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:
- It’s not a bubble: They’re not making any more land. It’s special here. (Who knew that land suddenly decreased?)
- It’s not a bubble: Weather. It’s special here. (Who knew that the weather suddenly got so much better?)
- It’s not a bubble: Everyone wants to live here. It’s special here. (But why so much so in the last few years?)
- 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:
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?
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…
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.
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.
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.
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…)
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.
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!