Well, for some people, myself included, the not-going-so-well recent IPOs (Square, Box, etc.) would help deflate the pressure on housing prices in SF/BA. I feel for the workers at these company, but it's becoming impossible to raise a family here when the rent/mortgage is creeping up to more than half of most people's salary.
My wife and I have put in more than 20 unsuccessful offers attempting to stay in our unfortunately popular neighborhood in the last two years. We have been chasing the affordability train for some years now, our increasing bids never getting ahead of the frenzy... (today, it seems we're at peak market and it'd be foolhardy to buy perhaps...)
NB: we don't just 'move further out' not only because of 20 years of community, our love of bike commuting, and our great 'hood...
...we are bound by the location of our excellent public school. Non-parents may not realize the staggering import of lucking into a K8 public school you truly love... for two siblings in SF, staying in our school instead of paying for some private (assuming we could get into one) will amounts to well over half a million dollars in post-tax income over the next decade...
We too are part of the tired story of 'middle' class (by SF standards... :P) professional families with 2x full time incomes finding it almost impossible to hold on to a life of modest middle class comfort in SF (where middle class means: a 1000 sq ft 2 bedroom home for family of four; one 25K car; public schools; etc.)
in my opinion, you're not really competing with those people, the real money that moves those markets comes from overseas. the local tech people just rent from the real owners.
with a global equities slump more foreign money might pour into california real estate.
Yeah, the way that the public school district system happens to interacts with housing markets is a remarkably powerful way of impeding class mobility. If your family already has a home in a well-funded school district, or if you can afford to move there, you can do very high return-on-investment things for your children. (Or, as you mentioned, if you can afford a private school.) And moving your home is a market with very long timescales.
Note that I am not saying that the school district system is somehow intrinsically morally bad, or that I know of a better alternative to it, just that it has this unfortunate result if you think class mobility is a good thing.
Ha, yes. I don't own a home, but I would like to someday, so I'm always confused how news about falling home prices is treated as "bad" in general in the media. For me, I celebrate the news. I want housing prices to go kaboom so I can afford one.
The problem with that though is that housing prices are tightly tied to surrounding economic factors. You could go to some crappy neighborhood in a depressed area of the USA and get a great house for "nothing" (relative to, say, CA). If housing prices go kaboom, it's likely because there aren't as many people moving there, and people aren't moving there because there aren't jobs that can support people.
And be careful what you wish for, because once you do own that house, if the prices continue to fall, you could be underwater fairly easily. If a $1m place falls to $750k, which you can afford, but then the economy continues to stutter, it could fall to $500k or $350k. Remember that your mortgage doesn't reflect what you could sell your house for, once you sign the papers, you're on the hook for it.
The problem with that though is that housing prices are tightly tied to surrounding economic factors
I really question what those economic factors are though. For SF it's clearly the availability of high paying jobs. However in Portland, OR (where I live) there are little to no high paying tech jobs available, and yet the housing prices are sky rocketing to levels never seen before.
Given my basic understanding of economics the current climate makes absolutely no sense. Wages have been stagnate for years, college grads have no career outlook (outstanding student debt is now $1.2 trillion), and prices for everything (except for oil) are higher than ever. I've seen friends empty their bank accounts just to pay rent. The concept of savings or retirement for millennial might as well not even exist.
The concept of savings or retirement for millennial might as well not even exist.
Probably not a popular view, but I think there's some truth to it. Check out the Harvard JCHS article [1], more households are paying 30, 40, and even 50% of their salaries for rent than ever before.
Major shifts like this can only be explained by culture, IMO. Maybe the US is undergoing a major shift toward wanting to live in city centers, even at the cost of saving for the future? Or people in certain metros just think they're that exceptional / special / etc. that they "deserve" to live in a certain place? Or everyone in a high-ambition career think they don't need to save because they'll "make it" (maybe true?) and will have fuck-you money in a few years?
Tangentially, the cost of paying a mortgage is comparable to or cheaper than paying rent in the metro areas I've priced. The problem is getting enough of a % downpayment saved to "unlock" the house purchase option.
People I've known who bought houses look at it as locking a "rent rate" in for 30 years and assuming the burden of maintenance rather than riding the fluctuating markets. Right now, they're locked in at lower rates than other people I know are paying in rent to live in a similar area.
