August 21, 2008

What kind of house does $1.2 million buy you in expensive New Jersey?

So yesterday we saw what $1.2 million buys you in the Bay Area’s best school district:

Let’s look at a house in what some claim is Burbed’s city of obsession in the East Coast:

Single Family Home – TENAFLY, NJ, 07670 – Realtor.com

Wow. Is it any wonder why the message boards are full of threads about people wanting to leave New Jersey and it’s best in nation school districts?

My god.

Just look at that bloat. You spend $1.2 million and you get 3425 sqft of waste. What are you going to do with that space? How will you be incented to work anymore? You’ll probably just want to sit at home and relax all the time.

And just think about those taxes in New Jersey. That’s right! They have a state income tax of 8.97% if you make more than $500,000. Which, of course, nearly all of Burbed’s readers do. (It’s only 6.37% if you make $75k-$500k. You might as well get food stamps if you do!) And no taxes on clothing!

Then there’s the lack of any good schools in the area. Do they have Cal or Stanford? DUH of course not. All they have is Princeton, and maybe Columbia. Are those schools known for anything?

When you put it all together, it makes sense why people are fleeing New Jersey for low tax destinations California all the time. Just the idea of living in 3425 sqft taxes my mind!

UPDATE: Edited the title.

Comments (80) -- Posted by: burbed @ 5:41 am

80 Responses to “What kind of house does $1.2 million buy you in expensive New Jersey?”

  1. bob Says:

    I Guess compared to the Bay Area, this home in NJ seems “cheap”, but its still a chunk of change in a not exactly cheap area of the country to live either.

    By contrast, here’s a similar property on lake front property right outside Nashville. The home is on the Historic Register.

    $425000 **LAKE VIEW MANSION**3 Story 1928 Colonial*$0 Down w/ GOOD CREDIT** (OLD HICKORY LAKE-Nashville)

    RESTORED Historic Executive Mansion Great View of the Lake.
    1930 3 Story Colonial Lake Home, 2700 s.f., 4 Bedroom, 2 ½ Bath, Formal Living & Dining Rooms, Oak Floors, Fireplace, Den with Lake View, Marble Entry, Large Master Suite and Bath with Walk-out Deck Overlooking the Lake, 10’ Ceilings, 3rd Floor Loft, Cobblestone Courtyard, Full unfinished Basement, 2 Car Garage, Large Corner Lot, Great View of Lake, across the street from $1.2 Million $ Home.

    This Home is on the Historic Register and nestled in the Community of Old Hickory Village, an incredible area virtually untouched by the Modern World. Step back in time to an era when people sat on their front porches and chatted with their neighbors, as they took their evening stroll along the Lake Shore. Area has 3 golf courses, country club, marina, swimming & picnic area. It is 20 minutes from downtown Nashville, 15 minutes to the Airport and 10 minutes in any direction to major shopping areas.

    This home is offered at the unbelievable low price of $425,000. PRICE WILL BE REDUCED IF THERE IS NO AGENT INVOLVED.

  2. bob Says:

    Whoops. here’s the link:

    http://nashville.craigslist.org/reo/806210247.html

  3. Jay Says:

    “By contrast, here’s a similar property ”

    Not sure I see how those two properties are comparable.. Old vs. New, 700 sqft difference, completely different environment…

    Nice house, though.

  4. bob Says:

    I guess it depends on what sort of environment you are willing to pay more for. Just my opinion, but if I had a choice of living in one area that has horrible traffic, frigid, cold winters, and a high cost of living versus one with a warmer climate, less people, and a lower cost of living… I think I’d choose the second one, not to mention the cost of the home in it is signifigantly cheaper. The house I showed is actually in the upper end of the market for that area. Most are under 250k.

    Then again, that’s just me. I suppose if you live in NJ, you can commute to NYC,which gives you bragging rights on par with living in SF.

  5. DensityDuck Says:

    Could we stop having posts like this? I want to hear about stuff in the Bay Area, not stuff somewhere else. If I were interested in New Jersey I’d live there!

  6. bob Says:

    I like these sort of posts. It helps to make comparisons because even with the housing bust happening, there’s still a HUGE delta between the Bay Area and most of the rest of the country.I think many who live here forget this and get used to thinking that 500k is somehow cheap when that’s practically a mansion everywhere else.They need that wakeup call sometimes. It would be nice to see more posts that expanded outwards and into more areas across the country.

  7. DreamT Says:

    Trust bob to keep this thread alive no matter the odds.

  8. Rocket Says:

    Bob, for the last 30 years there has been a 3X to 6X multiple between the Bay Area and the rest of the US for equivalent properties.

    My parents had a house on 2.5 acres in the Bay Area that they bought for $60K in 1975 and sold for a $180K in 1978 without putting a dime into it. The interesting part is, they were in high tech and they left at that time because they felt that high tech would be unsustainable in the Bay Area with land and housing prices so high.

  9. WillowGlenner Says:

    Right you are, Rocket. Personally I don’t think this period has valuations any more out of whack with the rest of the nation than any other time. The period where bay area housing (and rents) were really out of whack with respect to historical norms was in the 90s. At that time the rest of the nation had cheap real estate and ours was expensive. In this decade the rest of the country caught up.

    I’ve met many Bobs in my life- every decade, same old song.

  10. madhaus Says:

    Rocket, that’s quite a story. Where did your folks move to?

    As the Bergen County expert (I’m from there) , I can tell you that prices are coming down in Tenafly. That kind of house would have gone for $1.5m a couple of years ago. The site did not give the address for the house but I know where that neighborhood is (it’s pretty nice).

