The truth about Bay Area real estate appreciation (San Jose, San Francisco: rent, credit)

[phantompilot]

Originally Posted by dburbs1975

the water table is low now, but that is quite subject to change. My neighbor here grew up in Sunnyvale, he is about 42, and remembers years where the bay wetland area by the PA airport were pretty much more wet than land. When the water comes up, what ever it is that is under ground will rise as well, and will likely want to sit over the water.

I know that many people are used to living like this.

I have a really hard time spending 1.5 million, and yes, I know I can get a home near 101 just east of Whisman area for 1 million, where the risks for liquefaction and/or flooding are fairly high in the 30 years it will take me to pay off a mortgage.

Funny, that's actually where my property was, near Whisman and Middlefield. I wouldn't worry so much about liquefaction there, since that isn't landfill, and flooding has been fairly well controlled. There's a little pocket just across 237 from there, that is the most northwestern corner of Sunnyvale, have you looked in there?

The bad news for your sitch is that there really are not a lot of options given your desire for proximity to PA and being that PA is an epicenter of high prices due to FB. And Mtn View is not much better due to LinkedIn and Google. Speaking of PA , I know someone who just bought a teardown off Alma for 2M. Big lot but they're going to have 3.5M into it easy when they are done with the build which means about $1000/ft of living space. Very Manhattan-y (Upper Central Park) prices.

Check out the attached liquefaction map. You'll see you're not getting any addtl risk in Mtn View, of course if you want a real solid geological underfooting then you have to move up into the hills, which of course is the upthrusted bedrock that came out of the San Andreas Fault, and from whence all of the topsoil that makes up the land area of the South Bay came via erosive and sedimentary processes- but then you're looking at yet more stratospheric prices. Although, if you don't mind a little drive down the hill, you might want to check out the Woodside and RWC hills area - if you do wind up having to spend 2M you might be able to get a view out of it. Being up on the ridges is nice.

http://pubs.usgs.gov/of/2008/1270/of...s_scenario.pdf

[MediocreButArrogant]

Originally Posted by phantompilot

Yah, I understand that - it is a valid point. Only about 15% of the housing stock has tuned over in the last 15 years. But I think you will see that drastically accelerate - because lets face it, those long term owners are getting really old and most of their kids have long since moved away (and not likely to come back to occupy mom and dads house).

A lot of them aren't that old. We walk our dogs twice a day and say hello to all of our older neighbors. Many are in their mid to late sixties and have a lot of life left in them. The old guy across the street who's owned his house since 1970 is remodeling it because he plans to die in it. Plus, with their kids being able to inherit their tax base due to Prop 13, you may see a lot of these properties transfer to their kids, and their kids move into the house because there is no other way their kids could ever own a home in Silicon Valley.

You'd think the price appreciation should have put more homes on the market but it hasn't. Old people don't want to cash out and move to an area with a lower cost of living. Their homes are paid for, their property taxes are low thanks to Prop 13, and they like it where they are. Don't hold your breath waiting for the inventory to grow. I think the last couple years shows us that high selling prices aren't the incentive to older homeowners like you think it might be.

[rv2811]

Prop 13 and the lack of inventory has me holding on to my home. On my street 1 home has sold since we bought in 09. My folks are the same way bought in 88 and can buy in 2 million range. Then the hit of the new taxes so they re did the kitchen and other things to the home.

[Ultrarunner]

Originally Posted by rv2811

Prop 13 and the lack of inventory has me holding on to my home. On my street 1 home has sold since we bought in 09. My folks are the same way bought in 88 and can buy in 2 million range. Then the hit of the new taxes so they re did the kitchen and other things to the home.

It's not the same all around the Bay Area... visited the old neighborhood in Hayward... knew everyone on the block... now... only two remain from the 70's... 22 out of 24 changed hands.

I mention this because when my parents bought... their best friends also bought the same year in Santa Clara... same age, same size home.

My parents old home was resold last month for $450k and their friends home in Santa Clara is over a million... both cost almost exactly the same new in 1960.

Location, Location, Location...

[bentobox34]

Originally Posted by Lanienguyen

* Houses less than $1 million hover around 1,200 square feet, often unrenovated in the past 30 years. Houses in this range also have mediocre schools. Would you pay a million dollars for a house of that description in any other suburb in the United States? Silicon Valley is only special because of the current tech boom. The houses and neighborhoods themselves are not special.

Agree with everything above.

* Many tech companies in the Valley have not figured out how to monetize. That doesn't mean they don't/won't have value in the future, but it means the billion dollar valuations and the resulting instant millionaires are likely to go away.

Many observers have pointed out that the current boom is driven by companies that are established and have figured out how to monetize (Google, Apple, Facebook). Startups are a relatively small part of this tech boom, unlike the 90s.

* Most houses in the valley are more than an hour from San Francisco during rush hour or peak weekend times.

And your point is...?

* The area has the threat of megadrought and earthquake. Water rationing is already in effect.

True, but there are very few areas in the country at this point that don't have significant ongoing environmental issues and threat of natural disasters.