I willing to wager part of the problem is the lockdown on lending after 07/08 and more people got pushed into the rent market because they couldn't get the loans to purchase a house which has led to the inversion of the cost of owning vs renting. Historically, owning has been more expensive than renting in most places
Especially so for an investment like housing, where rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would.
Sorry for the barb, but that meme (your house as an investment) really bothers me, because it has the potential to do a lot of damage. It's like penny stocks. Sure you can make money if you really know what you're doing or get lucky, but by and large the idea that it's a good investment originates with people who've a financial interest in convincing you to buy some.
rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would
Pretty shortsighted view there, and demonstrably wrong. Historically housing prices have always risen faster than the rate of inflation - both in 'popular'neighborhoods and elsewhere. Take almost any 10 year period of time and you'd be very very hard pressed to find a region where housing prices didn't dramatically outpace inflation.
Yes, but if you're looking at them as an investment then you need to look at the overall picture. Just looking at prices over time is interesting, but it doesn't give the financial picture from the perspective of a homeowner because it ignores taxes, maintenance and repairs. Once all that's factored in the picture tends to get a lot less rosy.
For example, over the past 25 years the average price of a US home has grown by about 14% in real terms. I'm too lazy to calculate out what that would be as an annual percentage rate, but it's definitely lower than the average US property tax rate, which I believe is a smidge under 1%. So already, even without considering other expenses, houses tend to be gradual money losers on average.
Is this true in all countries, or just the ones (like my country, the USA) where the real estate market is rigged by various government/incumbent entities?
Eventually. I'd personally love it is my house stopped increasing in value so I can pay lower property taxes. My value went up over $100k in the first year after I bought it.
A house is more than just an investment, though. It's, you know, the place you live. The catchment area for the schools your kids go to. The hospitals you have access to. And so on.
This is hugely important for "normal" people. Most people have care a lot more about the value of their house not going down than not going up. Breaking even on a house is find because it provides roof over your head.
This doesn't seem like a "simple fact", rather insanity that has caused many of the economical problems we have seen recently.
I don't buy a house expecting to use it 10+ years and still make a buck selling it afterwards. The same way I don't buy a car and expect it to yield me money when it's a broken beater, in fact, the simple fact of buying it immediately devalues it (to others).
(I guess this is because (1) the market and tax situation in the US are broken and (2) it causes the land to be vastly more valuable than whatever is standing on top of it)
The larger point was that incentives flip as soon as you become a homeowner. As a renter, you are hoping for housing prices to go down and would like to see this happen via increased housing supply, deregulation, or even a local economic downturn as someone suggested above. But as soon as you become a homeowner, you want housing prices to level or increase because a large portion of your net worth is tied to it. So you suddenly want new housing supply to shrink, increased developmental regulations, and a booming economy in your area.
You buy the neighborhood with the price of a home (in theory). Invested neighbors keep appearances up, elect good leaders, push for better schools etc. Once the value starts dropping, none of that is necessarily a given. In my area once gorgeous suburbs became gang centers just a decade or two later. Not exactly a great thing given the recommended home stay for a starter home is about 5-7 years in order for you to "make your money back" should it even go up.
Not to mention a lot of consumers view home ownership as the single largest investment they make, so they are sitting on their retirement.
On the rent front, I doubt it -- salaries are just increasing to match.
All-cash comp in the 300-500k range is surprisingly common (at least for 10+ year experience people in hot fields); add any luck on equity, and 2 incomes, and you can afford SF rents as they stand.
Being able to reliably get a $300k/yr cash salary (salary+bonus, but still cash) seems more related to absurd rents than 10% of people getting huge equity payouts (which tend to not even be that huge). I also think a lot of people who get $1-5mm equity windfalls often think "oh, buy a house somewhere else" vs. "a small condo in SF".
(equity does affect the buy market; if there were a rate hike and China implosion at the same time, but people still had equity money, they'd probably be the majority of buyers.)
Median household income in SF is 77k, just FYI. Only 16% of SF households make over $200k (this includes 2 earner households, which is probably most of these). This doesn't negate anything in your comment, just adds a little bit.
This is a given and has already happened twice in the past 20 years. Housing is in a bubble in the Bay area yet again and history always finds a way to repeat itself. I do think we've learned some and that the economy is stronger now than the previous two crashes, but a 15-30% drop across the board seems reasonable.
