May 15, 2010

Not Everyone Gets A House

I found this article The Mad Scramble for Chinese Real Estate to be an interesting commentary on the large discrepancy between what new workers expect and what the market provides when it comes to housing. What I find particularly interesting is how closely it mirrors expectations of some of the people I've met in the San Francisco Bay Area.

For the majority of residential locations in the United States, housing prices are inline with average salaries. Meaning that a single person who makes an above average salary or a couple that individually make an average salary can easily afford the down payment and mortgage on a nice and relatively spacious home. No one expects the same from downtown New York City or San Francisco. Yet most people seem to expect it from the San Francisco suburbs. Especially if they grew up in another part of the country or moved here for work.

I can understand why. Things aren't that different, superficially. The area seems slightly more populated. The houses are relatively smaller and older. So logically these homes shouldn't cost as much as they do. But that is just a superficial view of things.

The wealth disparity in the Bay Area is significant. The median household income is only slightly higher than the rest the country. In other words, your typical clerk or service industry worker in Mountain View probably makes about $10k more than somewhere in the Mid-West. The difference between $40k/yr. and $50k/yr. is three months. But there's a much higher concentration of IT workers who are making significantly more money. And many of them are dual income. The difference between a single income of $50k/yr. and dual income of $250k/yr. is four years. This means the housing market has a higher percentage of customers (out of all residents) that can afford to pay more. The spread is too large for the people with lower salaries to compete.

In addition, there isn't really more room to expand within the existing cities. That means you won't see additional homes being added to Mountain View, Sunnyvale, Redwood City, Milpitas, etc. There is a bit of room left in San Jose, but not much. The population continues to increase. These cities are job centers. So prices on old small homes go up as demand increases but supply remains constrained.

Given this, I think it's easy to see why a 1200 square foot home might cost $500k. Even though the same home in your hometown might only cost $60k - $80k. You can't simply look at the size of a house and the overall look of its neighborhood and say the cost is wrong. Prices are no longer being artificially buoyed. This is just what things cost due to scarcity of land and the desirability of central housing locations.

(N.B. I haven't done any particular research into this area. This is just what I've concluded based on my own observations and through deductive reasoning.)

Posted by josuah at May 15, 2010 11:28 AM UTC+00:00

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