Relative Value of So Cal RE

[BostonAndOC_RE_perspective]

CONCHO,
Why is that surprising? $100K is entry level in the Bay area. Any degreed professional in their mid-30’s or older working in finance or high tech up there makes at least $150K. I know that just from my own company’s salary scale (which applies a double digit % salary differential adder based on the higher cost of labor up there. No adder for SD or OC).

My non-company friends who round out this decidedly un-scientific survey are very close friends, whom I trust. They’re a little older than me also, so I have the benefit of their counsel. Their salaries are really not that out of line. In one friend’s neighborhood in the East Bay, he mentioned entry level qualufying income to buy in his neighborhood (~$2M) is $500K. 4:1 ratio is a little high, but nothing like we’ve seen down here over the last few years. Bottom line: more high-paying jobs and less inventory in nice areas proportionally in the BA relative to LA and OC, and a huge disparity for SD.

[BostonAndOC_RE_perspective]

Heavyd,
Great point re: Cabo.

How are the Boyz (I couldn’t resist)? Iloved you guys back in the day.

[heavyd]

I’m not quite as fat as the real Heavy D, but it seems I am getting there…

[jrock]

I’ve heard a lot recently about rents increasing and that this will shore up housing prices. The overlooked apsect of this is that, although housing prices do not figure into the inflation statistics used by the Fed to set interest rates, rents do. I believe that rent makes up fully one third of the CPI. If rents increase at anywhere near the rate some folks are projecting, it will send the CPI through the roof and force the Fed to continue tightening. And continued tightening in this environment would almost certainly push housing over the edge. When all those ARMs reset, an unprecedented wave of forclosures would likely result, further depressing housing prices. I think this is why the Fed is in a no win situation. The baseless increases in asset valuation, which were ignored because they weren’t statistically accounted for, are now inevitably filtering down into the core inflation statistics. People stuck with negative cash flow properties are trying to recoup their investment by increasing rents. On the other hand, if the Fed continues with easy money policies, inflation will undoubtedly become a significant issue.

[powayseller]

Boston_OC, glad that you’re back.

[Anonymous]

B and OC RE, I’m familiar with the area: I worked in Menlo Park in ’97-’98 (exciting time), and am at my third VC-backed (all Sand Hill Road) startup.

There is fabulous wealth in the Bay Area. But, it’s highly concentrated. As such, I don’t understand why it would affect median home price; it certainly doesn’t affect median income, looking at the Census stats.

So, I’m guessing the home prices up there won’t hold up. I could be wrong. But I don’t think so.

[Anonymous]

Palo Alto, per the 2005 Census:

Population: 67K

Households: 27K

Median household income: $106K

Mean family income: $175K

% earning $150-199K: 11%

% earning $200K or more: 20%

Home ownership rate: 58%

Median home price: >$1.0MM

 

20% at $200K plus income won't support a city wide median home price of >$1.0MM.

I know, I know, there some zero income Stanford students who have tens of millions in the bank (from selling YouTube).  There aren't many of those, I wager, though.

[BostonAndOC_RE_perspective]

JG,
Many thanks for the stats. Pretty impressive, don’t you think? I mean in that they come close to supporting my thesis. 20% of the population (a big chunk) are 5:1 for housing. That is much saner than SoCal. BTW, its not just the Peninsula. I have friends that live in Piedmont (tony East Bay area) that modestly take home huge $$$ from the money game. SF is still the west coast money center.

You can buy a mid century 3/2 on a 5-7K sq ft lot for $1M. The really cool thing for a family is to live within walking distance of Stanford. Great atmosphere and opportunities for kids.

Can you find a SoCal town of at least 67K residents that has greater than or equal stats?

PS – glad to be back. I’m a constant lurker.

[Anonymous]

Unfortunately, the Census folks don’t make data for Rancho Sante Fe or La Jolla available, for comparison with Palo Alto.

First thing is that the standard comparison is median price to median income. 10X is not fun.

Let’s assume that the 60% of homeowners are the highest 60% of earners in Palo Alto. Then, median income of homeowners is 70% percentile: bottom 40% are renters, midway beyond is median for homeowners. 70th percentile household income = median homeowner income = $150-199K, per the Census data. $1.0MM home/$150-199K income is still painful; I’ve been there, when we had our McMansion in Sante Fe Valley. Trust me, at 6X, there’s little room for a hiccup; you better have your YouTube cash around.

Per the OFHEO index, prices in San Fran/San Mateo troughed at 99 in Q4 94; the index stands at 301 as of Q2 06; home prices have tripled. From ’94 to ’04, per capita income moved from $35K to $58K, +66%. 200% home appreciation vs. 66% income growth; smells like a bubble to me.

Unless they have big wads of cash in the bank, our well-heeled Nor Cal friends are at risk, too, me believes.

[Author]

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