How much pressure is there on housing prices when you live in Silicon Valley?
In California’s Bay Area, there is the world-renowned high-tech industry cluster “Silicon Valley”. The industry investment and attractive salaries are much higher than other industries, attracting a large number of young people and middle-class people to come to the gold.
However, compared to the income, the price of housing here is enough to discourage. According to the latest data from the California Association of Realtors website, the median home price in San Francisco and San Mateo has reached $1.82 million and $2 million respectively in the third quarter of 2021. Also in Singapore, another innovative Asian tech city, the latest average cost of buying a condo here reached about $1.08 million, according to ValueChampion, considered by CNBC to be the most expensive of the four largest cities in the Asia-Pacific region (the other three are Sydney, Taipei, and Seoul). It seems that life in the technology industry in big cities is not less stressful. So, what is the correlation between the high salaries of tech workers and housing prices? Do they have their home buying preferences? The California region will be used here as an example, and the data may give us some interesting answers.
Where are the highest prices in CA?
In California, two big cities are world-famous: San Francisco and Los Angeles. With the latter being more well-known (due to a gap in past news exposure) and far more populous (3.98 million in 2019) than the former (875000 in 2019), many people might assume that Los Angeles has better housing prices. But this is not the case. The data in the chart above shows that it is the parcels of land surrounding the SF Bay Area that are the most valuable and prime areas in California.
In 2020, the median annual single-family home sales price in San Mateo County reached $1.69 million, 7.7 times that of Lassen, the cheapest in California, and even more than the more prosperous and convenient San Francisco metro area. This figure is a reflection of the extreme thirst for housing in the technology industry cluster. Even discounting the possibility that the Covid-19 epidemic could cause housing prices to rise wildly (Telecommuting was prevalent during the outbreak, causing prices to fall in the core and soar in the suburbs), this huge difference within a single U.S. state is hardly comparable to any other state. By comparison, the median home price in Los Angeles ($640,000) is only about one-third that of San Francisco ($1.66 million).
Where are home prices rising the most in California?
The chart above shows the level of growth in each of the five counties with the highest and lowest home prices in California over the past 10 years (2011–2020). What can be seen is that Kern and Tehama, which are more remote and sparsely populated, have only just broken the $200,000 barrier in a decade. And thanks to the rapid development of the Silicon Valley industry in the San Francisco Bay Area and the talent gathering effect, several surrounding counties have achieved several times the growth in housing prices. According to research released by Mansion Global in late October, San Francisco and Silicon Valley counties of Santa Clara and San Mateo have seen the most rapid growth, with price increases of a staggering 532%, 513%, and 506% respectively over the past 30 years.
Just how hot is the real estate market in the San Francisco Bay Area? When compared to the 10-year average for California, the Bay Area largely overperforms it. Still, there is a trend of divergence among the traditional 9 counties in internal competition. San Mateo, San Francisco, Santa Clara, and Marin run away with the Bay Area as a whole, while five other counties like Napa and Alameda are left behind. Perhaps this needs to take into account the fact that home price levels differ at the starting point. But it is interesting to note that Marin, which had the highest home price levels 10 years ago, is instead gradually being overtaken by San Mateo and San Francisco, especially in 2013.
The timing looks critical. Coincidentally, the new headquarters of Apple and Google, which have a large number of employees, are located in Cupertino and Mountain View in the Bay Area, respectively, with the former officially opening in 2017 and the latter being bought by Google in 2011 as office space. At the same time, both locations are less than a 20-minute drive from San Mateo and Santa Clara, making it inevitable that the high level of convenience will drive up prices nearby.
What is the salary level of high technology practitioners?
The chart above represents the top 20 occupations in the Bay Area in terms of median annual earnings, and we can see a more serious income divergence, with the difference between the highest and lowest values more than double. The Bay Area as a whole is still more popular with people in computer systems-related industries.
It is worth noting that two of the top three income earners are direct participants in the healthcare industry: physicians and dentists. Their income is currently around $150,000-$170,000. 25% of physicians in the Bay Area earn more than $241,000 and 25% of dentists earn more than $208,000 a year, according to Teleport. Also, according to the latest survey data from the U.S. Bureau of Labor Statistics last May, the median income for dentists and practicing physicians nationwide is around $180,000–210,000, and it appears that the high wage climate in the Bay Area has not allowed traditional industries to follow suit. This could mean that the high saturation of investment in the tech industry is allowing AI and robotics to compress the viability of some traditional occupations in technology-intensive areas.
