be had for that much with some looking. A buddy of mine is renting a decently nice detached house with 3br for 3000/mo.
So the apartment costs 30k a year. Taxes will be quite low if a 401k are being maxed -- maybe 15k in total taxes? So we have roughly 80k - 15k - 25k = 30k to cover everything other than housing. This is very doable. It is not a lavish lifestyle but it's more than most Americans get to cover the same slice of expenses.
I live in the Bay Area. My wife and I, early thirties and a few years out of grad school, make about $300k combined and in our area (Sunnyvale) there are maybe 2 or 3 houses for sale at any given time under our rough budget of $1.2 million, which would be below the median list value for a house in the city. I say this as dispassionately as possible, but I would really like to know more about who is able to afford these houses. The article gives one example (doctor married to an engineer, no age given), but I wonder if that case is typical.
I hear from real estate agents that the typical buyer is a couple making $300k/year. They've just been in the workforce longer and have the downpayment by now. Your profile would suggest "a few years working and a decade of student debt".
This is typically only a problem for first time home buyers. If you already own a home in the bay area for more than a few years, you will have a significate amount of equity that will allow you to move up in more expensive area with a larger downpayment and a similar monthly payment.
So try buy a home in the less expensive area first.
Your mortgage on that 1.2M house is 5k a month (assuming 20% down). And most of that is tax deducatable. How did you determine 1.2M is the most you can afford?
Our jobs are high stress, evidenced by the median tenure at our jobs being about 3 years. The people that leave are not job hopping, they're having existential crises and changing career paths. Basically, we don't want to risk being shackled to our jobs to pay the mortgage.
Then, honestly, why are you looking to buy? Why do you have a budget of 1.2MM if you don't want to be shackled to your house? If you legitimately don't know what you're going to be doing in 3 years, buying an expensive house is a terrible idea.
We don't want to be shackled to a house we can only afford if we make at least our current salaries. A $1.2 million dollar house would not be such a house, as even if we made only $200k we could likely afford it. We are planning to live in the Bay Area long term for personal reasons, so buying something makes sense.
Mortgage deduction doesn't change the numbers by that much. People tend to overestimate how much of the mortgage will be offset by the deduction. With a good interest rate (which you have, if you're paying $5k/mo on a 1.2M house), about 65% of the P&I payment is interest (and this declines every year). If you're earning $300k married filing jointly, your top tax bracket will be 33%. So your $5k turns into $1072 that the government basically gives you back for owning a house.
But don't forget that claiming this means giving up the standard deduction, so back up and take $12600 out of your interest for a more accurate number. Instead of 39K for the first year, it's more like $26.4k. So now you're down to $726/month saved.
That's about 14.5% saved due to the deductibility of mortgage interest. So if you could afford $1.2MM without the deduction, you can afford about $1.37 with it, which is a decent jump but it's not putting you into even a $1.5MM house.
If you're earning $300K/year, you can likely afford a 1.2MM home without too much trouble, but it depends on whether you have kids (if you live somewhere expensive, childcare is also crazy expensive), have student loans, need two cars to commute, are investing for retirement heavily, etc. $300/year can easily put a 1.2MM house at the top of the budget for many couples. I say that as someone with a family income in that ballpark and a home that cost exactly that much. I cannot imagine trying to make ends meet with a higher mortgage payment, and we don't have student loans, or a second car, or a drug habit.
If you're earning $300k/year in California, you're paying ~$22k in state income tax, so you should be itemizing on your federal return with or without the mortgage, and subtracting the standard deduction from the benefit doesn't seem right.
Looks like you're right. I thought state and local taxes were deductible without itemizing but I was wrong. I've been itemizing for years so I guess I got that mixed up. (And I have no state income tax so it hasn't been a factor for years either.)
So that puts you back at the ~1000 mark for savings which probably gets you close to 1.5MM.
