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From the article -- Alan Barbic, president of the Silicon Valley Association of Realtors, said agents on the Peninsula are working harder to sell high-end prope

From the article -- Alan Barbic, president of the Silicon Valley Association of Realtors, said agents on the Peninsula are working harder to sell high-end properties. “Without a doubt,” he said, some professionals have been priced out of the market. This is why I always cringe at articles that say "Nobody can afford to live there." The reality is that lots of people can "afford" to pay these prices, more than there are homes, hence the high prices. When people stop being able to afford the houses, or willing to pay high prices, guess what, the prices go down. When I bought my current home it was during one of the "downturns" when everyone said "Silicon Valley is dead, look at all the chip companies laying off people and going out of business!" And then the Internet became the new thing and the market rebounded. And then it crashed again and house prices went down, and then it rebounded again. Houses cost what people are willing to pay for them. And when people stop paying what is being asked, the price goes down. Speculation can hide some of that dynamic during periods of rapid price increases but a lot of speculators go broke and give up. We saw a lot of that during the mortgage meltdown. I think it is great that the prices have moderated. And I think the number of new housing units coming on line has helped that as well.

devoply 8y ago
When you have a glut of capital it may not be the case that people are able to afford housing, it maybe the case that the wealthy have bought up a ton of investments; maybe not even local wealthy but foreigners. The best example of this is China or Vancouver where there is a glut of housing that no one can afford so it sits around empty... the people who paid for it don't have a problem with this.
drewblaisdell 8y ago
> This is why I always cringe at articles that say "Nobody can afford to live there." The reality is that lots of people can "afford" to pay these prices, more than there are homes, hence the high prices. A classic example of engaging with semantics over sentiment. "Nobody" is clearly just a hyperbolic proxy for "only a relatively small number of people".
- ChuckMcM 8y ago
  I think more accurately "Nobody" is a hyperbolic proxy for "me". Given the housing supply m the number of people who can afford to live here is demonstrably n which is >> m.
  - BoorishBears 8y ago
    Nobody: middle class Americans
  - cylinder 8y ago
    If most people in an area have owned their homes since back when they were cheap, and say only 1 house out of 1,000 comes up for sale per year with a high asking price, it's possible for "nobody" (99% of people) to be unable to afford to buy a home at current asking prices and yet for prices to sell high and for lots of people to be living in an area. This is why comparing home prices to average income of the entire population is a fallacy. Not every home comes up for sale at any given time. What matters is the sale price of recently sold houses to the incomes of those actively searching to purchase a new home as well as how many such people there are in the market. Older established residents in an area can be earning $80k/yr and be fine since they purchased the house cheaply and have paid it off. That doesn't mean you can afford to buy their house on an $80k income.
    - i_am_proteus 8y ago
      Not only that, but because of the California tax code, they probably can't afford to sell their house and buy one for a similar price.
      - mleo 8y ago
        Or you add on to a starter home making it no longer a starter home for the next owner. But current owner keeps the lock on property taxes.
        8y ago
ABCLAW 8y ago
>Speculation can hide some of that dynamic during periods of rapid price increases but a lot of speculators go broke and give up. We saw a lot of that during the mortgage meltdown. In Vancouver, ownership costs exceed the median household pre-tax income. This is literally impossible to sustain over the long term if we agree those prices are generated by housing demand from 'people'. It makes a heck of a lot more sense when we consider that this is an investment bucket that is attracting surplus foreign capital in a world where there is fierce competition for returns. Speculation isn't 'hiding some of the dynamic'. It is the dominant force in pricing. The typical 'healthy' value in most markets is 30% to 40%. Many specific 'hot' locations are hitting north of 66%. In Canada overall, the median is around 55%. Will the bubble pop? Eventually. But the damage is already being inflicted. There's an entire generation where home ownership rates have fallen off a cliff.
- ChuckMcM 8y ago