If we look at the subdivided careers in technology and related financial industries, what is their salary status?
As you can see, even those in the financial industry, who earn a lot of money on Wall Street, have a hard time finding a place at the top of the income list in the Bay Area. The core group of high earners here is still concentrated in positions such as computer systems, database, hardware and software development (senior management salaries in the technology industry may be higher). If we expand the scope of the table to all related positions in the finance and technology industry (a total of 42 occupations), we can find that the bottom of the annual income positions has almost nothing to do with computers.
Can they afford to buy a house?
What is the annual income to afford a house in the Bay Area? The data from CAR indicates that the minimum needs to be $235,000. Unfortunately, even in California, where every inch of land is gold, only 24% of residents have this affordability. We can also see from the chart above that those who can afford to pay full price for a single-family home in the Bay Area are largely concentrated among executives and even C-level executives at technology and financial companies. This also means that most people need to live in the Bay Area through loans and rentals.
But paying off the loan is not an easy task either. According to CAR’s calculations, the average monthly PITI (the sum of the average monthly down payment, monthly loan amount, real estate taxes, insurance, and property management fees) in the Bay Area is $5,880, which translates to $70,560 per year, not including the various expenses of daily life. Such a high cost of buying a home for most working people, not to earn $100,000 per year, they may have to wave goodbye and change the city.
Renting an apartment doesn’t seem too expensive. Looking at the listings on Zillow, while it’s largely impossible to find rentals in the Bay Area for under $1,000, there are still plenty of options in the $1,500 and $2,000 price points. However, the closer you get to San Jose, where tech companies are clustered, the higher the extra cost of renting an apartment. Most of the houses, apartments and studios in this neighborhood are not even equipped with basic furniture such as beds, closets, and sofas, which can be a significant expense.
Where do tech professionals like to buy?
There are many factors to consider when buying a home. Price, location, commute time, the convenience of the surrounding community, security, and even the wealth rating of the neighbors can all influence a home buyer’s final decision.
Dr. Michael Boles has published a data study at Towards Data Science that the issue of finding suitable houses in the Bay Area, and the image above is a heat map of Bay Area commute times that he has done. The commuting centers are San Francisco and Palo Alto, and the time point is 8:00 am on weekdays. Combined with the housing clustering characteristics below, we can see that even the blue areas with a commute of less than 1 hour are also home to a large number of relatively inexpensive homes priced under $500,000, which shows that commuting distance is a more important factor for people to purchase a home besides price.
A related issue is the area of preference for home buying. Although it is not possible to get complete and detailed data on Bay Area home sales, especially details such as location, we can still get some information from the condition of homes for sale.
In the distribution of lower-priced ($500,000 and below) and higher-priced ($5 million and above) homes in the San Francisco Bay Area, the former is farther away from San Jose, where internet company giants are located, and is mainly located in Oakland, Fremont, and Berkeley, where work commutes are long; while the latter is concentrated only in downtown San Francisco and the Peninsula area, which also indicates that homebuyers in this region have higher affordability and are extremely sensitive to commute time.
According to MarketWatch, San Jose, California has become the most densely populated area in the world for ultra-high net worth individuals (worth more than $30 million), with an average of one in every 727 people. Among the super-billionaires, Meta’s Mark Zuckerberg (Palo Alto), Google’s Larry Page (Palo Alto), Sergey Brin (Los Altos) , and Steve Jobs’s widow, Powell Jobs (Palo Alto) all live in this extremely high-end, large community.
Will it get harder to buy a house in the SF Bay Area?
The hard-to-find housing situation in the Bay Area is likely to continue. Norada Real Estate Investments analysis believes that the limited land has led to a shortage of housing, while the rapid economic recovery in the post-epidemic era has increased the number of jobs, in addition to San Francisco itself, 90.74% of residents are white-collar workers, with the ability to pay well above the national average. The future of high prices is supported by these motivations.
A related set of data is that the number of various homes, land for sale, and homes available for rent in the SF Bay Area that can be searched on Zillow is currently 11,188, which is far from enough for a metropolitan area of 7.77 million people. Predictably, the real estate market here will rise and fall with the changes in the technology industry. The industrial revolution, salary packages, inflation levels, and other factors will have a profound impact on Bay Area housing prices.