1.2M is also going to have ~14-16k/year for property tax and insurances associated with it. He said his budget is 1.2M not the max he could afford. I was looking in housing in the east bay and the cheapest over there in a decent neighborhood was 650k. Far, far more than I can afford.
Fun fact: in Tokyo prices are 3x lower than in the bay area, in large part because new housing is legally much easier to build.
If you want to make the bay area more affordable, check out the great work these folks are doing to legalize building new housing: http://www.sfyimby.org.
Aside from engineering/software development (which is maybe 10-20% of the job market), the average college grad only makes about $40k in Silicon Valley out of college.
it helps but theres far not enough high rise habitations in tokyo itself. its crazy when you see the number of small shacks and 4 stories building in many places.
1 - low interest rates and speciality jumbo programs to lock in high earners are providing balloon capital. When this pops people won't lose houses because they have fixed rates, but they will be equity poor or underwater as prices will correct at least 20% with interest rates rising.
2 - cash investors chasing yield and security. The "cash" offers clogging every market are disproportionally inbound from foreign nationals and now even starting to be private placement. Blackstone and other huge PE firms now consider "single family" to be a category akin to multi-family and are placing billions to buy and rent homes for yield. All this blows up when interest rates normalize - eg investors would rather own treasuries / CDs / etc at 5% vs homes at 5%.
Sam Zell - an infamous CRE investor nw $5b - has recently said he believes there is a material value of 10-15% a year of holding CASH - eg that the market is just about ready for a major correction and I agree wholeheartedly(1)
I wonder what the thought process of people buying $1MM+ houses in SV really is. I mean how much more are the prices going to go, so that's clearly not an investment. Even if the only job you could get was in SV, required you to stay close by _and_ paid enough, you are still paying a big chunk of it towards housing! Oh and you're going to live in a smaller house too!
It makes little financial sense. You'd be much better off earning less in the southeast or midwest and living big. Also wonder what the sweet spot is wrt city/jobs/salary/savings/housing.
> I wonder what the thought process of people buying $1MM+ houses in SV really is.
I think at that order of magnitude, it you would have to consider it a true investment, and you should be really bummed if you're holding on to it when the prices drop. I would be hesitant to question how much more the prices can go up. People say the same thing with the stock market all the time, but the long term trend remains up.
I'm from the Midwest, so I'm not exactly up on everything in California, but from a number of articles I've read I understand that San Francisco is really worried about maintaining their skyline. Because of this they don't want to develop anything really tall.
Venture capital firms are mostly in the same area (San Jose?), and the further out your startup is from there, the less likely they are to consider you. I'm guessing it's a waiting game for a big tech bust leading to a housing bust of some sort.
I'll take my $830/month rent for a 2 bedroom, 2 bathroom (cable and internet included) in Iowa for the time being.
It's not so much the skyline in SF, it's that somehow "not building anything" has become a sort of "progressive" litmus test - if you are in favor of making any changes that would result in more housing being developed, you are a neocon shill for developers who wants to "Manhattan-ize" all of our neighborhoods, and if you want to continue preventing any substantial amount of housing from being built, you are a true progressive defending the poor and downtrodden. And everyone in the Bay Area wants to be a progressive, so you end up with this weird groupthink where because "not letting developers make profits" is progressive and everyone identifies as progressive there's this incredible opposition to making the policy changes that would result in more housing getting built.
It's really weird and makes no sense to me, especially since the people who get really fucked by this are people working in services who end up commuting from places where housing is cheap like Tracy all the way to San Jose where all the jobs are, who are exactly the kind of people you would expect "progressives" to be doing anything to help.
Also, San Francisco (and the Peninsula) really don't need to develop anything really tall, they just need to develop a lot more 3-8 story buildings, particularly in areas that are currently single-family homes. Nearly all of the Peninsula and most of San Francisco are currently single-family homes on ~1/4 acre lots, i.e. very suburban character.
