9 ms·

This is one reason I don't live in The Valley, and I am by no means poor. I'm not an economist, but it really seems like there's a very perverse economic disto

by api 14y ago

This is one reason I don't live in The Valley, and I am by no means poor. I'm not an economist, but it really seems like there's a very perverse economic distortion that takes hold when the relative wealth of a region exceeds a certain level. The problem is emergent from two facts: (1) We almost always finance real estate on credit. (2) We use real estate as both a store of long-term savings and an investment whose value is heavily leveraged and is dependent upon the value of neighboring real estate. As a result, real estate acts like a sponge. When a region accumulates wealth beyond a certain point, it results in runaway real estate hyperinflation. This in turn forces people to put more and more wealth into real estate, as well as tempting people to engage in real estate speculation. This in turn feeds the cycle, and drives up rents for non-owners. This does several bad things. It prices out the not-already-rich and destroys the engine of class mobility that often created the wealth in the first place, prices out artists and others who contribute to culture in a less financially-centric way, and soaks up wealth that could have been used more productively. Instead of founding the next startup, a significant chunk of money ends up sitting in real estate to prop up the leverage bubble. Edit: I thought of what might be a more economically-correct way of saying that. Real estate is a liquidity trap. Finally, it's a ticking time-bomb. If the region's fortunes ever falter, everyone ends up massively underwater. Bay Area residents be warned: Detroit once had the highest average wages in the USA. It was the Silicon Valley of its time. Detroit had other problems the Bay Area isn't likely to have, but some significant fraction of its woes can be tied to the collapse of its real estate market and all the perverse follow-on effects this has. When real estate starts to go south in a big and long-term way, it really ruins a region's finances. P.S. I can't help but shake the feeling that the only winners from the above arrangement are banks.

