February 16, 2007

How the Bay Area caused home prices to go up nationally…

If you ask ask most people in the Bay Area “Why did homes get so expensive in the last few years?” you’ll probably here these reasons:

  1. It’s not a bubble: They’re not making any more land. It’s special here. (Who knew that land suddenly decreased?)
  2. It’s not a bubble: Weather. It’s special here. (Who knew that the weather suddenly got so much better?)
  3. It’s not a bubble: Everyone wants to live here. It’s special here. (But why so much so in the last few years?)
  4. It’s not a bubble: Web 2.0, Google, The Valley is BACK! Oh, and it’s special here.

The last one is distinctly possible. Google IPOed in 2004, instantly creating thousands of millionaires/billionaires. The job market has picked back up. Traffic is back with a vengeance.

Ok, so maybe that explains these two graphs:

graph-sf.png

graph-sj.png

The data for these graphs are from this Wells Fargo site – for some reason they don’t include data for the year 2002.

  • The red line is the median income, and as you can see it’s pretty high around here.
  • The green line is the median home price, and as you can see it’s pretty high around here.
  • The blue line is the price/income ratio: median home price divided by the median income – multiplied by 100 so that it shows up on this chart. (Otherwise, it’d be like 3.)
  • The purple line is what I think the home price should have been, using a trailing average of price/income ratio multiplied by the income.

Ok, with that said, let’s look at the graphs above. Right now, the price/income ratio in San Francisco is about 8.32 and in San Jose it is 6.75.

But why now? In San Jose, it used to be about 4x. Why the dramatic spike in 2004?

This is when most people would say “Duh! It’s because the job market picked up in the Bay Area! Have you tried hiring someone?” and “Gooooooooooooogle!”

That’s sort of true… but how does that explain this?

graph-la.png

That’s right – Los Angeles had a spike around the same time. So… maybe LA also became a lot more desirable and employed at the same time the Bay Area did. That’s stretching it… but maybe that’s what happened. They also have tech jobs there too…

But wait…

graph-lv.png

Why look at that… Las Vegas has the same sudden bump as San Francisco, San Jose, and Los Angeles. Ok ok… Las Vegas is really a suburb of Los Angeles, and so maybe the job market in San Jose was so strong that it carried through all the way to Las Vegas.

But wait…

graph-sea.png

graph-portland.png

Seattle isn’t near SF/SJ/LA/LV – but yet they have the same bump there too. Oh right… forgot… tech job market. Strong. So strong in the Bay Area that it made prices in Seattle go up too. And thus Portland too.

But wait…

graph-boston.png

Huh? Boston has the same sudden spike too! Oh right… tech jobs again! Ok ok… so the job market in the Bay Area was so strong, it made prices in LA (and its suburb, LV) go up, and also Seattle and Boston too. We’ll ignore the fact that the red-lines for all of these places show little-to-no increase. But yeah… the Bay Area became so desirable that the Bay State went up too.

But wait…

graph-chicago.png

Chicago too! They have a bump then too! That’s because… um… the Bay Area job market…. and…. um… oh right! Motorola introduced the Razor, and Motorola is located near Chicago. That’s why prices suddenly spiked up there. (We’ll ignore the fact that incomes sort of went down during that time…)

But wait…

graph-dc.png

graph-baltimore.png

Washington DC and Baltimore have the bump too! Well, DC does include Northern Virginia (NoVA) which is kind of techy – so their bump is because of Silicon Valley’s specialness. Baltimore… uh… well… The Wire was pretty good those years so maybe that was just a fluke.

But wait…

graph-ny.png

New York City metro has the same spike too. Um… that’s because… um… Google! Yeah! Google got into ads, which drove… um… down… ad sales in NY…. which… um…. drove up housing prices. Perfect. Check. Strong Job Market in the Bay Area. Got it!!

So there you have it!