    Density, I also prefer posts that cover here versus elsewhere, but an occasional comparison is useful. I could do without the constant comments about how much you can get for 1/3 the price in Nashville, I think I got the point after the 241st mention and I still have no interest in living there.

  11. bob Says:

    WG,
    Well if you’ve met a lot of “Bobs” in your life, then you obviously haven’t benefited from the encounter because you’re like about 80% of the people in the Bay Area and rather ignorant.

  12. bob Says:

    And Madhaus,
    I wouldn’t expect you to live anywhere except either coast since you share the sentiment of most people I’ve met in this area who look at the vast interior of the USA as a huge void, with only two places to live otherwise- either the east coast or the west coast. So it isn’t a surprise that you would never-ever consider anything other that the places you have already lived in. Typical.

  13. DreamT Says:

    madhaus – a 66% drop in equity in Tennessee, while Palo Alto and Cupertino held on? Surely you don’t have your facts right. Only a fool would prefer the bay area over Tenafly. Equity only goes up there.

  14. burbed Says:

    Bob, for the last 30 years there has been a 3X to 6X multiple between the Bay Area and the rest of the US for equivalent properties.

    But that’s because there used to be a 3x to 6x multiple between incomes in the Bay Area and the rest of the US.

    The income/house price multiple is the measurement you should be looking at. Historically it’s about 4x in the bay area – now it’s 6-10x.

  15. DreamT Says:

    bob’s gratuitous accusations achieve at least one purpose: proving that the huge void myth has some truth to it.

  16. Gavin Says:

    All comparisons should ideal be done on a relative basis. For example it is not very appropriate to compare house prices in the Bay Area with houses prices in Tennessee.

    It is better to compare the Price/Income ratio in the Bay Area with the Price/Income ratio elsewhere or the Price/Rent ratio in the Bay Area with the Price/Rent ratio in other parts of the U.S.

    In 2005 the joke was that the central valley (Stockton, Modesto etc) had Texas style living at California style prices. Incomes in the central valley were similar to those in Texas but house prices were similar to coastal California.

  17. taxy Says:

    In NJ and the east cost in general, having an expensive house really hurts, though.

    According to the tenafly website, the tax rate is $2.585 for every $100 in value. This means that the $1.2M house will run a sweet $31,020 per year in property taxes – and that can go up every year (it went up 6.37% from 2007). Due to Prop 13, a $1.2M house in Santa Clara county would be about $18,000 year and is basically locked in for as long as you own your home.

    Prop 13: keeping home prices artificially high and making old folks rich since 1978.

  18. burbed Says:

    In NJ and the east cost in general, having an expensive house really hurts, though.

    That’s certainly true. But it sure must be nice to have the nation’s best schools, great community services, good roads (given the fact that they have Weather and Season there – we don’t), and satisfaction in knowing that everyone, including corporations, are in the same boat.

  19. burbed Says:

    This means that the $1.2M house will run a sweet $31,020 per year in property taxes

    Actually I’m not sure that’s true:

    http://www.harmonhomes.com/real-estate/homes-for-sale/new-jersey/tenafly/detail/26786247

    $1.85 million house
    “taxes $21477 only”

    That’s only 1.2%-ish.

    There must be some other rules or valuation methodologies.

  20. cardinal2007 Says:

    In NJ and the east cost in general, having an expensive house really hurts, though.

    In Fairfax Co., where my parents live, the property tax rate is now under 1%. It tracks the value though, and I think the county is now outright lying about fair market values, I think in fact that they have some crazy notion that short sales and foreclosures just don’t count.

  21. rick Says:

    Bob, for the last 30 years there has been a 3X to 6X multiple between the Bay Area and the rest of the US for equivalent properties.

    This kind of blank statement is simply not true and have no facts to support it. Are you telling me a Milpitas home selling for 500k now is available for 80k somewhere else? Yes in Detroit it may be, not in Seattle, not in Washington, not even in Jackson, MI. Also, look at the charts for BA prices, the charts for price/sqft in any local areas, the recent run up is certainly not normal historically even for BA.

    This is another “in my mind it is the case”, like bob about Alameda.

  22. bob Says:

    Gavin has a good point: All bets are off comparing two places until you dig into the value of the average family purchasing power.

    So Let’s do the numbers.

    SF, Bay Area Median family income: $67,809

    Nashville area Median Family Income: $49,317

    So from the get-go, it looks like SF beats Nashville by over $20,000. Sounds pretty sweet, right?

    Well let’s do some more comparisons.

    SF,Bay Area Median home price: $484,000( down from 07)

    Nashville median home price: $228,000( down from 07)

    The conclusion here is that Nashville’s median income is 1/4 less than the Bay Area but its housing is 2.5 cheaper, hence the ratio of income versus home price are much closer versus the Bay Area where incomes are far removed from real purchasing power.Easy conclusion.

    But since most people in the Bay Area don’t count cities like Nashville as a “real” city since nobody that’s smart and seeking diversity would ever move there, let’s look at a city that people from the Bay Area tend to like. Heck- let’s check out today’s prize- Tenfly,NJ

    Tenfly NJ median family income: $124,656

    Whoah! That’s right up there with the RBA ain’t it?

    Tenfly NJ median home price: $983,970!!!

    Holy crap! Now That’s some serious coinage for housing. Its got the Bay Area beat by almost 50%. But even with a much higher median income, the incomes aren’t enough to cover the cost of housing.

    How about another comparison? What about one of those true Bay Area refugee cities, Austin, TX.

    Austin Median Family income: $60,875

    Uh-oh! It looks like Austin is gaining on the Bay Area. Only 8k more to go before they beat us!

