February 24, 2008

What will you do when house prices double in the Real Bay Area?

I was thinking of this comment from the other day:

Proof that Palo Alto is prime: $1204 per square foot. [Burbed.com]
Real Estater Says:

My answer is: Who cares where prices will be in 2011? All you need to know is that prices will double in about 10 years.

Don’t invest in those other places outside of the Bay Area. There’s no cool jobs, no smart people, no diversity, no ramen noodles, no Pho’, therefore, no doubling in price every 10 years.

No doubt it’s special in the Bay Area, especially Palo Alto – so let’s think about what would happen if house prices doubled in 10 years. Let’s assume that a nice starter home in Palo Alto costs about $1 million, and that a typical engineer in Palo Alto makes $150,000.

We’ll have to assume a 7.2% YoY appreciation for homes to reach doubling, and let’s assume that the engineer gets a 5% YoY raise:

doubling.png

Hm, if this happens, the price/income ratio is a mere 6.x today, but would increase to 8.2x in 2018.

Now, a few things could change… raises could soar, stock options could soar, and obviously the assumption that there is 7% YoY appreciation is low -so that will soar.

Can you afford the risk of being priced out forever?

Comments (23) -- Posted by: burbed @ 5:51 am

23 Responses to “What will you do when house prices double in the Real Bay Area?”

  1. blogdog Says:

    Good analysis. The insanity can’t go on forever….unless the bottomless pit of foreign cash picks up when the engineer you profile in this example finally runs out of buying steam. Just look at the Hillsborough market. Overseas and all cash…

  2. waiting_for_the_fall Says:

    who gets a 5% raise every year? Maybe upper management. The everyday worker only gets 2% raise, if they’re lucky. And not many companies give stock options these days.

  3. Renter Says:

    Harvard economist Kenneth Rogoff wrote a paper comparing historical bubble and financial crisis around the world, “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison”, which was also mentioned by BusinessWeek. Based on his analysis, if U.S. is not so special, U.S. housing price in 2010 would possibly go back to 2003 level.

    http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf

  4. ex-sunnyvale-renter Says:

    I’m really expecting a halving, such as we’re already seeing in areas, and a 30-year low such as the period from 1934-1954. Actually RE was low probably a bit later than that. It was reasonable through the 60s, for instance.

  5. burbed Says:

    >>The insanity can’t go on forever….unless the bottomless pit of foreign cash picks up when the engineer you profile in this example finally runs out of buying steam.

    Sure it can. Engineers just need to be willing to spend more and more of their income on housing. instead of 33% of gross right now, if they spent 45% or 55% they could help boost prices further.

    And think of the tax savings! Yum!

  6. Stevo Says:

    Burbed -

    TRBA already has a head start on your 7% YOY growth. Your chart showed it first, then rereport, then the Chronicle, and now 1siliconvalley:

    http://www.1siliconvalley.com/silicon-valley-housing-2007-year-in-review/#more-529

    Saratoga, you gotta pick it up this year to make the cut…

    Lovin’ it!

  7. Real Estater Says:

    >>who gets a 5% raise every year? Maybe upper management. The everyday worker only gets 2% raise, if they’re lucky. And not many companies give stock options these days.

    The topic at hand is real Bay Area and Palo Alto. These markets are not directly linked to everyday worker’s salaries. You definitely need to consider executive compensation, which has sky rocketed in recent years. Executive compensation is tied to profit sharing. Thanks in part to outsourcing and job cuts, local tech companies have been more profitable than ever.

  8. Real Estater Says:

    ex-sunnyvale-renter:
    >>I’m really expecting a halving, such as we’re already seeing in areas

    So far, the heaviest hit area, Contra Costa County, is only down by 20%. There is no drop in the core Bay Area at all. There are plenty of people waiting in the side lines right now, because the jumbo loan limit is about to get raised. Meanwhile, the demand continues to build. Therefore, expect higher prices by year end.

  9. fremont renter Says:

    If the prices still keeps increasing, at least one good thing will happen as a side effect. The RE sales would drop significantly and that would result in many REAs losing their job and thus would partly remove a lot of bad apples. I expect the online RE sites would achieve the same, but it would take much longer.

  10. Renter4 Says:

    >Executive compensation is tied to profit sharing.

    Yeah, but has the number of executives in the area been soaring as well as the profits they’re making? The number of houses sold in recent years reflects a far larger number of people than only the exectutives of tech firms.

    We’re not going to know what will really happen with prices for at least another year.

  11. Alison Says:

    Prices continue to drop, particularly in East Oakland where I live. Not sure how quickly they will rebound, and somehow I can’t imagine prices doubling in 10 years in my neighborhood. What price would it take to get folks to buy? See my blog posting about sales in Oakland going for under 399k (http://blog.redfin.com/sfbay/2008/02/oakland_recent_sales_surge_in_sales_under_399k_.html#respond)

  12. burbed Says:

    Mentioning Oakland is pretty irrelevant – it’s not in the Bay Area.

  13. RealEstater Says:

    Anything associated with “east” is not part of the Bay Area. Examples include: East Palo Alto, east Menlo Park, east San Jose, east Bay.