Home prices in the Bay Area surged in the last few years because of the strong job market and the increased desirability and suddenly shrinking amount of land. The tech recovery was so strong that it streamed out and caused a spike in home prices in second-tier cities like Los Angeles, Seattle, Chicago, Boston, DC – which in turn caused prices to go up in their suburbs of Las Vegas, Portland, and Baltimore to have the same spike.

The job market was so strong, that incomes somehow managed to stay flat while housing prices soared. Again, this is not due to a bubble, but because the job market was strong. Ignore the income lines. Only focus on the price lines.

Make sense? It’s 2.0! The paradigm has shifted! These are the new economics! The Bay Area is special!

For amusement’s sake, let me put forth an alternative theory: prices in the Bay Area surged just like they did in so many other cities across the nation, because of a boom in easy credit and low interest rates – not because it suddenly became so desirable. Possible? :)
Have a good weekend!

Click here to post a comment -- Posted by: burbed @ 5:27 am

No Responses to “How the Bay Area caused home prices to go up nationally…”

  1. bub Says:

    “Or maybe… just maybe… the surge in prices was a result of a national credit bubble…. hmm…..)”

    But if a Bubble is involved that means it’s possible for the Bubble to Deflate, Contract, Burst, Leak…….. damn.

    Luckily for me here comes a Realtor pushing her Lexus into a gas station (ran out of fuel again). Gotta go

    You-Hoo! Suzanne!

  2. i8thekittypurr Says:

    I like your pretty graphs….

  3. JasonofsoCal Says:

    Nice graphs. :-)

    Why am I suddenly having a sense of Deja Vu? I could have sworn I have seen graphs strikingly similar to those before….

    Oh yes. The Nasdaq graph from 1996 to 2000. ;-)

  4. Dice Says:

    But why hasn’t it popped yet around here. Look as Sacramento and Stockton…

    Why the hell won’t the prices go down around here. Apart from the extreme examples found on this site, by far and large, the sellers still haven’t budged yet. How much longer is it going to take? And if it does happen, what’s the drop gonna be like? 5%, 10%? Still not enough :(

  5. JasonofsoCal Says:

    Dice,

    Prices have actually come down. I have seen evidence of this in many areas. The problem is, housing is not as liquid as the stock market or other assets. Also, there is a level of stubborness amongst home owners who do not wish to see large cuts in probably their largest investment.

    Remember that we are only at the precipace of this housing debacle. And because of the slow nature of the way housing normally moves, this will take years to play out. Historically, the duration of an upturn in housing matches the duration of a downturn. So if you go by the assumption that this bubble, especially in the bay area, started around 1996-1997, we are likely not going to see a bottom for some time.

    The one wild card is how the exotic mortgages will effect the situation. It is possible that mass defaults will correct the market faster. Its the big unknown. But if we toss in that and a recession to boot, it may happen quicker. Although realistically, you probably won’t begin to see evidence of a bottom until around 2011-2012.

  6. Brendan Says:

    Burbed!!! I love it. Awesome post.

    This is how I see the BA housing market. I’ve been tracking some homes loosely in SJ lately because that is where I’d like to buy at some point. I’ve seen many different things happening on the local MLS:

    -Houses are ‘for sale’ for a LONG time. Some as long as 150 days.
    -Many listing I’ve tracked have been ‘canceled’ or ‘expired.’ You can bet those listings fall into one of three categories 1) The seller is waiting for a while to relist to reset the ‘days on market’ value. 2) The seller plans on renting for a year or so until the prices start going up 20% a month again. Then they’ll be RICH!!! Donald Trump says so! 3) They think that relisting in the summer when the market is typically ‘hotter’ will cause their house to sell for a higher price.

    My prediction is that this summer many homes will be listed and re-listed. This will cause the biggest surge in home inventory we’ve seen in a while. Many sources show that foreclosures are up… Just wait and see friends. Stick to your guns, don’t give in and wait for prices to come down to a more reasonable level. It will happen. As burbed has so eloquently shown the bay area ISN’T special and we’re going to get what we want soon.