    But what about house prices? Surely they must be AT LEAST as much as the BA since everyone there makes almost as much as we do. Let’s see…

    Austin Median home price:$197,871

    Nope! In fact, Austin’s cheaper than Nashville. Whoda’ thunk? So as you can see, so far Austin has by far the best income to buying power ratio out of all the cities mentioned so far. Even my beloved Nashville.m(you wonder why Austin is now no.2 as the best place to live)

    But, let’s compare one more city- better known as SFII, that city where if SF doesn’t work and you still love it, you can make-believe that you never left and move to Seattle.

    Seattle Median family income:$88,342

    Whoah… nelly! That’s actually MORE than what we make in SF, and almost as much as good ole’ Tentfly NJ.

    But what about home prices?

    Seattle Median Home price: $405,000

    Hey, hey- that’s more like it! Their prices are just as screwy as SF’s, but that’s ok since people from SF are used to that and expect prices to be out of whack.

  23. nelly Says:

    Yes?

  24. Rocket Says:

    Yeah, sorry Rick no hard data than my observations over the last 30 yars.

    I just try to find equivalent houses in similar size towns. Here is one in Sierra Vista, AZ that is almost identical in size, age, condition, and lot size compared to an investment house I have in Milpitas.

    http://www.realtor.com/search/listingdetail.aspx?ctid=2079&typ=1&sid=f1cf882bfb4f423d9c9dce5880e82e39&lid=1097230339&lsn=8&srcnt=489#Detail

    This house is $109,600 and my investment house in Milpitas is probably worth $5xxK today, down from $6xxK last year.

    500/109.6 = 4.56
    650/109.6 = 5.93

  25. Mark Says:

    The cost comparisons are interesting, and so is burbed’s implicit question of whether the Bay Area has “jumped the shark.” The Bay Area has changed a lot (read: deteriorated) in the past 30 years in terms of population density, infrastructure quality, school performance, and cost of living. Meanwhile, Loservilles across the USA flaunt Bay Area innovations as their own: high paying jobs, nice neighborhoods, sushi restaurants, even non-white residents. I don’t shop for knock-offs myself, but I find interesting burbed’s question of whether, at some point, these imposter metro areas might cut into the Bay Area’s cache (and, eventually, home prices).

  26. Lionel Says:

    Good news for future BA buyers from calculated risk–

    “For jumbo loans … delinquency rates were up 5.6% to 13% from June, with the biggest increase from the 2006 vintage. Delinquency rates also increased for Alt-A deals, led by those originating in 2007.”

    That’s gonna leave a mark.

  27. Gavin Says:

    Similar to Bob’s comparisons, here is another comparison of a place much more familiar to the Bay Area residents.

    In 2005, in Stockton just 75 miles from the “Real Bay Area” a house that cost $350,000 would rent for just $1050 per month a price to annual rent ratio of nearly 28. At this ratio Stockton could possibly have been made an honorary member of the “Real Bay Area”.

    With a huge chasm between renting and buying, all the riff-raff such as school teachers, bus drivers, cops and firemen could be kept away from owning homes in the community.

    Unfortunately for the snobs, the same house in 2008 costs $160,000 (a 55% drop) while it rents for about $1100 for a price to annual rent ratio of just about 12. This has made buying cheaper than renting if you put 20% down and include the tax deduction.

    Can the “Real Bay Area” sustain such high price to rent ratios while cities surrounding it have some of the highest price falls in the country?

  28. Rocket Says:

    Madaus – they moved to Arizona.

    I have no idea if the BA or RBA has jumped the shark. I thought it was insane 30 years ago, but I am still here.

    I feel I am just as bad at timing the real estate market as I have been with the stock market. Though our real estate equity still dwarfs our stock market equity.

    It will be interesting to see how it all turns out. Hopefully on the upside so I can retire. :-)

  29. bob Says:

    The BA jumped the shark (temporarily) during the bubble. People were jumping ship to other states. I imagine now that there’s a lull in that activity since those left are probably having ‘hope’ that prices will come down more, and enough for them to buy. If prices don’t come down, then the BA will continue to lose all those loony people that made it infamous: artists, musicians, young thinkers, writers, etc etc. Jumping the shark to me means that an area loses its identity. How affordable it becomes will have a lot to do with the future here.

    Meanwhile, a lot of those “other” areas benefited from the exodus. It only takes so many fresh young professionals to transform a city to a world-class one.

  30. nomadic Says:

    Gavin asked:
    Can the “Real Bay Area” sustain such high price to rent ratios while cities surrounding it have some of the highest price falls in the country?

    I don’t think so. Rents will have to go up and home prices will go down to equalize. I think there will always be some premium for owning because the cost of entry is high anyway and the bay area is more desirable than many other places.

  31. reader Says:

    SF, Bay Area Median family income: $67,809?

    Bull. I don’t have a single friend whose combined household income is less than $100k.

    But then again, I don’t know anyone in Novato or those places no one goes to.

  32. mtv-renter Says:

    reader, good for you, you don’t associate with that poor hoi polloi that makes less than $100k/year. I assure you, there are many such people in the bay area. They deliver your food, teach your children, take your garbage, deliver your mail, bag your groceries, etc.

    $67,809 median is very believable.

  33. burbed Says:

    Well, in all fairness, teachers get paid $50-70k – so a two working parent family would clear $100k.

    In my personal experience, nearly every family I know has both parents working.

  34. nomadic Says:

    … or the one who is working, makes over $100k.