Conversely, if the overall market is doing poorly (which it is), you'll get hit in your 401k/pension fund/retirement account. To which degree falling housing prices and falling savings funds would cancel each other out, I do not know. If it were just Box and Square that were doing poorly, you would be fine - these recent IPOs have relatively low institutional holdings as a % of total. Twitter, Facebook, Yahoo on the other hand - upwards of 60% of the stock is owned by institutional investors, AKA your retirement fund and Vanguard ETFs.
It already happened starting in December. House prices are down and competition has dropped. We'll see if this trend continues in January but my bet is that price houses will continue downward. The only problem is that interest rates continue to be low, so some people will always have the ability to outbid others.
It'll be easy to find a cheap place in Morgan Hill! SF/Peninsula, not so much. Prices never really went down by that much in '08 which was a real, honest-to-god housing crisis.. so a smaller tech deflation won't help much.
.. Or so I hope, since I just bought an overpriced Peninsula house last year :)
Sorry to tell that but no, it will not really help with raising a family here. Sadly current prices are new normal and deflated pressure will just let them to not grow further up in near future. (5%-10% drop is nothing for affordability). On another hand looking at what it became I don't even feel sorry for it's future. SF is over and to hell with it. Just a whole bunch of douches.
The real douches are the millionaire homeowners who pushed for restrictive zoning laws for so many years. They've made their fortunes, at the cost of SF mostly only being affordable for the rich.
1) "millionaire homeowners" is pretty much definition of SF. And while roughly 1/3 of SF residents are renters big part of them are temporary here (boom and bust nature of this place, you can call them carpetbaggers) and are just douches who are not homeowners.
2) Doesn't matter who exactly are douches or who can afford SF. SF is ugly place and no victorians can help it. Bigger problem though is that rest of the country can be even uglier.
Comments
Well, for some people, myself included, the not-going-so-well recent IPOs (Square, Box, etc.) would help deflate the pressure on housing prices in SF/BA. I feel for the workers at these company, but it's becoming impossible to raise a family here when the rent/mortgage is creeping up to more than half of most people's salary.
Preach, sibling!
My wife and I have put in more than 20 unsuccessful offers attempting to stay in our unfortunately popular neighborhood in the last two years. We have been chasing the affordability train for some years now, our increasing bids never getting ahead of the frenzy... (today, it seems we're at peak market and it'd be foolhardy to buy perhaps...)
NB: we don't just 'move further out' not only because of 20 years of community, our love of bike commuting, and our great 'hood...
...we are bound by the location of our excellent public school. Non-parents may not realize the staggering import of lucking into a K8 public school you truly love... for two siblings in SF, staying in our school instead of paying for some private (assuming we could get into one) will amounts to well over half a million dollars in post-tax income over the next decade...
We too are part of the tired story of 'middle' class (by SF standards... :P) professional families with 2x full time incomes finding it almost impossible to hold on to a life of modest middle class comfort in SF (where middle class means: a 1000 sq ft 2 bedroom home for family of four; one 25K car; public schools; etc.)
in my opinion, you're not really competing with those people, the real money that moves those markets comes from overseas. the local tech people just rent from the real owners.
with a global equities slump more foreign money might pour into california real estate.
Yeah, the way that the public school district system happens to interacts with housing markets is a remarkably powerful way of impeding class mobility. If your family already has a home in a well-funded school district, or if you can afford to move there, you can do very high return-on-investment things for your children. (Or, as you mentioned, if you can afford a private school.) And moving your home is a market with very long timescales.
Note that I am not saying that the school district system is somehow intrinsically morally bad, or that I know of a better alternative to it, just that it has this unfortunate result if you think class mobility is a good thing.
Ha, yes. I don't own a home, but I would like to someday, so I'm always confused how news about falling home prices is treated as "bad" in general in the media. For me, I celebrate the news. I want housing prices to go kaboom so I can afford one.
The problem with that though is that housing prices are tightly tied to surrounding economic factors. You could go to some crappy neighborhood in a depressed area of the USA and get a great house for "nothing" (relative to, say, CA). If housing prices go kaboom, it's likely because there aren't as many people moving there, and people aren't moving there because there aren't jobs that can support people.
