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.

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

Makes the ratio 8.9

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?

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.

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!)

“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.

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.

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.)

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?

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.

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.

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.

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.