  35. zanon Says:

    BOB: Look, I’m sympathetic to your POV that cost of living is very high in the Real Bay Area. But honestly, you comparing house prices here to house prices in other areas is just bogus and tiresome. The RBA is not Nashville or Detroit or Tenafly or New York. All those places are their own, people decide to live their for their own reasons, and the arguments you make just boil down to matters or taste, value, and willingness to pay, which every individual makes for themselves. It’s like saying everyone should move to Central Asia because you can get a 3BR/2BR yurt there for $5K.

    Also, this whole “I’m of the heartland and all you coasters are snobs” is a bore.

    GAVIN: You are on the right track: rent/price is the way to look at things, as that controls for location preferences. Whether or not the RBA can keep its ratios where they are while nearby areas crater depends, I think, on how much leverage there is under RBA realestate. If it’s highly levered, then it’s going to crumble as that credit evaporates. If people are sitting on a pile of equity, then prices don’t have to go anywhere.

    -zanon

  36. sg Says:

    > … or the one who is working, makes over $100k.

    I guess I was below poverty line a few years ago, while being an engineer at the same time.

  37. bob Says:

    Zanon,
    The facts and math are simple. What it boils down to is if too many people live in one area, then it tends to get expensive because everyone is competing with each other. At one time, California was completely rural- even the metro areas. Hence, it was cheaper. It wasn’t any less desirable than it is now. In fact, it was probably more so given that it had more natural beauty back then before it got all over-developed.

    Most of the areas I mentioned are far less populated, hence less people which= less competition and lower prices. Its really as simple as that. If others want to attach labels and reasons as to why it is worth the additional cost to live here, then so be it. But the reasons are none other than the quantity of people and the scarcity of developed residential areas.

    I am by no means saying that other areas are “better” than the Bay Area. If you LOVE living around millions of people, then large cities are obviously perfect for you. But this is a housing forum discussing housing prices, and no matter what this or any other area claim- whether they think of themselves as the smartest, brightest, whatever place to live, the fact is that housing prices here are totally removed from any sort of financial reasoning. You can’t buy houses with “progressive politics”. Just cold, hard, cash. When the math doesn’t add up, then something’s wrong with the picture.

  38. DreamT Says:

    bob – The Bay Area was considered more desirable when it didn’t have technology jobs? Do you realize that you’re bringing extrapolation to an entire new level? We could call it the BOB level, as in “BOB feels that way, so it IS that way”.
    Come on BOB, if a natural, undeveloped area was more desirable than today’s Bay Area, you can bet it wouldn’t be the most expensive real estate in the nation.
    Seriously BOB, if most people in your hometown have the same reasoning skills as you do, it must be a rather scary place to live.

  39. taxy Says:

    @Burbed

    I got my info directly from the source:

    http://www.tenaflynj.org/content/4484/default.aspx

    Click on “Final Tax Rate”. That will get you the total tax rate of $2.585 for every $100 of property value (2.585%). That $1.85M place should have $46,530/yr in taxes.

    I’ll bet that either the realtor is quoting the 6-month bill or NJ has a cap on the amount that the assessed valuation can go up year-over-year. If it’s the latter, then expect that the $21k bill will creep up to the $46k amount eventually.

  40. zanon Says:

    Bob: DreamT is right on this. Jobs are more important to an area than natural beauty when people think about where they want to live. As you say, what matters is “cold hard cash”, not vistas.

    You need to confine your observations on rent/price ratios, not RBA/Alabama ratios.

    -zanon

  41. DreamT Says:

    On the other hand (to soften my ever-so-harsh posts), I’ll trade the BA for one of Bob’s natural habitats anytime, if I don’t need to work. Alas, slave to the grind.

  42. nomadic Says:

    bob I bet you miss RealEstater about now.
    ;-) No one else to pick on today.

    One exception to the “undeveloped is cheaper rule:” playgrounds of the wealthy. Like Aspen, Park City, etc.

  43. Herve Says:

    > slave to the grind

    Don’t worry, you are not the only one.

    Speaking of the devil, when is RE coming back from his “international vacations”? :-)

  44. DreamT Says:

    nomadic – I’m exposed! Regarding the areas you mention, I guess they would be aptly described by this charming oxymoron: “sophisticatedly undeveloped”? :)
    Which begs the question: is Bob a sophisticate?

  45. madhaus Says:

    Tenafly tax rates: it doesn’t matter what the stated tax percentage is, New Jersey has something that California does not have: THE ASSESSOR. And when your house gets assessed, and why, nobody ever seems to know.

    The assessed value of your house is rarely what it sold for. It is usually lower. Back when I lived on the other coast, the tax rate in my city was a whopping 6%! But everyone’s house was assessed for 1/3 the market value, so it was really 2%.

    From talking to family who live in Tenafly, houses are reassessed every few (6-8) years independent of sales. And every city does it their own way, so that’s why taxes are often part of a NJ real estate ad; if the house is assessed low, that’s a bonus. Buying it does not trigger a reassessment right away.

    So, that 2%+ rate does not mean anybody is actually paying 2%+. Depends on how much your house got assessed for, and that’s bloody voodoo.

  46. madhaus Says:

    You know, bob gave away the whole stupid game. Looks like everyone in his family travels to the big city for a few years to earn some bucks and then comes back. Kind of like the Amish only more southern. He’s just repeating the same story and thinks this somehow makes him more sophisticated than anyone else.

    I think he’s just jealous of those of us who actually, you know, live where we want to NOW.

  47. DreamT Says:

    You know what would be fun? Bob presenting the daily news on TV, sharing his uncanny knowledge of the bay area:
    “You’re like about 80% of the people in the Bay Area and rather ignorant.”
    “Most people I’ve met in this area (…) look at the vast interior of the USA as a huge void”
    “People from SF (…) expect prices to be out of whack.”
    … and his profound wisdom in order to educate American citizenzy:
    “How affordable it becomes will have a lot to do with the future here.”
    “When the math doesn’t add up, then something’s wrong with the picture.”
    Thanks to Bob, we are less dumb.