And be careful what you wish for, because once you do own that house, if the prices continue to fall, you could be underwater fairly easily. If a $1m place falls to $750k, which you can afford, but then the economy continues to stutter, it could fall to $500k or $350k. Remember that your mortgage doesn't reflect what you could sell your house for, once you sign the papers, you're on the hook for it.
I really question what those economic factors are though. For SF it's clearly the availability of high paying jobs. However in Portland, OR (where I live) there are little to no high paying tech jobs available, and yet the housing prices are sky rocketing to levels never seen before.
Given my basic understanding of economics the current climate makes absolutely no sense. Wages have been stagnate for years, college grads have no career outlook (outstanding student debt is now $1.2 trillion), and prices for everything (except for oil) are higher than ever. I've seen friends empty their bank accounts just to pay rent. The concept of savings or retirement for millennial might as well not even exist.
Probably not a popular view, but I think there's some truth to it. Check out the Harvard JCHS article [1], more households are paying 30, 40, and even 50% of their salaries for rent than ever before.
Major shifts like this can only be explained by culture, IMO. Maybe the US is undergoing a major shift toward wanting to live in city centers, even at the cost of saving for the future? Or people in certain metros just think they're that exceptional / special / etc. that they "deserve" to live in a certain place? Or everyone in a high-ambition career think they don't need to save because they'll "make it" (maybe true?) and will have fuck-you money in a few years?
It's a big change from the past, that's for sure.
[1] http://www.jchs.harvard.edu/research/publications/projecting...
Tangentially, the cost of paying a mortgage is comparable to or cheaper than paying rent in the metro areas I've priced. The problem is getting enough of a % downpayment saved to "unlock" the house purchase option.
People I've known who bought houses look at it as locking a "rent rate" in for 30 years and assuming the burden of maintenance rather than riding the fluctuating markets. Right now, they're locked in at lower rates than other people I know are paying in rent to live in a similar area.
I willing to wager part of the problem is the lockdown on lending after 07/08 and more people got pushed into the rent market because they couldn't get the loans to purchase a house which has led to the inversion of the cost of owning vs renting. Historically, owning has been more expensive than renting in most places
Being underwater is only an issue if you want to sell the house, or lose the ability to pay for it.
But at least you still have a house, and steady, predictable payments - instead of rent that could start creeping up and up and up.
It is nice to have somewhere to live though
Yes, but as soon as you buy one you will want housing prices to go up, just like any investment.
Especially so for an investment like housing, where rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would.
Sorry for the barb, but that meme (your house as an investment) really bothers me, because it has the potential to do a lot of damage. It's like penny stocks. Sure you can make money if you really know what you're doing or get lucky, but by and large the idea that it's a good investment originates with people who've a financial interest in convincing you to buy some.
Pretty shortsighted view there, and demonstrably wrong. Historically housing prices have always risen faster than the rate of inflation - both in 'popular'neighborhoods and elsewhere. Take almost any 10 year period of time and you'd be very very hard pressed to find a region where housing prices didn't dramatically outpace inflation.
Yes, but if you're looking at them as an investment then you need to look at the overall picture. Just looking at prices over time is interesting, but it doesn't give the financial picture from the perspective of a homeowner because it ignores taxes, maintenance and repairs. Once all that's factored in the picture tends to get a lot less rosy.
For example, over the past 25 years the average price of a US home has grown by about 14% in real terms. I'm too lazy to calculate out what that would be as an annual percentage rate, but it's definitely lower than the average US property tax rate, which I believe is a smidge under 1%. So already, even without considering other expenses, houses tend to be gradual money losers on average.
Is this true in all countries, or just the ones (like my country, the USA) where the real estate market is rigged by various government/incumbent entities?
Eventually. I'd personally love it is my house stopped increasing in value so I can pay lower property taxes. My value went up over $100k in the first year after I bought it.
A house is more than just an investment, though. It's, you know, the place you live. The catchment area for the schools your kids go to. The hospitals you have access to. And so on.
This is hugely important for "normal" people. Most people have care a lot more about the value of their house not going down than not going up. Breaking even on a house is find because it provides roof over your head.
Exactly, so many people seem to forget this simple fact
This doesn't seem like a "simple fact", rather insanity that has caused many of the economical problems we have seen recently.
I don't buy a house expecting to use it 10+ years and still make a buck selling it afterwards. The same way I don't buy a car and expect it to yield me money when it's a broken beater, in fact, the simple fact of buying it immediately devalues it (to others).