kiba 14y ago
Growth makes all problems go away, or more like delaying it until it starts to hurt.
- api 14y ago
  What I wonder is: by pricing out the not-already-rich, does real estate hyperinflation actually destroy the engine of youthful ambition that created the success in the first place? I mean, $3000/month rent for a one-room apartment makes it very hard to take the risk of founding a startup at 22.
  - kiba 14y ago
    It probably takes a while before everyone notice. Problems like this usually stays around until after we hit the end of our growth phrase.
  - wtracy 14y ago
    I'm curious, where are you having trouble finding one-room apartments for under $3000/month? Throughout the South Bay, I'm seeing prices between $1000 and $2000/month for one-bedroom apartments (not one-room apartments!). Even that gets a bit of sticker shock when I tell friends outside the Bay Area about prices here.
    - fzzzy 14y ago
      The $3000 figure is probably referring to San Francisco. $2000 a month for a one bedroom in Mountain View is a fantasy. Sure, you can go south to sunnyvale or further, but that adds quite a significant commute if one is working in Palo Alto/Mountain View.
      - milkshakes 14y ago
        For what it's worth, I lived in MV (rengstorff and sierra vista) for a year last year, in a 2 bedroom I kept all to myself for $1800 a month. It had a lovely back yard with a family BBQ area.
        fzzzy 14y ago
        Wow, sounds like you lucked out.
        milkshakes 14y ago
        You, too can be this lucky (adjusted for inflation): http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=&altView=&query=&srchType=A&minAsk=&maxAsk=2100&bedrooms=1&nh=81 http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=&#3...
      - 14y ago
JPKab 14y ago
Very intelligent analysis. Take a look at Manhattan, or the entire Washington, D.C. metro area for an example of this.
- api 14y ago
  Manhattan has this problem, but it also has a much deeper bench of economic diversity. DC has The Fed, which is unlikely to go anywhere this century. Finally, both Manhattan and DC have good transit systems that link them to larger outlying areas. So for NYC you have stables of lower-rent areas in Brooklyn, etc. In DC you've got Northern VA and up toward Baltimore.
yummyfajitas 14y ago
There is a third fact which also plays an important role - land use regulations. Logistically it's fairly easy to expand the supply of housing, particularly cheap housing - build bigger buildings and fill them with tinier apartments. But good luck getting the legal permissions to do this.
- pfedor 14y ago
  Zoning laws seem like one example of a regulation that genuinely prevents the tragedy of the commons. If one person built a twenty story house on their property, that person would get rich and all their neighbors would be slightly worse off. If everyone did that, the business owners and VSs would move somewhere with less traffic and fewer neighbors, the software engineers would follow and Palo Alto would become just another slum.
  - yummyfajitas 14y ago
    Their neighbors are slightly worse off, and 20 people have a place to live. But I guess those 20 people don't count, right?
    - pfedor 14y ago
      Their neighbors are slightly worse off, and 20 people have a place to live. That is what happens when only one landowner chooses "defect". If all of them do it, then 20 people times the number of lots might find a place to live, except it's no longer the kind of place where they want to live. Or put another way, there is already a lot of places where you can live cheaply, it's just that a lot of people would rather live in Palo Alto than in those places. But if you turn Palo Alto into a housing project, then the reason why they want to live there might stop existing, because all the rich people, who are the reason the rest of us want to be in the Silicon Valley, likely prefer not to live in close vicinity to "bigger buildings filled with tinier apartments." Of course I don't have a glass ball and cannot know for a fact that's what would happen, but it doesn't seem far fetched and at least personally I find it no less believable than many other tragedy of the commons situations which are posited to justify this regulation or that.
fzzzy 14y ago
Very interesting comparison to Detroit. Those factory jobs used to pay extremely well compared to the cost of living.
- api 14y ago
  This is a great read: http://www.amazon.com/Detroit-Biography-Scott-Martelle/dp/156976526X http://www.amazon.com/Detroit-Biography-Scott-Martelle/dp/15... There are definitely some major differences, but there are comparisons as well. The big comparison is how Detroit was mostly a one-horse town -- automobiles -- and it was economically ruined when that industry changed. Keep in mind that the industry didn't die... there are more cars now than ever. It just shifted in such a way as to unseat Detroit as the Silicon Valley of the automobile revolution. Of course Detroit had other problems: race relations, corruption, etc. But those are problems that can be dealt with if a region has a good economic base. If it would have kept its Silicon Valley of the auto crown, I don't think they would have been big issues. (Edit: Nowadays, Detroit is actually a potentially attractive contrarian place to go. Start here: http://omnicorpdetroit.com/blog/ http://omnicorpdetroit.com/blog/ ) When this happened, wages collapsed. When that happened, the leveraged real estate pyramid fell. When that happened, tax bases collapsed, infrastructure collapsed, crime soared, and everyone left. Kaboom. This scenario could definitely happen to The Valley. Another scenario that could lead to a slower decline would be if SV completely priced out everyone but CXO-level people. This would transform it into a closed circle-jerk of high-ego CXO types, all of whom would be convinced (as such personality types generally are) that they've got everything all figured out. The Valley would become like a giant IBM-in-the-70s or Microsoft-in-the-90s, and the market would eventually leave it behind.

by api 14y ago

kiba 14y ago

Growth makes all problems go away, or more like delaying it until it starts to hurt.

api 14y ago
What I wonder is: by pricing out the not-already-rich, does real estate hyperinflation actually destroy the engine of youthful ambition that created the success in the first place? I mean, $3000/month rent for a one-room apartment makes it very hard to take the risk of founding a startup at 22.
- kiba 14y ago
  It probably takes a while before everyone notice. Problems like this usually stays around until after we hit the end of our growth phrase.
- wtracy 14y ago
  I'm curious, where are you having trouble finding one-room apartments for under $3000/month? Throughout the South Bay, I'm seeing prices between $1000 and $2000/month for one-bedroom apartments (not one-room apartments!). Even that gets a bit of sticker shock when I tell friends outside the Bay Area about prices here.
  - fzzzy 14y ago
    The $3000 figure is probably referring to San Francisco. $2000 a month for a one bedroom in Mountain View is a fantasy. Sure, you can go south to sunnyvale or further, but that adds quite a significant commute if one is working in Palo Alto/Mountain View.
    - milkshakes 14y ago
      For what it's worth, I lived in MV (rengstorff and sierra vista) for a year last year, in a 2 bedroom I kept all to myself for $1800 a month. It had a lovely back yard with a family BBQ area.
      - fzzzy 14y ago
        Wow, sounds like you lucked out.
        milkshakes 14y ago
        You, too can be this lucky (adjusted for inflation): http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=&altView=&query=&srchType=A&minAsk=&maxAsk=2100&bedrooms=1&nh=81 http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=&#3...
    - 14y ago