  Take the analysis a step further though, population density matters, not median income. Take the ownership cost, and the total supply of housing, now align that with the households (groups who would live in one housing unit) and align it to the right side of the income distribution. You will find that all housing is consumable by households for which their income exceeds the ownership costs. That is how the market works, the people who can afford houses buy them. If there are more people who can afford houses than there are houses, the prices adjusts upwards to capture that value, if there are more houses than people who can afford them, the price adjusts down to capture that value. There are no houses (typically) that are otherwise market acceptable that are not owned. What is more, it has been shown that if you add houses, that widens the overlap with incomes, starting from the "high" end and moving down. That is why Sunnyvale has authorized the building of thousands of new houses and apartments. Even trying to artificially hold units out for "low income" people results in fraud where low income people "rent" those houses and then sublet them out at market rate to recapture the value. We just convicted a woman of doing that and she isn't the only one.
  - ABCLAW 8y ago
    >Take the analysis a step further though, population density matters, not median income. With respect, I'll maintain that it's an issue if the supporting cash-flow underlying the market can no longer, numerically, support the market pricing. >You will find that all housing is consumable by households for which their income exceeds the ownership costs. That's not what's going on in Vancouver's case and the numbers make it very, very clear. No one here is confused about supply and demand. If housing prices tracked 'people's ability to pay for housing', as you're positing, then the ratio of income to total ownership costs would remain reasonably linked. The issue is that demand isn't from 'households'. It's from REITs, speculators and foreign capital. You can feel free to look at the spread between total ownership costs and rental rates. In the most expensive cities the spread is largest. In other words, the rental rates have changed far less than the total cost of ownership, because there is very little ability for personal incomes to absorb the housing price increases. What's more, the correction isn't going to be quick, nor is it going to be soon. The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity. When the bubble pops and speculators are suddenly underwater, they'll prune their portfolio and keep the accrued equity gains, which will put them very far ahead of those who didn't get in. This is why people advocate for regulatory intervention. Because the only way this train stops is when it slams into the concrete wall at the end of the track.
techiferous 8y ago
> Houses cost what people are willing to pay for them. And when people stop paying what is being asked, the price goes down. I follow that. Is there a delay in the system anywhere, though? For example, does it take a few years for the price correction to happen? Delays can really mess with a system -- leading to oscillations, etc.
- whatshisface 8y ago
  Imagine you were selling a house. The absolute upper limit on the delay would be how long it takes for you to come down on the price if there are no buyers (a month at most). If there were other sellers who may have already waited for a while, the delay will be even shorter. Houses are less liquid than stocks so the delay is relevant to some people, but it's much faster than the timescale over which housing shortages play out.
  - cpwright 8y ago
    Or you own the house, but have external factors like your mortgage; or psychological factors like "I don't want to lose money on it." In which case you will pull the house from the market, rather than correcting the price. Or alternatively, not list it in the first place unless you are distressed. Any of these outcomes reduce supply and would cause prices to be stickier.
- harikb 8y ago
  There is a huge delay in publishing the prices for which houses were sold. In an ideal world, we would really know how many offers were actually in play and what was it sold for the day after it is sold. Access to that information varies and there are lots of insider-trading-like actions done with this information.
- roguecoder 8y ago
  The inefficiencies are the regulations preventing housing from being built and property taxes from rising. In a free market system, when the price of something goes up so does the supply. Since that can't happen, the market can't adjust.
gwbas1c 8y ago
> Houses cost what people are willing to pay for them The cost and availability of new construction also influences that.
- goobynight 8y ago
  Right. The house itself isn't interesting. It's the land + limits on making high rises. Those that already own have a strong incentive to kick the ladder down, so to speak, and try to make it so that no new houses can be made.
seanmcdirmid 8y ago
To have bought in Silicon Valley in the early 90s after the S&L crisis and Japanese bubble pop. Anyways, it will continue to go up and down, it’s never different this time. If you are in it for the long term it doesn’t really matter that much l, but if you are speculating and heavily leveraged....
deleted 8y ago
[deleted]
pmart123 8y ago
I completely agree with your assessment, but I find it troubling that the government has incentivized the idea that “homes are an investment that should always go up.” While less so in California, municipalities typically have a short-term incentive to support high prices through property taxes, although society would net benefit by putting capital to more productive assets.
- ChuckMcM 8y ago
  It has been my experience that the bank is pushing the "this is your biggest investment" mantra. That may be unique to the area, governments (perhaps because they know their tax rate is capped at 1% + local taxes) do not seem to be involved.

