October 27, 2007

Why “california bay area home price” will never fall

 The other day someone found this blog by searching for “california bay area home price”  – I bet they were wondering if prices would ever fall.

Fortunately, a Kevin posted a good explanation:

What would you say to these Manteca folks? — Burbed.com: Your San Francisco Bay Area Home and Mortgage Insanity Blog
The median household income for all bay area counties is $72,000. For Santa Clara County, it’s $78,000.

The median income is not what you should use to guage the median house price. Historically, in virtually every part of the country (including the bay area), the median house price has hovered around 5.0-5.5x the local median income. This means that if the median income is $80,000, the market will support house prices in the range of 400-480k.

The median house is NOT bought by the median income family. Generally speaking, only the top 60-80% of incomes can/should realistically qualify for the mortgage on anything, with the remaining 20-40% renting permanently.

Lop off the bottom 30% of households from the “buyers” category and you wind up moving that median from $80,000 to around $120,000 — suddenly the $500k house looks reasonable. At 20% down and a 6.5% fixed 30 year mortgage you’d be paying under 30% with property taxes included. If you’re making $120k a year and can’t save $100k over the course of 4-5 years while renting, stop buying so much crap.

By that metric, it’s probably safe to say that a reasonable median in the bay area is $400-500k. Currently the median is still nearly $700k. It would take a minimum 20-30% price drop to make things rational.

Unfortunately, bay area buyers are not rational. People are more than willing to spend more than half of their income on a house. Thanks to Prop 13 and reverse mortgages we aren’t seeing old people being “forced” to sell. Greedy owners who are overly concerned with property values refuse to allow any significant new development, despite the huge swaths of unused land all throughout the bay area cities. I fully expect people to continue shelling out outrageous sums of money for shitty houses for many long years.

Not only that, but the median includes a number of… shall we say… Pre-Prop 13 buyers. So it’s actually skewed down. There’s also the fact that most buyers don’t rely on paychecks – everyone has stock and stock options that are soaring.

Long story short: be prepared to spend a lot, to get very little, in a suburb. Prices are set to take off. $15 billion Facebook any one?

Comments (13) -- Posted by: burbed @ 5:49 am

13 Responses to “Why “california bay area home price” will never fall”

  1. ex-sunnyvale-renter Says:

    Everyone has stock options that are soaring. Everyone.

  2. 3rd Generation Says:

    I’m really not exactly sure how to respond…

    “Thanks to Prop 13 and reverse mortgages we aren’t seeing old people being “forced” to sell.”
    -I guess he wants me to “force” my 75 y/o mother out of her house that she has spent a lifetime in RIGHT NOW so a ‘transaction’ occurs and yuppie swine can move in. Do you laugh at people in wheelchairs too?

    “Greedy owners who are overly concerned with property values refuse to allow any significant new development, despite the huge swaths of unused land all throughout the bay area cities.”
    -Like, where are you talking about?

    “There’s also the fact that most buyers don’t rely on paychecks – everyone has stock and stock options that are soaring.”
    -Incorrect.

    “Long story short: be prepared to spend a lot, to get very little, in a suburb. Prices are set to take off.”

    -Kevin, get professional help, and soon. There are other careers besides pimping yourself out and ‘selling’ Real Estate.

  3. Kevin Says:

    That last part (about the stock options and the other stuff) wasn’t from me. It’s clearly separated by a big quote box, and was intended to be satirical, obviously.

    I’m not in favor of forcing old people out of their houses, but it’s natural in other parts of the country for people who are no longer working to sell their homes and move into some place smaller, and that doesn’t happen here because of Prop 13. It drives up prices for everyone else. It’s even worse when those benefits are given to land lords, children of buyers, and even grandchildren of buyers.

    Do you actually live here? Drive along the 101, 237, or down Mathilda avenue any time and you’ll see plenty of available land that is currently zoned commercial. Tear down all those empty office buildings in Sunnyvale and re-zone it residential, allow high-density housing and you’d actually see rationality return to the local market (now that lenders aren’t giving loans to anyone with a pulse).

    The fact that a person making over $100,000 a year can’t afford a 2 bedroom condo here is just not natural. People have been so brainwashed by real estate “professionals” that they’re willingly dropping more than half of their incomes to “own” 40 year old town houses. Fix the zoning and building regulations, get rid of prop 13, and price to income ratios will probably be right back where they were in the 70s.

  4. nc mortgages Says:

    cant we all just get along

  5. burbed Says:

    >>Tear down all those empty office buildings in Sunnyvale and re-zone it residential, allow high-density housing and you’d actually see rationality return to the local market (now that lenders aren’t giving loans to anyone with a pulse).

    Fortunately, local homeowners are trained to shout “TRAFFIC! CHANGE OF OUR CITY’S CHARACTER! TRAFFIC!” whenever stuff like that is proposed.

    So we can be sure there won’t be new housing built.

    Repeal Prop 13? Why do you hate our freedom?

  6. The Hermit Says:

    dont be a hater but a lover

  7. Brendan Says:

    Well it’s true that traffic would increase with higher density housing. The home owners are using that as an excuse, but unfortunately even if you did allow the construction the roads wouldn’t keep up. It’s just that the tree huggers are opposed to opening up the carpool lane, and widening the roads.

  8. DensityDuck Says:

    On the other hand, the city planners doing the rezoning invariably assume that most of the new residents would take the Light Rail to work. This is being used as a justification to cram a few thousand condo units into the Empty Quarter between 101, First Street, and Trimble.

  9. burbed Says:

    Good thing we build companies far away from light rail because that’s prime retail real estate space.

    Really what they should do is build more automalls next to light rail, and then build housing over the automalls.

  10. sonarrat Says:

    I used to work at Trimble & Junction. The light-rail running on First Street really made it time-consuming to get around, and it takes too long to ride from Caltrain. Grr…

  11. DensityDuck Says:

    sonarrat: Hah, yes, that was a topic of the Mr Roadshow column a couple weeks ago…apparently the San Jose roads department didn’t install a traffic-light control properly, and it resets every time the train goes by. As a result, First Street has about four times as much green light as it ought to have.

  12. David Says:

    The home price will never fall? Take a look at what happened from 1989-1998.

    How quickly you forget.

    7 years (give or take) of fat, 7 years of lean. Looking forward to another 5 years of dropping prices.

  13. RedSquid Says:

    Just ask my brother, bought a really nice Eichler in Mountain View in 1990 and sold 4 years later for 20% loss – (he got married and her house was better).
    His former house would now sell for about $1 Million … and is far more overpriced and unaffordable than when he bought, even though the interest rates are incredibly low.
    It will take years before these prices can rise again.


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