JPKab 14y ago

Very intelligent analysis. Take a look at Manhattan, or the entire Washington, D.C. metro area for an example of this.

api 14y ago
Manhattan has this problem, but it also has a much deeper bench of economic diversity. DC has The Fed, which is unlikely to go anywhere this century. Finally, both Manhattan and DC have good transit systems that link them to larger outlying areas. So for NYC you have stables of lower-rent areas in Brooklyn, etc. In DC you've got Northern VA and up toward Baltimore.

yummyfajitas 14y ago

There is a third fact which also plays an important role - land use regulations. Logistically it's fairly easy to expand the supply of housing, particularly cheap housing - build bigger buildings and fill them with tinier apartments. But good luck getting the legal permissions to do this.

pfedor 14y ago
Zoning laws seem like one example of a regulation that genuinely prevents the tragedy of the commons. If one person built a twenty story house on their property, that person would get rich and all their neighbors would be slightly worse off. If everyone did that, the business owners and VSs would move somewhere with less traffic and fewer neighbors, the software engineers would follow and Palo Alto would become just another slum.
- yummyfajitas 14y ago
  Their neighbors are slightly worse off, and 20 people have a place to live. But I guess those 20 people don't count, right?
  - pfedor 14y ago
    Their neighbors are slightly worse off, and 20 people have a place to live. That is what happens when only one landowner chooses "defect". If all of them do it, then 20 people times the number of lots might find a place to live, except it's no longer the kind of place where they want to live. Or put another way, there is already a lot of places where you can live cheaply, it's just that a lot of people would rather live in Palo Alto than in those places. But if you turn Palo Alto into a housing project, then the reason why they want to live there might stop existing, because all the rich people, who are the reason the rest of us want to be in the Silicon Valley, likely prefer not to live in close vicinity to "bigger buildings filled with tinier apartments." Of course I don't have a glass ball and cannot know for a fact that's what would happen, but it doesn't seem far fetched and at least personally I find it no less believable than many other tragedy of the commons situations which are posited to justify this regulation or that.

fzzzy 14y ago

Very interesting comparison to Detroit. Those factory jobs used to pay extremely well compared to the cost of living.

api 14y ago
This is a great read: http://www.amazon.com/Detroit-Biography-Scott-Martelle/dp/156976526X http://www.amazon.com/Detroit-Biography-Scott-Martelle/dp/15... There are definitely some major differences, but there are comparisons as well. The big comparison is how Detroit was mostly a one-horse town -- automobiles -- and it was economically ruined when that industry changed. Keep in mind that the industry didn't die... there are more cars now than ever. It just shifted in such a way as to unseat Detroit as the Silicon Valley of the automobile revolution. Of course Detroit had other problems: race relations, corruption, etc. But those are problems that can be dealt with if a region has a good economic base. If it would have kept its Silicon Valley of the auto crown, I don't think they would have been big issues. (Edit: Nowadays, Detroit is actually a potentially attractive contrarian place to go. Start here: http://omnicorpdetroit.com/blog/ http://omnicorpdetroit.com/blog/ ) When this happened, wages collapsed. When that happened, the leveraged real estate pyramid fell. When that happened, tax bases collapsed, infrastructure collapsed, crime soared, and everyone left. Kaboom. This scenario could definitely happen to The Valley. Another scenario that could lead to a slower decline would be if SV completely priced out everyone but CXO-level people. This would transform it into a closed circle-jerk of high-ego CXO types, all of whom would be convinced (as such personality types generally are) that they've got everything all figured out. The Valley would become like a giant IBM-in-the-70s or Microsoft-in-the-90s, and the market would eventually leave it behind.