(I guess this is because (1) the market and tax situation in the US are broken and (2) it causes the land to be vastly more valuable than whatever is standing on top of it)
The larger point was that incentives flip as soon as you become a homeowner. As a renter, you are hoping for housing prices to go down and would like to see this happen via increased housing supply, deregulation, or even a local economic downturn as someone suggested above. But as soon as you become a homeowner, you want housing prices to level or increase because a large portion of your net worth is tied to it. So you suddenly want new housing supply to shrink, increased developmental regulations, and a booming economy in your area.
You buy the neighborhood with the price of a home (in theory). Invested neighbors keep appearances up, elect good leaders, push for better schools etc. Once the value starts dropping, none of that is necessarily a given. In my area once gorgeous suburbs became gang centers just a decade or two later. Not exactly a great thing given the recommended home stay for a starter home is about 5-7 years in order for you to "make your money back" should it even go up.
Not to mention a lot of consumers view home ownership as the single largest investment they make, so they are sitting on their retirement.
On the rent front, I doubt it -- salaries are just increasing to match.
All-cash comp in the 300-500k range is surprisingly common (at least for 10+ year experience people in hot fields); add any luck on equity, and 2 incomes, and you can afford SF rents as they stand.
Being able to reliably get a $300k/yr cash salary (salary+bonus, but still cash) seems more related to absurd rents than 10% of people getting huge equity payouts (which tend to not even be that huge). I also think a lot of people who get $1-5mm equity windfalls often think "oh, buy a house somewhere else" vs. "a small condo in SF".
(equity does affect the buy market; if there were a rate hike and China implosion at the same time, but people still had equity money, they'd probably be the majority of buyers.)
Median household income in SF is 77k, just FYI. Only 16% of SF households make over $200k (this includes 2 earner households, which is probably most of these). This doesn't negate anything in your comment, just adds a little bit.
I think this adds some necessary context to the previous "300-500K" comment.
Yeah, I meant scoped within peak-earning-tech-people.
Jeesh, 500k? Guess I'm in the wrong industry....
This is a given and has already happened twice in the past 20 years. Housing is in a bubble in the Bay area yet again and history always finds a way to repeat itself. I do think we've learned some and that the economy is stronger now than the previous two crashes, but a 15-30% drop across the board seems reasonable.
Conversely, if the overall market is doing poorly (which it is), you'll get hit in your 401k/pension fund/retirement account. To which degree falling housing prices and falling savings funds would cancel each other out, I do not know. If it were just Box and Square that were doing poorly, you would be fine - these recent IPOs have relatively low institutional holdings as a % of total. Twitter, Facebook, Yahoo on the other hand - upwards of 60% of the stock is owned by institutional investors, AKA your retirement fund and Vanguard ETFs.
It already happened starting in December. House prices are down and competition has dropped. We'll see if this trend continues in January but my bet is that price houses will continue downward. The only problem is that interest rates continue to be low, so some people will always have the ability to outbid others.
It'll be easy to find a cheap place in Morgan Hill! SF/Peninsula, not so much. Prices never really went down by that much in '08 which was a real, honest-to-god housing crisis.. so a smaller tech deflation won't help much.
.. Or so I hope, since I just bought an overpriced Peninsula house last year :)
It might do more than just deflate pressure a little...
Sorry to tell that but no, it will not really help with raising a family here. Sadly current prices are new normal and deflated pressure will just let them to not grow further up in near future. (5%-10% drop is nothing for affordability). On another hand looking at what it became I don't even feel sorry for it's future. SF is over and to hell with it. Just a whole bunch of douches.
The real douches are the millionaire homeowners who pushed for restrictive zoning laws for so many years. They've made their fortunes, at the cost of SF mostly only being affordable for the rich.
1) "millionaire homeowners" is pretty much definition of SF. And while roughly 1/3 of SF residents are renters big part of them are temporary here (boom and bust nature of this place, you can call them carpetbaggers) and are just douches who are not homeowners. 2) Doesn't matter who exactly are douches or who can afford SF. SF is ugly place and no victorians can help it. Bigger problem though is that rest of the country can be even uglier.
I'll add that people are romanticizing SF based on its past. Long gone past.
Present is ugly.