Odds of California real estate going down a lot (San Jose: 2014, apartments)

[ncole1]

So I see people are paying almost a million dollars now for very modest (but detached) homes in places like LA and SF. Is this really sustainable? We have had a big influx of foreign wealth...which...who knows if it will continue or not? Even if we ignore the most extreme cases like Baltimore and Detroit, "momentum" in RE prices is far from consistent especially over periods of more than a few years.

It really strikes me as weird that people are so eager to stretch into the crazy overpriced market there as if there is zero chance (or nearly so) of a real correction happening. What am I missing?

[chet everett]

If there are solid JOBS then people can afford to pay big money for housing. San Jose and Belle Aire have LOTS of people making HUGE incomes, Detroit? Not so much...

The sectors that make people rich in LA and SF are driving the GLOBAL economy -- Entertainment and Technology are solid bets for the foreseeable future.

[ncole1]

Originally Posted by chet everett

If there are solid JOBS then people can afford to pay big money for housing. San Jose and Belle Aire have LOTS of people making HUGE incomes, Detroit? Not so much...

The sectors that make people rich in LA and SF are driving the GLOBAL economy -- Entertainment and Technology are solid bets for the foreseeable future.

Even local incomes don't support those prices. Higher than most of the country, sure, but not that high. Silicon Valley is not the only employer, there are plenty of others, and the average salaries are not so much higher than everywhere else to support ~200% higher prices!

And the Detroit analogy is actually fairly apt as the same could have been said about the automakers back in their big day as we are saying now about the IT sector nowadays.

[Goinback2011]

In some parts of CA, it's Chinese money driving the price increases.


Yeah, that will last.

[chet everett]

Originally Posted by ncole1

Even local incomes don't support those prices. Higher than most of the country, sure, but not that high. Silicon Valley is not the only employer, there are plenty of others, and the average salaries are not so much higher than everywhere else to support ~200% higher prices!

And the Detroit analogy is actually fairly apt as the same could have been said about the automakers back in their big day as we are saying now about the IT sector nowadays.

No, MANY people that understand economics realize that Detroit was headed off a cliff -- the competitive pressures from other automakers, combined with the highly inefficient compensation structure that saw generations of Unionized workers make out like bandits with unsustainable pensions and free healthcare for unskilled work meant it was only a matter of time before Detroit crashed. The executives at the various automakers did not care, they too got gold plated individual compensation. One of the few outsiders to "sound the alarm" was Ross Perot, when his data processing firm was bought by GM he got a seat on their Board of Directors. He told the press about how perilous GM's future was. Even ran for President of the US. GM bought out his shares and told him to get lost...


You are correct that folks not involved in high tech or entertainent do have to use a greater percentage of their salary to live in convenient parts of LA or SF, but that is just how things work. LOTS of other cities also have very costly cores -- in Europe those that wish to live inside Paris pay FAR higher taxes than those in the outlying area. Land prices in Hong Kong are orders of magnitude greater than those across the Bay. Similar prices exist in Vancouver and Toronto.

[SportyandMisty]

Originally Posted by ncole1

Even local incomes don't support those prices. Higher than most of the country, sure, but not that high. Silicon Valley is not the only employer, there are plenty of others, and the average salaries are not so much higher than everywhere else to support ~200% higher prices!

Silicon Valley has a long-standing culture of equity participation that typically doesn't show up in salary comparisons, because, of course, they are not salary. For a very long time, that was Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NQs). More recently, especially due to financial accounting rule changes, the trend has been to give restricted stock to employees as an alternative to stock options.

This culture of equity participation isn't prevalent everywhere. There are many old-line major corporations based in the eastern US who do not award equity to their broad employee base. Indeed, several of these only award equity to the top handful of executives. Corporations based in the western US have a different culture - one of broad participation.

[NewbieHere]

Wishful thinking. In 2008-2009 housing bust, it didn't go down enough. I was a housing analyst for 8 years, meaning I looked at houses everyday for 8 years so I know.

[pacific2]

Originally Posted by ncole1

Even local incomes don't support those prices. Higher than most of the country, sure, but not that high. Silicon Valley is not the only employer, there are plenty of others, and the average salaries are not so much higher than everywhere else to support ~200% higher prices!

And the Detroit analogy is actually fairly apt as the same could have been said about the automakers back in their big day as we are saying now about the IT sector nowadays.

The comparison is not so far off, and I have read of others doing the same.

People will always need cars, right? Well, Detroit, The Motor City, was once the place for the automotive industry.........until they pulled out and went elsewhere, including overseas. Most auto jobs and jobs in other areas were lost. Detroit then spiraled down as there was no other industry to replace it.

Detroit was once such a boomtown, that it was known as the "Paris of the Midwest."

There are still a lot of millionaires in the metro Detroit area:
Detroit Ranks No. 11 in the U.S. for Millionaires - DBusiness Daily News

[NYer23]

Originally Posted by ncole1

It really strikes me as weird that people are so eager to stretch into the crazy overpriced market there as if there is zero chance (or nearly so) of a real correction happening. What am I missing?

Several factors:
1. General trend of consolidation of wealth in major cities (best paying jobs, highest GDP, etc...)
2. Low borrowing cost (interest rate are record low levels) and tax deductible on mortgage interest payments.
3. Rent continues to skyrocket in major cities (rent can cost as much as the monthly mortgage payment).
4. Even if real estate was to decline by 30%, there is no guarantee I will be able to buy a property if you take 2008 financial crisis as a example. I might lose my job, banks don't lend money, institutional buyers will outbid me with all cash offer for distressed properties and drive up the cost (blackstone became the largest private landlord in the US).
5. Government intervention will continue to prop up the market (zoning regulation limiting the supply of new construction, FHA borrowing, allow foreign capital to buy real estate, etc...) and any major industry that is too big to fail will most likely get bailed out.

[Chango]

Originally Posted by ncole1

So I see people are paying almost a million dollars now for very modest (but detached) homes in places like LA and SF. Is this really sustainable? We have had a big influx of foreign wealth...which...who knows if it will continue or not? Even if we ignore the most extreme cases like Baltimore and Detroit, "momentum" in RE prices is far from consistent especially over periods of more than a few years.

It really strikes me as weird that people are so eager to stretch into the crazy overpriced market there as if there is zero chance (or nearly so) of a real correction happening. What am I missing?

Well, in the case of wealthy Chinese buyers, they can either buy empty Chinese condos/apartments that nobody there can afford to live in, buy into a stock market that is falling so fast that the government has to repeatedly halt trading and threaten to arrest people who try to pull their money out... or invest in CA real estate.

As Chinese investors tend to move in herds when it comes to overseas investments I do wonder where they'll move next when CA properties no longer seem like a good investment.