Certainly it’s challenging for the average person to buy a home in Silicon Valley these days. It’s challenging for even the “tier 1” top 25 percent of Valley earners to buy. But is it more challenging than it’s ever been?
The quick answer: no.
It’s an answer I’ve been trying to get across lately: that for as long as I’ve been selling homes, the Valley has been tough on home buyers. In fact, this chart showing the percentage of San Mateo and Santa Clara Counties residents able to afford their county’s median-priced home shows that Silicon Valley has been challenging home buyers since at least 1991, seven years before I began selling. Buyers would have been even more challenged in 1989, the peak of that cycle, than in 1991, when the winding down of the Cold War was hammering Silicon Valley’s defense industry-based economy, and home prices with it.
Sure, we’re at the lower end of the historical range these days. As of Q4 2016 only 15 percent of San Mateo County residents could afford that county’s median-priced home of $1.3M, while just 22 percent of Santa Clara County residents could afford the median-priced home of $1.005M. With prices going up this spring, these percentages have almost certainly shrunk.
But while home ownership has typically been available to a larger percentage of local residents than it is today, the paradox is that even when it’s been easier to buy financially, it’s been harder psychologically. Would you buy when home prices are soft because Silicon Valley’s economy is tanking, as it did during the early ’90s and early ’00s, or when we were in the grips of a world-wide recession? Would you buy a home when your job is in jeopardy and your friends are telling you the Valley is finished? When conventional wisdom and your gut say “wait for certainty”?
One difference between now and 1991 is that today many young professionals carry bigly education debt, making it harder for them to qualify for a loan. However, experience makes me wonder how much of a factor student loan debt is in the Valley. I’ve seen maybe sixty credit reports over the past few years, for applicants to properties I’ve leased ranging from San Jose to Redwood City. Virtually all those applications were from young professionals. Only a handful showed outstanding student loans.
Another difference between now and then: tight credit. The media says it’s hard to get a home purchase loan. But none of my clients have had trouble, suggesting that either the Valley attracts better borrowers or that the Valley’s wealth-generating opportunities make its residents better borrowers.
One more wild card is the Valley’s notoriously high cost of living. But is it any higher, relatively, than it was in 1991? Bureau of Labor Consumer Price Index statistics can tell us.
The quick answer: yes.
What’s causing this rapid increase in the local cost of living? I’m sure the answer is buried in BLS wage statistics, probably under the heading Computer and Mathematical Occupations, but I’m running out of time and patience, so let’s use common sense, even though it usually puts us in the ditch on the road to enlightenment. See where the local and national costs of living diverge, right around 1998? What happened then, boys and girls? Right! Dot-com hit high gear, the land flowed with milk and honey, and coders started making way more money than their aerospace engineer daddies ever dreamed of. The dot-com boom ended. The “way more money” didn’t.
So let’s posit that sharply rising affluence in Silicon Valley’s “tier 1” workers, aka techies (shorthand for workers in computer hardware, software, internet and information services, and biotech) has been driving up the cost of living, including the cost of housing, at a rate faster than the average of U.S. urban centers, for the past twenty years. Case in point: according to ValleyWag, Valley tech wages went up 8 percent between 2013 and 2014, based on Bureau of Labor Statistics data analyzed by JLL, a commercial real estate services firm. The same source says that the average Valley tech salary as of August 2014 was an ample $195,815, highest of any of the 34 U.S. tech centers compared in the survey.
Which was almost exactly the $198,100 annual income needed to purchase the median-priced home in Santa Clara County in Q4 2016. Coincidence? Maybe, but wouldn’t it be tidy if the median price of a home was pegged to the median salary of its most likely buyer?
Another indication of who’s driving the rising cost of living here: since 2010, median inflation-adjusted wages for four of the Valley’s five occupational groups have been flat or even declined, according to Joint Venture Silicon Valley’s 2017 State of the Valley. Only workers in the Management, Business, Science and Arts (Arts? Really?) category saw real income rise. Real income in the service sector declined 8 percent since 2010.
So here’s a simple and necessarily simplistic but not necessarily inaccurate summary: techie wealth drives up the Valley’s cost of living in general–there’s a direct and positive correlation–and its cost of housing in particular, especially when that wealth is focused on new or remodeled homes in a handful of highly-regarded cities and school districts.
Back to the original question: is it more challenging for the average person to buy a home in Silicon Valley than it’s ever been?
“Anywhere else we’d be rich. Here we’re just average” says the client, as Silicon Valley inexorably heads toward a society of coders and busboys, with precious little in between. Maybe we should rephrase the question: are average persons an endangered species in Silicon Valley, most of them having moved to Portland? Or can we solve that problem simply by redefining what “average” is?
Maybe the best answer is that, today, the average Valley resident is like Lake Woebegon’s kids: well above average.
copyright © John Fyten 2017