BTW, I see mostly 6000-7000 sq ft lots, which is 1/6 or 1/7 of an acre. But how do you replace those with 3-8 story buildings? Those people have lived there for 20-30 years. Do you declare a housing crisis and evict them?
Are there examples of where this was done? I would love to know how fast it occurs, and see a graph of adoption/change over time.
I would imagine 5-10% of people would sell (to the developer) immediately. But those lots probably wouldn't be adjacent. Maybe after 3-5 years, enough adjacent lots could be found to make it appealing to a developer. (The developer wants economy of scale, and economy of multiple units sharing common space.) Where is the tipping point?
If the developer offered to buy homes at 20% over market rate, I wonder how the graph would change, vs. market rate.
But the developer needs to start buying immediately, yet can't recoup their investment for several years. They may not like that.
It just entirely depends on people's priorities. Some may feel that the particular career opportunities they have access to here are a very high priority for them.
Also, if someone had built a social circle over the early part of their careers, and are now thinking of these need for a larger place to raise a family, the social ties may be hard to give up. If they have no ties to the Midwest, done may be adverse to building a social circle and foundation from scratch again, even if the economics are favorable.
That is simply not true. Even if you bought at the peak in 2007 in Sunnyvale you are likely up 50% or more on your investment. If you were lucky and bought in 2005 or 2009 your house is probably worth 60-70% more than when you bought it. This has been true for the past 25-30 years in much of SV. That doesn't mean it will continue forever, of course, but the trend has been there for a very long time now.
Ok, but what if I had invested the house money - would the rate of return be more/equal/less? There's of course the economy crash but I would expect that to affect house prices too. Just sounds like a bad idea to consider primary residence an investment.
It's surprisingly hard to beat investing in real estate in growth markets like SV because of the leverage afforded by the ratio of down payment to home price....
For example in Los Gatos, appreciation has been 5% on average for many years, and so the 200k you put down on a 1m house will typically appreciate by 50k. 25% roi in year 1, increasing each year. Of course, property appreciation doesn't happen in a straight line, and houses cost money to maintain (property taxes, etc) but the larger point is valid.
Obviously that depends on what you invest in and how much risk you are willing to carry. In the long term the stock market index funds have returned about 6-7% annually adjusted for inflation. Take almost any 10-year window in the past 30 years and SV home prices have either matched or beaten that substantially.
Real estate speculation by putting all your money in a your own house is generally not a good investment. You aren't diversifying, you don't have any information advantage over the market, you're unlikely to be objective about the value, and there are high friction costs in buying/selling it.
Maybe a bit like driving an classic car in everyday use. Except the car has low friction.
Edit: Not saying you should not buy a house, just that you should be honest about what it is - you get value from owning and living in it, and the market risk is unwanted for most people.
But all the other actors in the market have the same tax advantage, so the house prices rise in concert with the tax deduction. (at least in SV, can be different where construction costs dominate)
When using normal real estate investment vehicles, investors are also able to deduct the interest as a business cost.
> I mean how much more are the prices going to go, so that's clearly not an investment.
Except it is.
You forget that in most scenarios your initial capital and what you paid toward the place is still there, and you'll keep paying it even if you wind up underwater, and you can generate cash flow from the place, and a lot of that is tax deductible, resulting in decent windfalls from the government annually.
I used to live in Back Bay, Boston, where prices are well over $1000/sq ft, so I'm not shocked by the prices at all.
Weather is nicer in SV. Not everything in life is about financial decisions. Living "big" in midwest means you need to live in midwest, which will decrease my standard of living tremendously, the social aspect at least.
Places that are equally nice are also expensive, e.g., LA, Zurich, NYC, London. I just prefer to live in a nicer area than to live in a 7 bedroom house with a 10 car garage.
Can you say more about the social aspect? Seems like a big-ish city in the Midwest would be similar -- and perhaps with more well-rounded people (who do more than work 60 hour weeks).
It's like the difference between Zurich and Hamburg - one is a lot more homogeneous than the other.