  7. jo jo Says:

    only one reason prices spiked INTEREST ONLY LOANS and NEG AM and the COVER OF BUSINESS WEEK..remember its not what you pay but how much your payment is. I laugh my ass all the way to the bank

  8. Waitingforthebust Says:

    Just wanted to say you have a fanstatic blog, I really enjoy all of the hard work and analysis. I hope you can get more people to your site.

  9. fcrenter Says:

    Awesome post!, thanks for the research.

    I have also been wondering
    what component of bay area housing bubble
    is due to the googzillionaires.

    The spike in housing starting Q4 03 defies
    logic

  10. Gordon Says:

    “I have also been wondering
    what component of bay area housing bubble
    is due to the googzillionaires.”

    Actually, that effect is tiny. Google currently employs 10,674 people. And not all of those are completely in the Bay Area. Also, the proportion of those that actually made the millions (or billions) is only a fraction of that. So arguments sake, let us assume that 20% of the employees became millionaires. (It is likely a lot smaller) So roughly 2000 millionaires.

    If you compare that as a ratio of the total population of the Bay Area, it is hardly a hiccup. Even taking the total employee base of google and determining the ratio, it is still only a small fraction.

    But ultimately, one has to consider the demographics as well. Where do you suppose the google millionaires are purchasing their homes? Answer: Los Altos, Atherton, Palo Alto. I can pretty much guarantee that very few google millionaires purchased homes in sunnyvale, fremont, san jose, daly city, etc.

    I think one of the major points that this blog (and others are attempting to demonstrate) is that sections of the Bay Area are quote-unquote, ‘desirable’, while others are little more than standard suburbia. Somewhere in the past 8 years or so, that distinction became hazier.

  11. burbed Says:

    I think one of the major points that this blog (and others are attempting to demonstrate) is that sections of the Bay Area are quote-unquote, ‘desirable’, while others are little more than standard suburbia. Somewhere in the past 8 years or so, that distinction became hazier.

    Wow… very well said.

  12. Norcalboomer Says:

    I hear Google is opening a server farm in or around Lenoir, NC. I wonder if we will see a run up in Real Estate prices there?. I’m sure once Google hangs a shingle there, Lenoir will become ” special”.

  13. Gavin Says:

    The price spike in 2003-2004 may be explained by the sudden increase in subprime mortgagaes. There is a graph in the Wall Street Journal (WSJ) of the percent of subprime mortgages in each year that shows a spike in 2003-2004 that is suspiciously similar to the graphs you posted.

    See the graph below if no WSJ
    http://img131.imageshack.us/my.php?image=subprimemh6.png

    See the WSJ article
    http://online.wsj.com/article/SB117167930652011972.html?mod=hps_us_inside_today

  14. Alex Says:

    wow if the bottom won’t happen until 2011-2012, how much rent is one going to lose during those 5 years? I’ve been tracking houses in Fremont for the past 6 months and most of the houses below 700k have sold w/i a month. Very depressing for people who can’t afford that 4000k monthly mortgage.

  15. burbed Says:

    Don’t exaggerate – with 10% down, it’s only $3879 a month. With 20% down, it’s only $3448 a month.

    That’s only $46,548 or $41,376 a year in mortgage payments.

    But just think, you would get $10k back in tax deductions. That should at least cover the property tax and insurance.

  16. Alex Says:

    O I forgot w/ such high wages around here, most people should have 70k saved up or 140k saved up in no time to buy that starter home :)

  17. “Affordability is the lowest here of anywhere in the U.S.” - Long Island is less affordable?? -- Burbed.com: Your Silicon Valley Home and Mortgage Insanity Blog Says:

    [...] Here’s a chart using the same data from this entry: [...]

  18. Thomas Says:

    10,674 people at Google.