  48. madhaus Says:

    I say lock bob and RealEstater in a steel cage and let them argue with each other all they want, only one gets to leave alive.

    The narcissistic yuppie versus the NASCAR non-dad. Who will prevail?

  49. anon Says:

    Bob is correct.

  50. anon Says:

    He’s probably the only regular poster on this board with an ounce of common sense.

    Let’s quote:
    ““You’re like about 80% of the people in the Bay Area and rather ignorant.” correct
    “Most people I’ve met in this area (…) look at the vast interior of the USA as a huge void” correct
    “People from SF (…) expect prices to be out of whack.” correct
    … and his profound wisdom in order to educate American citizenzy:
    “How affordable it becomes will have a lot to do with the future here.” Incorrect
    “When the math doesn’t add up, then something’s wrong with the picture.” correct
    Thanks to Bob, we are less dumb.” incorrect. Nothing bob says will give you an ounce of common sense.

  51. DreamT Says:

    anon – I assure you, both Bob and you help us lowly ignorant folks feel less dumb everyday, one posting at a time. Please keep posting.
    By the way, http://0.0.0.1/ is not a website – I checked! I realize you’re anonymous but don’t abuse your status to mislead us.

  52. anon Says:

    Fascinating. Ironic that I am not the one throwing around personal insults, no?

  53. madhaus Says:

    It’s really great to have folks like anon and bob posting here, who are always 100% sure that everything they have to say is correct.

    They are always right.

    Just ask ‘em.

  54. anon Says:

    Lol, in fact once I thought I was wrong, when in fact I was mistaken.

  55. DreamT Says:

    anon – Others might call this “constructive feedback” sprinkled with a hint of sarcasm. But personal insults? That’s just ghetto speak when it is uncalled for.
    In any case you started antagonizing everybody by claiming only anonymous posters could be truthful. That sir was a real insult to the board at large. Since then you’ve remained true to form.

  56. austindweller Says:

    DreamT, madhaus,

    Add me to the list of people who believe bob is mostly correct. Cals don’t understand even simple math. Go buy your high priced condominiums in WillowGlen and suffer high cost of living only to find out you lost all your savings when you retire. I doubt CA property is even going to appreciate anymore for next 10 years or so. Almost all RE bulls (or fools) have already died or will slowly be dead financially as the bust unfolds.

  57. bob Says:

    Oh, so now we’re talking about jobs and how that tech jobs makes the BA more desireable than other places? I’m a little confused here because to me, that statement seems to indicate that everyone must want to work in tech, those who don’t are merely losers, hence since tech is THE place to be, then that explains why everyone wants to live here.

    Zanon again mentions that in order for true economics to be realized as accurate, a rent to own ratio must be shown.I disagree with this because the only number that’s actually important is family or individual purchasing power and what the cost of owning a home costs X’s annual income. A healthy level is around 3X’s annual income. But just to make sure I satisfy this additional statistic, I’ll compare them anyway.

    Huntsville,AL
    Avg. Median price for rentals, Huntsville, AL:
    $590.00/month or- $0.74 Per sq foot

    Avg. Median price for homes(to buy), Huntsville, AL:
    $144,900 or- $86.35 Per sq. foot.

    Median Income, Huntsville,AL: $61,036
    Home price= 2.364x annual income
    Mortgage payment= $840.34 a month, 30 yr fixed.

    Bay Area:
    Avg. Median price for rentals, SF Bay Area:
    $1,565/month or- $2.00 Per sq foot.

    Avg. Median price for homes(to buy), SF Bay Area
    $485,536 or- $412.53 Per sq foot.

    Median Income, SF Bay Area: $67,809
    Home Price= 7.16x annual income
    Mortgage payment= $ 2,830.33, 30 yr fixed.

    The conclusion is that even though Huntsville has an almost identical median income, renting is actually a LOT more than buying. But at the same time, the cost of buying the avg. area home is only a little over 2X’s the median income. In the Bay Area, the opposite is true: It is clearly much cheaper to rent. Additionally, it takes a little over 7X’s the avg annual income to cover the cost of a home. So the delta is an incredible 3.5 times greater in the cost of home ownership costs between Huntsville and the Bay Area.

    Typically in a normal market, rents are actually higher than buying. That’s where the old adage of ” You’re throwing money away” came from, because in many cases, that is actually the case, and buying actually makes financial sense. I’m just using this one city as an example. But there are many others- including cities that people from the Bay area consider as “real cities” that have similar ratios.

    Anyhow, the point of arguing this is futile. The math alone should make things rather obvious.

  58. SiO2 Says:

    so, let me throw fuel on the fire.
    I agree, SJ is more expensive than Huntsville. But for whatever reason, I and many people prefer SJ to Huntsville. (I’ve been to Huntsville in fact, it’s not too bad, but I’d rather live here.) So I’m willing to pay more to live here.

    The argument of “SJ should cost the same as Huntsville” is like saying “anyone who buys a Mercedes over a Chevy Aveo is an idiot, because they both go from point a to point b.” It’s true, but some like the Benz better.

    The ratio doesn’t have to be equal in all cities, because in some places people like the city enough to give up something else. For example, someone would live in SJ and take cheaper vacations around California instead of flying somewhere. Or live in a smaller house.

