I recently won the IPO lottery--went from nearly zero net wealth to a solid seven figure net wealth. I could buy a house in the bay area and give up > 50% of my cash for it, or I could give up 15-25% of my net wealth with a down payment on a a mortgage and pay (PITI) 110% or more of what I could pay in rent for a similar home.
Or I could continue renting and put that 15% - > 50% of my net worth in appreciating assets and income producing investments. Even better: I could move my family to a place where people aren't paying $2M for a home that's worth $250k.
The housing market here is suited best for people with absolutely no money sense at all, or those VHNWI and UHNWI who can buy into genuine investment grade real estate out here. It makes zero sense for the vast majority of people to buy here, especially people who more or less win a lottery with some options from a company that makes an exit. In almost every case their money would be put to better use renting here and investing elsewhere (assuming they're tied down here, e.g., due to work).
Or people who've put down roots here. Some people value family, friends, and community more than economic maximization. The Bay Area has excellent schools, being nerdy makes you cool, immigrants and people with different skin colors are accepted, there are a wide variety of cultural attractions, the weather is always nice, and you can get out in nature quickly.
If I were still a single guy I probably would've moved back home after winning the stock option lottery, but my wife's family is all here, my friends are here, my kid won't get bullied for being nerdy, etc. That's really why people stay, and they pay a premium to do it.
All of the cultural items can be had by renting here, too, as my family does, and deploying the rest of the capital in ways that aren't financially illiterate. The decision to buy in the bay area, for the vast majority of people, is damaging to their financial health.
That was basically my reasoning when I first came here as well, and so I didn't buy. (Elsewhere in this subthread, I'm arguing exactly that point.)
The part that I didn't factor in was rents basically tripling while I was here, which apparently is not an uncommon occurrence in the Bay Area. In 2010 I was a genius for paying $1400/month in rent rather than $4000/month to buy a condo. In 2017, when rents were $4500/month but that condo payment would've still been $4000 (for a bigger place!) and the condo's value had gone up from $400K to $1M, I was less of a genius.
YMMV. I'm expecting very significant inflation and I've watched firsthand as a lot of my friends got priced out of the Bay Area, so I bought as a way to ensure that my kid will be able to stay in the same school district and remain near family. Time will tell whether that's a fiscally brilliant or fiscally idiotic decision.
> All of the cultural items can be had by renting here, too
I have a few older retired friends that thought this, then the area started gentrifying, prices went up and they've had to move out of the area they've lived in all there lives.
Purely economically motivated decisions are rare. We all have reasons beyond the financial to live wherever, including something as simple as our wife/husband wants to live there.
There is also an inertia bias. Life has to get pretty expensive for many people to want to undergo the hassle of moving cities / states, which includes leaving behind loved ones, and learning everything new (including leisure things like where you like to eat).
Going meta, NYC and California/The Bay Area make the bulk of their tax revenue from very few industries. The tipping point at which they lose a financially significant portion of their tax base, and the flow on affects of that for government workers and the multiplier downstream, has likely been reached.
> Or I could continue renting and put that 15% - > 50% of my net worth in appreciating assets and income producing investments.
Property is a leveraged investment (as well as the loan being a hedge against inflation, depending on the rate you negotiate - with a 7 figure NW you should never have to use market rate). Unless you're using a large amount of margin on these "appreciating assets", the appreciation should be compared at a 1:5 rate.
Be careful not to become one of those people who "win the lottery" and then lose it all in their hubris. I'd stop saying things like "people with absolutely no money sense at all" - for all we know, that's you.
Or I could continue renting and put that 15% - > 50% of my net worth in appreciating assets and income producing investments. Even better: I could move my family to a place where people aren't paying $2M for a home that's worth $250k.
The housing market here is suited best for people with absolutely no money sense at all, or those VHNWI and UHNWI who can buy into genuine investment grade real estate out here. It makes zero sense for the vast majority of people to buy here, especially people who more or less win a lottery with some options from a company that makes an exit. In almost every case their money would be put to better use renting here and investing elsewhere (assuming they're tied down here, e.g., due to work).