I don't think it's that easy to "live big" in the midwest too. Where is the nearest Ferrari service center if you live in Iowa? What's the equivalent of The French Laundry?
If I want cheaper cost of living I'd most likely move to Berlin.
You'd be much better off earning less in the southeast or midwest and living big.
I recently bought a fairly expensive house and happily sacrificed square feet for a shorter commute and being closer to the city center. We looked at several houses that where in the 2000-3000 sq ft range and most felt way to big for what we needed/wanted. A smaller house was at no point in the process seen as a negative. We eventually got a house that's just under 1500 sq ft with a small, but very nice, garden and we've so far not once wished that it was bigger (although we might add a small conservatory, bringing it to just over 1500 sq ft). Bigger house just means more work keeping it cleaned and maintained. Living in a huge house far out in some dull suburb with a long commute to work sounds like my perfect nightmare.
As for our 'financial' reasoning. It was a house we really wanted to live in, in an area we really wanted to live in and we could afford it, so we bought it.
Because consumers are primarily used to buying consumables, it results in them not having an intuitive sense when it comes to investments. Buying a house is essentially mostly an asset allocation problem, not a purchasing problem.
Think of it this way, would you rather buy 1 house in Palo Alto or 5 houses in Des Moine? What would 5 houses in Des Moine get you? Well, you could rent the other 4 houses out and get some sort of rental income but you get a higher salary working in Palo Alto, both are income streams.
After X number of years, your 5 houses in Des Moine will be worth some amount and your 1 house in Palo Alto will be worth a different amount. Your houses in Des Moine are probably $600,000 worth of brick and concrete which are guaranteed to depreciate over time and $400,000 worth of land which may appreciate. Your Palo Alto home is like, $200,000 of brick and concrete and $800,000 worth of land so much more likely the growth in land will make up for the depreciation in house. Plus, in Palo Alto, you can be a part of the NIMBY coalition that defends against any law that threatens the value of your house while encouraging office space to be built that increases it's value.
You can apply the same calculus to say, buying a $200K Des Moine house and $800K of index funds or renting in Palo Alto and buying $1000K of index funds or any other asset allocation mix you like.
At the end of the day, even though they look like big scary numbers, the relative impacts are much tinier because you're just shifting assets between different classes. Most asset classes grow at about the same risk adjusted rate because the market is efficient (excepting brick and concrete which is guaranteed to depreciate as a consumable).
Of course, this is assuming every person has essentially access to infinite amounts of credit providing they can put up the collateral to back it up. Once you get into the nitty gritty of who can and cannot gain access to credit, then issues of privilege also get involved.
I understand not everyone works in tech but it's not unusual for Bay Area couples to make $300k-$400k per year 6-8 years out of college working in tech.
Consider an example of new grad with CS major working in major software company. Currently new grads start at $120k total package (base + RSU/stock + bonus). After maxing out 401k, taxes, rent(with roomates), car payments etc., one can save $35k-$40k per year. So for a couple having worked for 5 years each could save $35k * 5 * 2 = $350k in total. Use $250k to make downpayment to buy $1.25M home making most of mortgage interest deduction. That's how myself and most of my Indian tech friends in Bay Area bought homes. Being lucky in an IPO also helps. Above calculation assumes no student or credit card debt.
I'll never understand how this is not unusual. I make decent money and could offer my portion of the 300-400k total, but every girl I've dated out here is making < 40k/year.
Is there a TechMeetDoctor dating site I'm missing?
Just don't get divorced. I've seen it happen, and the couple usually is forced to sell the house. Esp. hard if they have kids -- moving down to a 2br appt in a new school district.
What are all the people going to the bay area planning on doing long term? Was it never a long term place for most people? Just not thinking about it? Renting and living with roomates forever?
Several of my coworkers are entering "long term" and having their first kids.