    That’s the thing, different people like different things. Bob’s strategy of working and saving here to retire to TN works for him. My strategy (and RE’s I guess…) is to work and live here for the foreseeable future. I’ll end up in a smaller house on a smaller lot than Bob but that’s a fine tradeoff for me.

    The problem comes if it is truly unaffordable. Obviously for a growing percent of people, this is the case, as shown by foreclosures.

  59. Knicksfan Says:

    Madhaus is right. Taxes in Long Island are strange too. They use some crazy formula of the price the house was built at, plus some random amount of appreciation. No one ever actually pays the full %.

  60. bob Says:

    I agree with SiO2′s balanced argument. The statement that certain cities are more popular than others is technically correct. More people living in a confined area again means more competition and fighting with checkbooks. But I do have to question the general attitude some people have that places like SJ are inherently better than other, less expensive cities.

    Not sure if I agree with the comment that comparing cheaper, poorly made cars to nicer ones as an analogy comparing one city to another is accurate either. I don’t believe that SJ is nicer than many of the cities I mentioned, and vice versa. All of these areas have their own unique character that qualify them as nice in the eyes of many who choose to live there, and that choice is strictly of personal preference. I know people who absolutely love Alaska, and it is freezing cold there. One of the most expensive cities in the world is Oslo, Norway, which is also a city you don’t exactly live in for the weather either.

    What SiO2 also pointed out is also the key point of this conversation, which is that yes- it is more popular for people to live here, but regardless it is overpriced, and in my opinion by a large scale.

  61. rick Says:

    Rockets,
    Here is a measure for you:
    http://radarlogic.com/daily%20price%20chart/DailyPublication.html

    There is no data readily available for time frame longer than 10 years, most of the sources I use with good coverage only cover California. The average is $220+ across the US, the “rest of the country” includes quite a few metros that are 30% off from SJ even today. Phoenix Arizona falls in bottom 30% and SJ is 3.5 times Phoenix area.

    And you can look at PropertyShark or WG’s favorite Redfin to check all zips in BA, you should find majority of them gained 100% from 1999 and 50% again from 1997. There is another famous chart showing the normal rate of rise for housing prices and the abnormally from 2000ish. So even in 1999 housing wasn’t in that big of a bubble. (For RBA it might be and Steve had a chart that it spiked in 1999 and was crashing by 2001)

    I am sure you guys are all familiar with the data, but simply dismiss it with whatever reason you can find.

  62. SiO2 Says:

    Bob,
    I don’t think SJ is overpriced. If I did I would move out. Maybe to Huntsville, there’s some high tech there! I could even take your strategy – sell my house here and use equity along with other savings to retire. So please let me be clear. Sure I wish Palo Alto were cheaper, but it’s not. And we can construct all sorts of arguments based on $/ft, price vs median income etc but the reality is that a 1600 ft house in SJ (nicer parts) costs $600k+ and in the midwest costs $200k. All the persuasive arguments in the world will not convince the SJ seller to take $200k, or even $250k.

    I take your point on the Mercedes vs Aveo. A better comparison is BMW vs Toyota. BMW has pluses (more fun, nicer materials, better handling/braking/acceleration), Toyota has pluses (usually more reliable, better mpg, easier to use controls, softer ride). So there’s reasons why someone would like a Toyota over BMW without considering the price – in fact I know people like that.

    I don’t think SJ is inherently better for all people. It’s definitely better for me though. And for many people – whenever this all washes out, it’s likely that SJ will continue to be more expensive per sq ft than the most of the US. Each individual decides if it is worth it or not.

  63. bob Says:

    SiO2,
    To me, if an area isn’t overpriced, then it means that local wages support prices. It is impossible to place a value on fuzzy logic; that SJ is better than other areas- which is what you’re still basically saying( Toyota versus a BMW). The real comparison boils down to comparing a BMW versus a BMW. Same car. Different places. Different preference of place.

    The only way that housing would be priced accordingly in any given area is if wages keep up with inflation, which isn’t the case in the Bay Area at all. In order for the BA to match Austin, Hunstville, or Atlanta, the equivalent family in the BA would need to be making close to 150-175k per year. $67,000 is a far cry from that amount. I don’t think anyone can disagree that at the end of the day, money talks, and if you don’t have enough, then you can’t afford and none of those other supposed virtuous factors matters at all.

  64. Gavin Says:

    SiO2: I have to agree with Bob when he compares relative values in two cities such as Price/Income and Price/Rent. This is not a matter of preference or taste. You could use purely objective values to show one place is overpriced when compared to another.

    If San Jose were so desirable it would affect both rents and prices driving both up. And if Huntsville were so undesirable it would drive both rents and prices down. But the price to rent ratio would be similar in the two cities especially because there is no rent control in either city.

    In California property taxes are likely to be a smaller fraction of house price because of proposition 13 driving the price/income ratio in San Jose slightly higher but there is no justification for the price/rent ratio being double the ratio in Huntsville.

    You claim that all the persuasive arguments in the world will not convince the San Jose home seller to take a lower price but exactly the same statement could be made about the Stockton home seller in 2005. He was asking $350,000 for a house and getting that price. Today (in 2008) he would only get $150,000. It wasn’t preferences or tastes that drove house prices up in Stockton and it is not preferences or tastes that drove house prices down.

    It was a housing bubble with faulty future growth expectations that caused prices to go up and down. An easy way to detect irrational expectations is to compare the price/rent ratio.

  65. Rocket Says:

    Rick – thanks for the link.

  66. madhaus Says:

    I don’t know how many times we have been through this argument, people. Is there a bubble? Yes. Are prices coming down? Yes, mostly, except for a few RBA holdouts. They came down last in the last housing bubble, too.

