Fundamental Value of a Home

[bsrsharma]

I have been having this fundamental question for some time, and would like to invite the readers to try to give some rational explanations:

Why is there the real estate axiom “location, location, location”?

Why are potential home buyers so keen on exactly where they want to live. I can understand some simple reasons like nearness to job, good schools etc., But what explains the reason that someone would pay millions of $ for a La Jolla house rather than live very well in a large fine estate in, say, Colorado, Idaho, Wyoming, Georgia, Carolinas etc., I won’t accept the argument that all those places are miserable armpits compared to SoCal. If sunny weather is desired, they can always visit Calif. or Florida for a vacation. I am sure a millionaire can get someone to clear the snow etc., Really well to do folks can practically work from anywhere with the modern conveniences. Why isn’t there a (much larger) “outsourcing” of home buyers and jobs to less expensive but good locales? Give me all your thoughts on this seemingly irrational behavior people make when it comes to choosing a place to live.

[FormerOwner]

In any company, there are a few key people that run the whole operation and make all the major decisions. Those people decide where the office(s), manufacturing facilities, warehouses, etc. will be located. These people generally work out of the main office so they will locate it in the area where THEY want to live and they aren’t constrained by housing prices. Areas like this also have a “critical mass” of like minded people and are often near research universities and major airports – plus they are just nice places to live as far as cultural amenities, etc. La Jolla fits this bill for the biotech industry. Because there are a lot of biotech firms in La Jolla, there are a lot of biotech jobs in La Jolla. Because there are jobs, there are people that want to live near those jobs. Those people can either buy or rent.

However, MOST people are NOT highly paid biotech workers. The issue is that in our global economy, wages for the average Joe get held down by global competition so the bulk of the population just doesn’t have much in the way of buying power unless they go into horrendous debt. That’s what will cause prices to crash back down. It remains to be seen how that crash affects the lower cost neighborhoods vs. the middle vs. the high exactly.

Personally, I have no problem with “throwing my money away on rent” and will never buy a house again unless the numbers pencil out – period. One thing I really like about renting is that if the neigborhood goes downhill or if you get a new job, you can just move when your lease is up or go month-to-month if you think you might be moving soon. No stress of having to show your house, etc. and no closing costs.

Long term, it appears to me that future generations are going to be making even less money (since most new jobs are in low-pay industries) and having fewer kids – this really increases the downside risk of homeownership, making it even more important to make sure that the price you’re paying is in line with rent.

[FormerOwner]

In any company, there are a few key people that run the whole operation and make all the major decisions. Those people decide where the office(s), manufacturing facilities, warehouses, etc. will be located. These people generally work out of the main office so they will locate it in the area where THEY want to live and they aren’t constrained by housing prices. Areas like this also have a “critical mass” of like minded people and are often near research universities and major airports – plus they are just nice places to live as far as cultural amenities, etc. La Jolla fits this bill for the biotech industry. Because there are a lot of biotech firms in La Jolla, there are a lot of biotech jobs in La Jolla. Because there are jobs, there are people that want to live near those jobs. Those people can either buy or rent.

However, MOST people are NOT highly paid biotech workers. The issue is that in our global economy, wages for the average Joe get held down by global competition so the bulk of the population just doesn’t have much in the way of buying power unless they go into horrendous debt. That’s what will cause prices to crash back down. It remains to be seen how that crash affects the lower cost neighborhoods vs. the middle vs. the high exactly.

Personally, I have no problem with “throwing my money away on rent” and will never buy a house again unless the numbers pencil out – period. One thing I really like about renting is that if the neigborhood goes downhill or if you get a new job, you can just move when your lease is up or go month-to-month if you think you might be moving soon. No stress of having to show your house, etc. and no closing costs.

Long term, it appears to me that future generations are going to be making even less money (since most new jobs are in low-pay industries) and having fewer kids – this really increases the downside risk of homeownership, making it even more important to make sure that the price you’re paying is in line with rent.

[bsrsharma]

FormerOwner,

You are right about the elephants of the jungle living wherever they want to; but they can set up their branches, factories etc., in places in flyover country, USA where housing cost is a fraction of what it is in San Diego/OC/Silicon Valley/NYC rather than take a long jump to Asia.

[bsrsharma]

FormerOwner,

You are right about the elephants of the jungle living wherever they want to; but they can set up their branches, factories etc., in places in flyover country, USA where housing cost is a fraction of what it is in San Diego/OC/Silicon Valley/NYC rather than take a long jump to Asia.

[surveyor]

stability

Why isn’t there a (much larger) “outsourcing” of home buyers and jobs to less expensive but good locales?

At the heart of it, people don’t tend to like change. Change can be scary. There is no guarantee that the situation will improve if they move to a different location. People get to a point where they are comfortable where they are and the more comfortable it gets, the harder it is to leave.

I come from a location where there is a constant hurricane at least every year. Terrible. It knocks out the power for a month, the sewer water backs up, and you have to rebuild your house because it can get severely damaged during the storm. The local government is in shambles, public education is virtually third world, and salaries and job opportunities are extremely low. There are, however, still people living there and they wouldn’t want to move for the world. My parents could probably make a very comfortable existence most anywhere else, yet they choose to stay there.

Change. That’s your answer.

[surveyor]

stability

Why isn’t there a (much larger) “outsourcing” of home buyers and jobs to less expensive but good locales?

At the heart of it, people don’t tend to like change. Change can be scary. There is no guarantee that the situation will improve if they move to a different location. People get to a point where they are comfortable where they are and the more comfortable it gets, the harder it is to leave.