Among this cohort, a 90-minute commute is luxuriously short. They walk at least a mile to their nearest BART stations (BART won't provide even close to adequate parking, or price it high enough to bring the waitlists under 3+ years), then stand elbow-to-elbow on the fully packed trains for 50+ minutes.
They are the front lines, gentrifying the furthest places from San Francisco that are still part of its transit ecosystem. As they bid up property, their strategy will stop working soon, but by then they'll be owners. Extremely leveraged, house-poor owners, but owners. And they'll convince themselves that 3+ hours of dead time every day isn't a huge waste of life.
I do something similar because my mental health goes down the toilet when I come home to the inescapable sound of other people's TV and phone conversations (and I already blast headphones all day at my open-plan office). The only people on my team with sub-30-minute commutes share apartments in the stabbier neighborhoods in the city.
Oh, how I wish I could be content in a low-rise cube farm in the rust belt where I grew up. The scenery isn't pretty, but commuting on a freeway that actually moves is incredible. And the average door-to-door time is like 25 minutes.
Some of us have always lived here, and find it hard to move away from friends/family. I'm in that camp at the moment, but if I ever want to own a 'middle class' house, my partner and I will undoubtedly move (she teaches preschool and I'm a software engineer). Renting seems like the more 'sane' option because home loans are front-loaded with interest and non-equity payments anyways.
Depends on where - we basically live in SJ (Campbell) and the prices are still near 1M for a decent place. A friend just bought a >1M house in South SJ, far away from just about everything except Netflix.
Midtown SJ is cheaper, and hopefully on the up-and-up. East SJ is cheap but sketchy. Downtown is getting nicer but is definitely on the more expensive side unless you want to live under a freeway.
It's a combination of a number of reasons but yes, it is in large part due to zoning and NIMBYism. SF and the Bay Area as a whole are incredibly expensive places to build housing. Much of the peninsula is completely hostile to density, and to an only slightly lesser extent, so is SF. It doesn't help that through subsidies such as Prop 13 and rent control, a large part of the voting block is essentially insulated from the horrible policy decisions they support.
In addition, you shouldn't be so surprised that this is what has become of the former hippy capital of the world. SF style liberals aren't actually nearly as progressive as they would like the world to think. Many of those who you might identify as hippies are simply self entitled white people from middle class and above childhoods. The real working class of this country didn't have the ability to move to SF in the 60's to be part of the whole counter culture movement. It should come as no surprise that those who did aren't too fond of poor working class people living in "their" city.
I have friends who are NIMBYs, so I've come to understand how they feel. I don't think it helps to label and disparage them.
They feel a bit like the Native Americans felt when white men took over their land. They were here first, living peacefully. The NIMBYs didn't ask for tech companies to take over their cities, and try to drive them out.
Some still want to stay, because they grew up here, and all their friends are here. Others are sick of the congestion we've created, and would like to move outward to, say, Woodside or Saratoga, but those places are even more expensive. And yes, property tax would be brutal if they moved. So can't capture the gains on their homes either. They're stuck.
I wish I could suggest a good alternative to them... are there any?
You're right, perhaps I shouldn't be so disparaging of SF NIMBYs, although likening their situation to the forced taking of land from Native Americans is surely overly sympathetic, if not down right insulting.
For the record, I spent part of my childhood in the Bay Area, I graduated from high school in SF, most of my closest childhood friends were made during my time in SF/Oakland, some of my best childhood memories were made there, and I could not reasonably afford to live there today if I were to move back. So, in many ways I am very sympathetic to the human toll that increased housing costs result in as they keep me from ever moving back.
With that being said, SF and the Bay Area as a whole have been underdeveloping housing for decades, this is not a recent trend related solely to tech. I have a very hard time feeling sorry for a group of voters who vote down any sensible housing and density initiatives and then years later complain about increased housing costs. It doesn't take a policy expert to predict what will happen here. I particularly don't have much sympathy when those same voters who are incredibly adept at holding back high density development are perfectly fine greenlighting corporate parks and commercial development. It seems to me that many Bay Area municipalities, and by extension their voters, love the added tax revenue that large employers bring in but don't want to adapt the environment to house said employees. So no, in short I'm not buying the argument that they didn't ask for the tech companies to take over their cities. In fact, they wanted exactly this. They also wanted some other municipality to shoulder the cost of housing those employees. They are now realizing that they probably can't have it both ways.