    But to claim that San Jose should sell for Huntsville prices is just silly. More people want to live here than want to live in Huntsville, for various reasons.

    Now, the price/rent ratio is also an interesting statistic, but we have to look at both housing supplies, purchase and rental, in figuring why the rent ratio is so bonkers here. A place like Huntsville does not have constrictions on housing. If more housing is needed, then construction companies are hired by developers and start building them.

    Here, most of the area is already built out. Almost all the undeveloped land here is state or county park or reserves, or protected hillsides. The only place to build out is in the edge cities: Gilroy, Tracy, Vallejo. When prices got too expensive, that’s exactly what happened, and then the edge cities started ramping up in price too.

    Now, not only has the credit bubble popped, taking the housing bubble with it, we’ve got $4 gas (which was as high as $4.60). That makes the edge cities much less desireable. Down they go, and eventually they will get cheap enough to pull people out of closer-in homes. Eventually.

    But face it: if you want to work where you can quit your job and have a choice of ten other places you can go, and you’re a software or network engineer, this is it. There’s a few other areas like it on a much smaller scale, but this is The Place for starting a new software business or finding a job in an existing one. You can talk until you’re blue in the face about Huntsville rent ratios. Doesn’t matter. Few people here want to move there, so prices will be higher here, barring extraordinary events such as a mega-quake, a nuclear attack, or a permanent drought.

    bob, I think what really bugs you is that you’ve got your life plan worked out and we’re not following you along. It’s not enough that we say, “Good for you,” you want us all to pick up and move out to validate your decision. Is your decision thus the wrong one for you if we don’t follow it to the letter? You claim Californians all think it’s wonderful here and for some reason that really annoys you. Why do you care so much? It doesn’t bug me that you like rural life, why does it bug you that I like being around lots of people and things to do?

  67. madhaus Says:

    hey burbed, where’s my long post? Did it go to moderation?

  68. burbed Says:

    Restored

  69. SiO2 Says:

    Ok Bob and Gavin -
    If houses should be uniformly priced based on price/rent and price/income ratios, then why are those ratios different in SJ than in Huntsville? After all, the loose credit happened across the US.

    Even given the geography constraint that Madhaus cites, if the ratios should be uniform then people should dash for Huntsville etc once the ratio is better there. But clearly they don’t. And haven’t for many years.

    My theory is that people are willing to pay a higher percentage of their income for housing here than elsewhere. There’s many reasons for that, including the hope of punching the golden IPO ticket, weather, desire to live near immigrants from one’s mother country…

    Also, I wonder if income distribution is more high-end weighted here than elsewhere. A receptionist probably makes about the same everywhere in the US. A hotshot software engineer probably makes more here than elsewhere. The median would not capture that. But, it seems reasonable that over-median-income people are more likely to purchase than under-median-income people, hence pushing up purchase prices more than the median would indicate.
    This is totally speculation but makes sense to me.

    believe me, I wish that $1.5m could buy something nice in Palo Alto, so I’m not wishing for prices to stay high. (until I finally get there of course). But, looking at the continued strong earnings reports from tech companies (HP this week) and the difficulty I have finding engineers, I don’t think employment is suffering. Therefore I don’t see Stockton-style price drops in RBA.

    (also I believe that RBA prices didn’t go up in the same % that Stockton/etc did, so even with reversion to the mean they won’t go down the same %. an entry house in Los Altos was $1.2m in 2002, now it’s 1.5m. So maybe it falls back to 2002 levels at 1.2m. Except the economy is stronger now than it was in 2002, so maybe not.)

  70. WillowGlenner Says:

    I don’t know how many of you are landlords but the rent to buy ratio is not as bonkers as it was. One property management blog I read speculated that since the housing bust, bay area rents for single family homes have risen 30%. I am not sure if this equates to the housing bust but I can attest that rents are indeed rising. The statistics for rents don’t tell the whole story either, because all that matters on a rental is what it costs to rent a new place, not the current, average rents that tenants are paying now. Many landlords never raise rents.

  71. WillowGlenner Says:

    I think he’s just jealous of those of us who actually, you know, live where we want to NOW.

    madhaus, I thought we already had these bay area haters pegged as similar to your neighbor who came up from San Diego and went back due to his dissatisfaction with his inability to live in an “executive class” house.

    All these guys are basically the same- they come out from Minnesota where they are director of manufacturing at Cray corp or fill in the large corp name. They get here and for the first time in their lives they realize that middle management job is not a ticket to the high life in the actual big city. Too bad, so sad.

    I actually think removing these middle management types from the bay area could be the secret to this region’s success. Most engineers I know don’t mind following directions from a talented CEO, but having to work in a place with a pecking order where they are below some other working stiff in the corner office who is just a middle manager is too much. In the bay area we really humiliate this group too, many middle managers are in cubes and have no admin support either. This group leaves the bay area with their tails between their legs.

  72. Gavin Says:

    SiO2: You said

    “My theory is that people are willing to pay a higher percentage of their income for housing here than elsewhere. There’s many reasons for that, including the hope of punching the golden IPO ticket, weather, desire to live near immigrants from one’s mother country…”

    But Bay Area residents are only willing to pay a higher percentage of their income to buy. They are not willing to pay a higher percentage of their income to rent. Also, you can punch the golden IPO ticket by renting, you can enjoy the weather while renting, you can live near immigrants from your mother country while renting.

    When you mention “income distribution is more high-end weighted here than elsewhere” you are getting closer to reasons why the price/rent ratio should be higher in the Bay Area. At higher incomes the mortgage deduction is worth more so it is worth more to buy.