    Actually you can dice that even further.
    When Goog went public they only had some 3000 world wide? But thats ok too… No you really have to go back even further. Say 1998-2001 for fully vested options to take effect. Now we are talking around 500 employes per their S1 when they filed. It also depends on number of options granted. Some only get 1000 shares. No big impact. Read their Cap Table in S-1. As one news story pointed out back during the IPO only 300 or so benefited.

    So ok, lets really ask these 300 or so how they felt when they Google Hit 300-400 per share.

    I will tell you. Everythings changed. You wake up! Call you broker sell everything. Send an email to your new boss that was hired last month! ( You really cant stand this guy, because you know more and he came from a dead busted company) and give your notice. You go back to bed and sleep.

    Next you move out of the Bay Area to LV or Miami where prices are 1/3 and homes are 2x bigger.

    You dont even bother to stick around Bay Area. You see once the realtors in Palo Alto figure your from Google, which they ultimatly do via background check.
    Your toast! They will jack up real estate prices 100%
    And you can pay because your from Google. Everyone is like that! Your life has changed and you need to leave fast before you loose everything.

    You leave for LV or Miami or SoCal … as far from BA as you can…
    There is no sales tax or state income tax and you live on 5% of your cash. I doubt you will find anyone from IPO date working at Google. They are all gone just like the Yahoo and other dot.coms.

    For full disclosure I worked for two tech companies that went IPO in 1994 and 1996. By 2000 I had $2.5M and that grew to $6M by 2006.

  19. burbed Says:

    >You leave for LV or Miami or SoCal … as far from BA as you can…

    There’s the problem right there.

    No one wants to leave the Bay Area – it’s the most special and perfect palce on earth.

  20. Thanks SFGate! -- Burbed.com: Your San Francisco Bay Area Home and Mortgage Insanity Blog Says:

    [...] Have you seen the stats on how the Bay Area is such the perfect place to live, full of good restaurants, smart people, and great weather that our housing prices soared even as “more people left than they did in Detroit”? Nothing says strong fundamentals like our best of class income/price ratio: [...]

  21. densityduck Says:

    A house (well, a townhouse) in my neighborhood went on the market in April for about $550k.

    In June, it re-listed with a different agent at $535k.

    In July, it re-listed with a third agent at $515k.

    I’m walking by it the other day, and the “$515″ is crossed out and “$500″ penciled in…

    So that’s a 10% drop in asking price over the past in less than six months. Has the bubble popped yet?

  22. jj Says:

    what makes you think incomes and home prices need to be in a particular constant relationship?
    There is no natural law that demands this, no economic law. Only a lending guideline, my friends.

    Look at gas prices. 3x, more actually, from 1993. Why aren’t you talking about a bubble in gas?

    Or milk, $7 a gallon for Organic milk at Safeway or any other major market. Where’s the milk bubble?

    Here’s one primary factor for much of the cost increase in the Bay Area, government greed. Yep, local governments figured out that they could strong arm the builders to fund their socialist experiments in “low income” or even better, once they figured out that was a bit too much truth in advertising, “inclusionary” housing. The “impact fee”, is often $150K per unit. Do you have any concept of how much instant unaffordability that builds into the market? Some greedy local city decides to redistribute some wealth and suddenly every house in the city gets a $150K boost, minimum. So there it is folks, there is more than one reason for everything.

    If you’re a simpleton, keep digesting tripe like burbed.com simple information and you’ll be happy. If you want to understand things, you have to be a bit more analytical about it.

  23. 3rd Inning of MBS crisis..Hussman - Early Retirement Forums Says:

    [...] Ignore the discussion of one market vs. another; just look at the red lines versus the green lines. How the Bay Area caused home prices to go up nationally… [Burbed.com] The further away green gets from red, the more situation = bad, which you kind of acknowledge. But, [...]

  24. Jagjeet Singh Says:

    Why would the bay area prices going up again?
    Are people crazy or not done yet…

    There are tons of foreclosures pending and I guess they need one more lesson :-(


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