I come from a location where there is a constant hurricane at least every year. Terrible. It knocks out the power for a month, the sewer water backs up, and you have to rebuild your house because it can get severely damaged during the storm. The local government is in shambles, public education is virtually third world, and salaries and job opportunities are extremely low. There are, however, still people living there and they wouldn’t want to move for the world. My parents could probably make a very comfortable existence most anywhere else, yet they choose to stay there.

Change. That’s your answer.

[WaitingToExhale]

As a member of the “highly paid biotech” workforce, I can vouch that most of US can’t afford to buy homes, either. As I’ve mentioned in another post, I keep staring at the hundreds of homes at 800K and up and keep wondering where are all the people that can can afford those things? A minimum of 2-household income at 100K each for the 4X salary maximum that used to be the standard.

Pigginton has answered these questions, I think, in that there just are NOT that many people that can afford them. Banks were just handing out crzay loans because all of the middlemen could make money regardless of whether the borrowers could make good.

FormerOwners point about the big cheeses making location choices (particularly in small biotech) is a good one. Since the executives tend to live near the coast, they want the company near the coast, nevermind the possibility of available lab space inland.

[WaitingToExhale]

As a member of the “highly paid biotech” workforce, I can vouch that most of US can’t afford to buy homes, either. As I’ve mentioned in another post, I keep staring at the hundreds of homes at 800K and up and keep wondering where are all the people that can can afford those things? A minimum of 2-household income at 100K each for the 4X salary maximum that used to be the standard.

Pigginton has answered these questions, I think, in that there just are NOT that many people that can afford them. Banks were just handing out crzay loans because all of the middlemen could make money regardless of whether the borrowers could make good.

FormerOwners point about the big cheeses making location choices (particularly in small biotech) is a good one. Since the executives tend to live near the coast, they want the company near the coast, nevermind the possibility of available lab space inland.

[noone]

Think of it as a symbiotic relationship. People want to live where they might be able to find work. Even if they have a job, they have to think about what will happen if they lose their current job. Companies want to be located where they have the largest pool of potential employees.

From time to time there are shifts in which locations are the most popular. It probably starts with a couple of small companies being in a certain place at a certain time. When the companies start to grow, people take notice. This attracts more people and more companies, which attracts more companies and more people, which attracts more people and …

Before the dot com boom, San Jose was not a very desirable place to live. Before Microsoft, Seattle was mostly Boeing and military.

And then of course you have the opposite in places like Michigan. Detroit was huge until the U.S. auto industry started to crumble.

San Diego used to be that little town where Angelinos spent their weekends (or drove through on their way to Baja). But over the past 10 years or so that has changed dramatically. Some changes are for the better and some are for the worse.

[noone]

Think of it as a symbiotic relationship. People want to live where they might be able to find work. Even if they have a job, they have to think about what will happen if they lose their current job. Companies want to be located where they have the largest pool of potential employees.

From time to time there are shifts in which locations are the most popular. It probably starts with a couple of small companies being in a certain place at a certain time. When the companies start to grow, people take notice. This attracts more people and more companies, which attracts more companies and more people, which attracts more people and …

Before the dot com boom, San Jose was not a very desirable place to live. Before Microsoft, Seattle was mostly Boeing and military.

And then of course you have the opposite in places like Michigan. Detroit was huge until the U.S. auto industry started to crumble.

San Diego used to be that little town where Angelinos spent their weekends (or drove through on their way to Baja). But over the past 10 years or so that has changed dramatically. Some changes are for the better and some are for the worse.

[no_such_reality]

The Irvine Housing Blog covered the sales price affects on land value. Irvine Land Value

[no_such_reality]

The Irvine Housing Blog covered the sales price affects on land value. Irvine Land Value

[Bugs]

I would say the range for gross income multipliers for houses (not apartments) probably won’t get any lower than 10x gross annual rents no matter what happens. 11x annual income would probably be more realistic. That’s as an average throughout the region, meaning some of the beater neighborhoods would be a little lower and the more desireable areas would be a little higher. It wouldn’t surprise me at all if La Jolla’s desirability bottomed out no lower than at 13x gross, maybe even higher.

There’s no saying that some areas like La Jolla and Del Mar will unwind as much (percentage wise) as the regional average. If the region corrects at -50%, these high-demand areas may only correct at -25% or -35%. The arguments of “they’re not making any more land, everyone wants to be here, etc” don’t necessarily apply to the region as a whole but they do apply to these much smaller high-demand areas.

I could be way wrong, but I’m just not seeing La Jolla SFRs bottoming out to $350,000.

[Bugs]

I would say the range for gross income multipliers for houses (not apartments) probably won’t get any lower than 10x gross annual rents no matter what happens. 11x annual income would probably be more realistic. That’s as an average throughout the region, meaning some of the beater neighborhoods would be a little lower and the more desireable areas would be a little higher. It wouldn’t surprise me at all if La Jolla’s desirability bottomed out no lower than at 13x gross, maybe even higher.

There’s no saying that some areas like La Jolla and Del Mar will unwind as much (percentage wise) as the regional average. If the region corrects at -50%, these high-demand areas may only correct at -25% or -35%. The arguments of “they’re not making any more land, everyone wants to be here, etc” don’t necessarily apply to the region as a whole but they do apply to these much smaller high-demand areas.

I could be way wrong, but I’m just not seeing La Jolla SFRs bottoming out to $350,000.

[Author]

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