  14. rick Says:

    Burbed, let me help NAR correct you again -

    RE generally doubles every 10 years.

    NOT just in the BA! Didn’t you people watch their insightful commercials?

  15. SantaClarite Says:

    “Sure it can. Engineers just need to be willing to spend more and more of their income on housing. instead of 33% of gross right now, if they spent 45% or 55% they could help boost prices further.”

    They won’t. Some European and Indian guys at work (Mountain View) were saying they know at least 30 families with kids who are renting, because it is cheaper and apartments mean less driving for the parents to drop children to see their friends. As it is USCIS has said that Indian/Chinese are not welcome here. (green card taking more than 6 or 7 years apparently.) A lot of them are renting and planning to move back to India/China after 6 years on H1B visa..

    Rent market will remain strong and rents will rise but house market will try to go down but the buy-to-rent investors will buy it when the super-jumbo loan limits rise in Q2 or Q3 of this year, so it will be flat for 2008 in Bay Area.

    2009 will be fun — no more super jumbo mortgage loans, recession, more ARM resets PLUS Democrats raising taxes.

    “Anything associated with “east” is not part of the Bay Area. Examples include: East Palo Alto, east Menlo Park, east San Jose, east Bay.”

    Correct, time to move east – to NYC, and Connecticut, wher ea million bucks buys a house worth living in.

  16. SantaClarite Says:

    Correction:

    2009 will be fun — TAIL END OF FOLLOWING FACTORS:
    no more super jumbo mortgage loans,
    recession,
    more ARM resets
    PLUS
    ALL NEW FACTOR of Democrats raising taxes income taxes.

    Ha ha.

  17. burbed Says:

    >>2009 will be fun — TAIL END OF FOLLOWING FACTORS:
    no more super jumbo mortgage loans,
    recession,
    more ARM resets
    PLUS
    ALL NEW FACTOR of Democrats raising taxes income taxes.<<

    The democrats will also ban ARMs from resetting and enable judges to change interest rates at will. Those are all part of Hillary’s platform.

    So… I don’t think all of your predictions will come true.

    As for raising income taxes, I hope so. Our debt is way out of control.

  18. RealEstater Says:

    Guys,

    If you ignore the media spins, you’ll see that the stock market is having more up days than down days, and major housing markets in the Bay Area are business as usual. Things really aren’t that bad!

  19. hedda Says:

    “If you ignore all the evidence, and smoke some of this crack, you’ll be just as happy with Bay Area Real Estate as I am!”

  20. Pralay Says:

    So far, the heaviest hit area, Contra Costa County, is only down by 20%. There is no drop in the core Bay Area at all.
    ———————

    Hmmm, that wipes out 100% downpayment, if someone put 20% down at all.

    And, now look at citywise charts for SC country in rereport.com/scc/. Especially sales vs inventory charts in Sunnyvale, Santa Clara, San Jose. What is this called? Sometime like “supply-demand”?

    Now, look at some of sales records in San Jose Mercury News. These sellers got to be dumb! They bought their homes in 2003/2004/2005/3006. Their accepted sale prices barely cover the 6% commissions. I am not even including the closing cost they paid while buying.

    MV:
    185 Espinosa Lane:$958,000, bought in 2005:$915,000
    173 Bel Air Court:$742,000, bought in 2006:$700,000
    1129 Phyllis Avenue:$805,000, bought in 2005:$750,000

    Willow Glen:
    3078 Nattinger Lane:$600,000, bought in 2004:$541,000

    North SJ:
    1159 La Rochelle Terrace #F:$707,000, bought in 2005:$669,000

    West SJ
    334 Santana Row #342:$569,000, bought in 2005:$540,000
    1955 Bright Willow Circle:$885,000, bought in 2005:$843,000

  21. burbed Says:

    >Hmmm, that wipes out 100% downpayment, if someone put 20% down at all.

    That’s probably why it’s best not to put any downpayment.

  22. Pralay Says:

    That’s probably why it’s best not to put any downpayment.
    ————–

    I agree, but who will get loan today in zero down? I think banks got a pretty good lesson. Eventually bank is the loser in upside-down loan (and then American taxpayers for bailing them out). Didn’t you hear people already started walking out from home?

  23. Pralay Says:

    and major housing markets in the Bay Area are business as usual.
    ————————

    Indeed. All media spin, including this one: “Shea Homes halts development in Santa Clara, Mountain View”

    http://www.bizjournals.com/sanjose/stories/2008/02/25/story10.html?q=bay%20area%20home%20prices

    It says:
    “Citing general declines in sales activity and prices in the area, Shea Homes will wait until this summer before determining whether market conditions warrant resuming construction at its 130-townhome Boulevard community in Santa Clara and 151-home Mondrian development in Mountain View.”

    Business as usual indeed!

    People don’t need to read “media spin” to get facts. They just need to check real estate data (many of them from actually from real estate industry). I am sure Shea Homes did the same. For example, rereport.com I gave above.


Leave a Reply

Please be nice. No name calling, no personal attacks, no racist stuff, no baiting, etc. Let's be nice to each other in the true Bay Area spirit! (Comments may be edited/removed without notice.)