devoply 8y ago

When you have a glut of capital it may not be the case that people are able to afford housing, it maybe the case that the wealthy have bought up a ton of investments; maybe not even local wealthy but foreigners. The best example of this is China or Vancouver where there is a glut of housing that no one can afford so it sits around empty... the people who paid for it don't have a problem with this.

drewblaisdell 8y ago

> This is why I always cringe at articles that say "Nobody can afford to live there." The reality is that lots of people can "afford" to pay these prices, more than there are homes, hence the high prices. A classic example of engaging with semantics over sentiment. "Nobody" is clearly just a hyperbolic proxy for "only a relatively small number of people".

ChuckMcM 8y ago
I think more accurately "Nobody" is a hyperbolic proxy for "me". Given the housing supply m the number of people who can afford to live here is demonstrably n which is >> m.
- BoorishBears 8y ago
  Nobody: middle class Americans
- cylinder 8y ago
  If most people in an area have owned their homes since back when they were cheap, and say only 1 house out of 1,000 comes up for sale per year with a high asking price, it's possible for "nobody" (99% of people) to be unable to afford to buy a home at current asking prices and yet for prices to sell high and for lots of people to be living in an area. This is why comparing home prices to average income of the entire population is a fallacy. Not every home comes up for sale at any given time. What matters is the sale price of recently sold houses to the incomes of those actively searching to purchase a new home as well as how many such people there are in the market. Older established residents in an area can be earning $80k/yr and be fine since they purchased the house cheaply and have paid it off. That doesn't mean you can afford to buy their house on an $80k income.
  - i_am_proteus 8y ago
    Not only that, but because of the California tax code, they probably can't afford to sell their house and buy one for a similar price.
    - mleo 8y ago
      Or you add on to a starter home making it no longer a starter home for the next owner. But current owner keeps the lock on property taxes.
      - 8y ago

ABCLAW 8y ago

>Speculation can hide some of that dynamic during periods of rapid price increases but a lot of speculators go broke and give up. We saw a lot of that during the mortgage meltdown. In Vancouver, ownership costs exceed the median household pre-tax income. This is literally impossible to sustain over the long term if we agree those prices are generated by housing demand from 'people'. It makes a heck of a lot more sense when we consider that this is an investment bucket that is attracting surplus foreign capital in a world where there is fierce competition for returns. Speculation isn't 'hiding some of the dynamic'. It is the dominant force in pricing. The typical 'healthy' value in most markets is 30% to 40%. Many specific 'hot' locations are hitting north of 66%. In Canada overall, the median is around 55%. Will the bubble pop? Eventually. But the damage is already being inflicted. There's an entire generation where home ownership rates have fallen off a cliff.