    You can quantify the effect of proposition 13. You can also quantify the effect of the higher mortgage interest deduction but even with both these it is impossible to explain why the price/rent ratio in the Bay Area should be double what it is in other cities.

    I also agree with you that the Bay Area saw smaller percentage increases in house prices than Stockton from 1996 to 2005 so it is likely to see smaller drops.

  73. SiO2 Says:

    Gavin, you said
    “it is impossible to explain why the price/rent ratio in the Bay Area should be double what it is in other cities.”

    And yet it is, and has been for many years. That struck me when I moved here from the midwest 20 years ago, and it is still the case. It’s not a housing bubble phenomenon, the loose credit was available across the US. (uncited source alert, there was an article on money.cnn.com or finance.yahoo.com recently about predicting the end of the bust by looking at price/rent, and it had the price/rent ratio in SF area at some value that was higher than the other listed cities. Unfortunately I can’t put my hands on the article.)

    So why is it? I have two theories, from reading this and other housing blogs.

    1. prop 13 encourages people to hang on to houses to rent out, since they can keep the low tax base. And the cost of the house to such a person is less than it is for someone (like WGer) who buys a house specifically for renting out.

    2. there’s cultural pressure for Chinese and Indians to buy instead of rent. There is for Caucasians as well but it’s more so for Asians. I know two guys who are getting married and ended up buying places under pressure from both families. Here and in China! True, two stories do not make a proof, but I believe that this is the case based on experience.

    any other guesses? Gavin and Bob say that this should not be the case, yet it is and has been. Even pre-boom, as was discussed in a posting a few months back. So why should it be different here? Is it also the case in other larger cities, like Chicago or NY? It’s definitely the case in Chinese cities; Shanghai and Beijing are steeper than SJ on rent/buy. Around $350k (usd!!) for an 1200 ft apartment that would rent for about $900 usd.

    one final note, you mention 1996-to 2005 time period. 96 to 00 was the tech boom. Lots of IPOs put lots of $ in people’s pockets. Sure, you can say that they were bogus, and many of the companies did fail. But the fact is that people made a bunch o $, and some of that went to houses. So the price growth up to 00 was justified in that people made more money. (again this probably won’t show up in median, since the income of the top 25% doesn’t change the median if the income of the bottom 50% is flat). And prices actually came down in 01 and 02. So the housing bubble in RBA really started in 02, in the sense that the prices grew in a way that was not connected to incomes.

    good commentary. the exchanges here are far better than something like cnn.com where half the posters are barely literate. They must be from the midwest :) (no insult intended, really! I kid!)

  74. madhaus Says:

    WG, re: #71. I agree with everything you said. Doesn’t explain why we have the Alameda Chamber of Commerce posting to a Silicon Valley property blog, but what you said is so true about middle management types. (And you got my neighbor in one.)

    There are all kinds of places to live where I probably wouldn’t be too happy, and I fail to see how it’s a character defect to choose one that I like.

    SiO2, re: #73, I love the discussion here too. There’s been talk here in the past that Indians may be more likely to rent than Chinese, but that may be the short-termers. Plenty of both (owners) in my neighborhood. But there’s a huge apartment (not condo) complex at Stelling and Valley Green, must have thousands of people living there; I see lots of Indian families around the property whenever I drive by.

  75. DreamT Says:

    Gavin – “But Bay Area residents are only willing to pay a higher percentage of their income to buy. They are not willing to pay a higher percentage of their income to rent.”
    Renting is the fallback from purchasing real estate. As such the willingness to pay a higher percentage of income is probably not a prime driving criterion.
    In plain English: if your rent goes up, you’re rather screwed whether you like it or not..

  76. DreamT Says:

    SiO2 #69 – “I wonder if income distribution is more high-end weighted here than elsewhere”
    Nice demonstration. In addition, I postulate that in areas of historically high appreciation such as the bay area, the salary of people who purchased 10 years ago or more is reflected in the median but immaterial as far as current affordability goes – because their peers are no longer the ones buying the house next door! So in my opinion, the greater the historical appreciation in local prices, the more the ratio salary median vs house price is misleading as a predictor of future price movements. Same conclusion as you in any case.

  77. nomadic Says:

    Just getting caught up. It is a good discussion, and better thought out than many that just turn into love/hate for the RBA.

    I think you guys are touching on the reason why the price/income ratio is different here (and in other high-priced areas like NYC). It’s two supply-side factors – a lack of land for additional housing and the restricted number of potential buyers. What I mean by “potential buyers” is that the high cost of entry limits buyers to the higher income households. In many areas that means prices need to really drop a lot. But here the number of housing units is restricted enough to give the higher prices support near those levels. It makes the ratio look way off because that includes ALL incomes and not the actual population that could buy.

    Does that make sense or has my severe lack of sleep completely impaired my thinking skills? If I wasn’t so tired I’d look up the ratio for NYC – anyone care to take a peek?

  78. DreamT Says:

    nomadic – yes that is the essence of my post #76. I’d help you look up the ratio but save for madhaus and a couple other posters, it would seem we’re mostly talk on this board. :)
    So… madhaus will look it up for you… right madhaus?

  79. nomadic Says:

    I found some data. 2004 numbers for NYC:

    income: $45,343 per the Census Bureau
    home price (NY-North NJ-Long Island): $403,600

    Makes the ratio 8.9

  80. Knicksfan Says:

    THAT’s cuz it includes all the people in Harlem, the Bronx, Crown Heights who will never and should never be able to afford a home.

    The City (not SF, the real City) alone has 400,000 people in public housing:

    http://www.nyc.gov/html/nycha/html/home/home.shtml

    Those saps are a statistical anomaly.


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