* Half the cities in the country are trying to attract tech companies. Meanwhile, cities like Mountain View and San Jose are limiting how much space big companies like Google can take over.

Far more than half - practically every city that can afford to staff an Economic Development Department has some policies/programs in the works to attract tech. But the results are underwhelming 99% of the time outside Silicon Valley.

Your comment was quite far off regarding San Jose. San Jose is doing everything it can to attract job-creating companies and I have never heard of them taking any measures to limit commercial/office development. On the contrary they tend to reduce fees and provide incentives to the point of absurdity, while still failing to see the same level of development as Mountain View, Sunnyvale, etc.

Your comment on Mountain View fails to acknowledge that the limited Google's plans in favor of Linkedin... resulting in the same overall amount of development. They made a smart decision to stay a two company town, rather than putting all their eggs in one employer.

[Ultrarunner]

Location, Location, Location...

[calicoastal]

Commuting sucks in multiple ways, this drives prices up in areas that reduce commute times.

[opossum_]

Hmmm.... many supposedly "smart" people are packed like sardines in a can into "Bay area" with extremely poor standard of living, horrible traffic, crowds, housing and air quality....they're priced out and competed out of "apartments"....outbid on purchases (they can't afford to own RE here anyway).... does it mean they're going to finally use their smarts and go somewhere else? More outsourcing by companies? Companies moving their offices? RE echo-bubble and tech bubble bursting after 2016 election.... Will this bubble burst in 2017?

[kinimod]

Originally Posted by SportyandMisty

Most people don't really understand the value of owning a home. It affords tax-free income in the amount of the fair market rental.

Stay with me...

When you own a home & live in it, you "pay yourself rent" in the amount of the fair market rental rate. This is, of course, not reported as income on an IRS form 1040, so that income is tax-free.

Stay with me...

Imagine you and I own otherwise identical houses right next to each other. Under normal circumstances, each of us lives in the house we own. Imagine as a thought experiment that you rent your house to me, and I rent my house to you. We each pay rent to the other, and each receive rental payments from the other. Because these houses are identical, the fair market rental rate is also identical. Each of us pays exactly the same $$$ in rent as we receive in rental income, those cancel each other out.

But not when it comes to income tax time.

When calculating our respective tax obligations, each of us has jobs with income, various investments, and under the hypothetical example, each of us would also report rental income in the amount of the fair market rental rate.

Let's say for the sake of argument that the fair market rent is $3000/month. So, each of us pays the other $36,000/year, and each of us receives $36,000/year. At tax time, each of us reports an extra $36,000 in extra income. We also have some expenses associated with that income such as depreciation expense, and various other landlord expenses for repairs and the like.

At the end off the day, though, we probably end up paying our marginal tax rate on that extra $36,000 of income.

So, coming back to reality... when we own a home & live in it, we "pay ourselves rent" and that rent is tax-free income (not reported as income on our IRS 1040s). If the fair market rental rate is $3,000 per month, we have tax free income in the amount of $36K/year. Not too bad.

That, boys and girls, is the true financial benefit of owning a home.

You're missing some critical elements in your renter vs. owner thesis:

- Opportunity cost: the buyer most likely has paid a downpayment, which could have been invested elsewhere. Stock indexes over the last 100 years hugely outperformed all real estate across US.

- You can argue that some people lucked out with boom-bust timing. But many lost a lot of money also. Luck is not an investment strategy, neither is hope.

- a price-to-rent ratio in SF Bay Area is highest in the entire US, around 45 (source here). That means, a house with a mortgage of e.g. $8000/mo only rents for $5000/mo at best. A renter could be putting the extra $3000/mo into other investments (e.g. conservative stock/bonds portfolio). Over 10 years, at 5% compounded, that is around $100K in profit thanks to renting, while that renter actually stays in the exactly same house as a neighbor with a mortgage. The renter is over $400K wealthier over 10 years while having the same living standard!

- Not to mention that over 10 years, the owner likely sunk about additional $20K in restorations and maintenance.

[simboticus]

Originally Posted by kinimod

You're missing some critical elements in your renter vs. owner thesis:

- Opportunity cost: the buyer most likely has paid a downpayment, which could have been invested elsewhere. Stock indexes over the last 100 years hugely outperformed all real estate across US.

- You can argue that some people lucked out with boom-bust timing. But many lost a lot of money also. Luck is not an investment strategy, neither is hope.

- a price-to-rent ratio in SF Bay Area is highest in the entire US, around 45 (source here). That means, a house with a mortgage of e.g. $8000/mo only rents for $5000/mo at best. A renter could be putting the extra $3000/mo into other investments (e.g. conservative stock/bonds portfolio). Over 10 years, at 5% compounded, that is around $100K in profit thanks to renting, while that renter actually stays in the exactly same house as a neighbor with a mortgage. The renter is over $400K wealthier over 10 years while having the same living standard!

- Not to mention that over 10 years, the owner likely sunk about additional $20K in restorations and maintenance.

Also, you are not really paying yourself 100% of your mortgage payment. For the first 12 years or so the majority of it is going to the bank in the form of interest payments.