With regards to congestion, this is just as much the fault of a population increase as it is the fault of communities in the Bay Area being unwilling to make the necessary investments in housing and transit. And of course it's been long time Bay Area residents who have fought those investments.
>So can't capture the gains on their homes either.
They can't capture those gains right now. I'm sure they'll be more than happy to capture those gains in the future when they sell or pass on their houses to their kids. This is what really bothers me about Prop 13.
If CA voters are truly worried about grandma being forced out of her house due to tax increases, then sure, lets have some mechanism to insure that doesn't happen. Personally, I think the result of such programs is that you end up with grandma living alone in a 4 bedroom house on a 7,000 sq ft lot in Palo Alto, not exactly an efficient use of land. But I get it, people don't want to downsize later in life.
Maybe instead we could have a system were the property taxes are capped at a predefined rate while owning the home, as currently happens under Prop 13, but the difference between the capped taxes and the current taxes are accrued and held as a lien against the home so when it is sold the back taxes are paid off. The current system were long time homeowners are subsidized by newer owners but are allowed to reap the rewards of increased real estate prices seems terribly unfair.
If we're going to have rent control, I'd also like to see that it's means tested so we don't have upper income renters holding on to SF property as pied-à-terres.
Ultimately, the only real long term solutions will be to build far more dense housing, and the transit to go along with it, or make the Bay Area a less desirable place to live. If the residents of the Bay Area want to preserve it as it currently is, that's fine by me, but then they don't get to complain when they can no longer afford to live there.
>They were here first, living peacefully.
This argument to me basically boils down to "I got mine, so screw everyone else". Sorry if I'm not too sympathetic to it. If Bay Area residents are so against other Americans moving to their cities, perhaps they should organize politically to introduce a Constitutional amendment that forbids "non natives", good luck defining that, from living there. They could even set up border checks when entering the cities. Of course, other cities may then similarly choose to ban Bay Area residents from moving in. I'm going to take a wild guess and say that Bay Area NIMBYs will suddenly think that this is horribly unfair.
The house value does not need rise enough to offset the interest + taxes unless you're buying it and leaving it unoccupied for all this time.
If you need a house to live in, the monthly rent for a 1MM house is likely going to be over $3k. Over 30 years this will come out to be $1.08M, much more than the $870k in mortgage interest + taxes for owning the house. On top of that there's the 20-30% tax discount on the mortgage interest that will make owning even more favorable.
>> If you need a house to live in, the monthly rent for a 1MM house is likely going to be over $3k.Over 30 years this will come out to be $1.08M, much more than the $870k in mortgage interest + taxes for owning the house
Over 30 years, if house prices go down due to whatever reason, so will rents (more or less). Homeowners will be underwater and suck up all the downside risk. Renters will remain free of crushing debt.
The only way homeowners are protected is if the house appreciates enough to eat up that downside risk before a future catastrophe arrives, right?
Hopefully, otherwise remote working will increase in popularity at about the same rate it is currently but people will just continue to leave such high rent areas.
At least you're not in Singapore. Here, 1 million USD won't even get you a small condo. A house will cost you around 2 million USD,and that would be a cheap one. In a prime location the price goes up to several times that amount.
This isn't just Silicon Valley, the same is happening in many parts of the world, like London, Vancouver and Sydney. At least in SV there are still a lot of people that can afford those inflated prices, the rest of us have to wait until the bubble pops.
Must be nice to have parents who can just loan you ~$200k to make an offer on a 2 million dollar house in Sunnyvale of all places.
I can't get over how ridiculous the market in the bay area is right now.