ChuckMcM 8y ago
Take the analysis a step further though, population density matters, not median income. Take the ownership cost, and the total supply of housing, now align that with the households (groups who would live in one housing unit) and align it to the right side of the income distribution. You will find that all housing is consumable by households for which their income exceeds the ownership costs. That is how the market works, the people who can afford houses buy them. If there are more people who can afford houses than there are houses, the prices adjusts upwards to capture that value, if there are more houses than people who can afford them, the price adjusts down to capture that value. There are no houses (typically) that are otherwise market acceptable that are not owned. What is more, it has been shown that if you add houses, that widens the overlap with incomes, starting from the "high" end and moving down. That is why Sunnyvale has authorized the building of thousands of new houses and apartments. Even trying to artificially hold units out for "low income" people results in fraud where low income people "rent" those houses and then sublet them out at market rate to recapture the value. We just convicted a woman of doing that and she isn't the only one.
- ABCLAW 8y ago
  >Take the analysis a step further though, population density matters, not median income. With respect, I'll maintain that it's an issue if the supporting cash-flow underlying the market can no longer, numerically, support the market pricing. >You will find that all housing is consumable by households for which their income exceeds the ownership costs. That's not what's going on in Vancouver's case and the numbers make it very, very clear. No one here is confused about supply and demand. If housing prices tracked 'people's ability to pay for housing', as you're positing, then the ratio of income to total ownership costs would remain reasonably linked. The issue is that demand isn't from 'households'. It's from REITs, speculators and foreign capital. You can feel free to look at the spread between total ownership costs and rental rates. In the most expensive cities the spread is largest. In other words, the rental rates have changed far less than the total cost of ownership, because there is very little ability for personal incomes to absorb the housing price increases. What's more, the correction isn't going to be quick, nor is it going to be soon. The only rational move as a real estate investor in most of these markets is to continue pumping capital and re-leveraging on the basis of accrued equity. When the bubble pops and speculators are suddenly underwater, they'll prune their portfolio and keep the accrued equity gains, which will put them very far ahead of those who didn't get in. This is why people advocate for regulatory intervention. Because the only way this train stops is when it slams into the concrete wall at the end of the track.

techiferous 8y ago

> Houses cost what people are willing to pay for them. And when people stop paying what is being asked, the price goes down. I follow that. Is there a delay in the system anywhere, though? For example, does it take a few years for the price correction to happen? Delays can really mess with a system -- leading to oscillations, etc.

whatshisface 8y ago
Imagine you were selling a house. The absolute upper limit on the delay would be how long it takes for you to come down on the price if there are no buyers (a month at most). If there were other sellers who may have already waited for a while, the delay will be even shorter. Houses are less liquid than stocks so the delay is relevant to some people, but it's much faster than the timescale over which housing shortages play out.
- cpwright 8y ago
  Or you own the house, but have external factors like your mortgage; or psychological factors like "I don't want to lose money on it." In which case you will pull the house from the market, rather than correcting the price. Or alternatively, not list it in the first place unless you are distressed. Any of these outcomes reduce supply and would cause prices to be stickier.
harikb 8y ago
There is a huge delay in publishing the prices for which houses were sold. In an ideal world, we would really know how many offers were actually in play and what was it sold for the day after it is sold. Access to that information varies and there are lots of insider-trading-like actions done with this information.
roguecoder 8y ago
The inefficiencies are the regulations preventing housing from being built and property taxes from rising. In a free market system, when the price of something goes up so does the supply. Since that can't happen, the market can't adjust.

gwbas1c 8y ago

> Houses cost what people are willing to pay for them The cost and availability of new construction also influences that.

goobynight 8y ago
Right. The house itself isn't interesting. It's the land + limits on making high rises. Those that already own have a strong incentive to kick the ladder down, so to speak, and try to make it so that no new houses can be made.

seanmcdirmid 8y ago

To have bought in Silicon Valley in the early 90s after the S&L crisis and Japanese bubble pop. Anyways, it will continue to go up and down, it’s never different this time. If you are in it for the long term it doesn’t really matter that much l, but if you are speculating and heavily leveraged....

deleted 8y ago

[deleted]

pmart123 8y ago

I completely agree with your assessment, but I find it troubling that the government has incentivized the idea that “homes are an investment that should always go up.” While less so in California, municipalities typically have a short-term incentive to support high prices through property taxes, although society would net benefit by putting capital to more productive assets.

ChuckMcM 8y ago
It has been my experience that the bank is pushing the "this is your biggest investment" mantra. That may be unique to the area, governments (perhaps because they know their tax rate is capped at 1% + local taxes) do not seem to be involved.