Saturday, April 27, 2019

Do High Wages Drive Housing Prices or Vice-Versa?

No matter what your income bracket, the cost of housing, on average, seems to take up 1/3 to 1/2 of your income.  Always has, always will.  Of course, that's the statistical average.  As an individual, you do have choices as to how much house to own - or rent.

NOTE:  This is a posting I started a while ago and only recently finished.

A reader writes that a recent article states that people living in the San Francisco Bay Area making over $100,000 a year "feel poor" because of the high cost of living.   Of course, this is nothing new in America, where people whine and complain about living "paycheck to paycheck" on a hundred grand or more - often far more.

This begs the question - are high housing prices the result of high salaries or vice-versa?  I think the former and let me explain why.

When you have a high population concentrated in a small area where long commutes are not practical, people will drive up the demand for housing.   If they have high salaries, they can afford to pay more for housing, so they will bid up prices in order to secure housing, often pricing poorer people out of the market.

So when you start paying IT people and software "engineers" (let them design a bridge!) over a hundred grand a year or more, housing prices are going to skyrocket.

We saw this happen in the Bay area before - back in the 1990s, when hardware was the big ticket to success in silicon valley - where there was actual silicon in silicon valley, or at least notions about it.  Chipmakers (who actually designed chips, but rarely made them on site) hired engineers to design semiconductor circuits - those little black things inside your cell phone.   The problem was the same back then as what it is today.  An engineer making $50,000 a year out of school would bid up a plain 2-bedroom house in a neighborhood close to San Jose or Fremont, and a housing boom started.

It eventually burst with the tech bubble of 1995 and housing prices dropped - for a while.  Many companies decided to move to places like Boulder or Austin where housing prices were cheaper and it was easier to hire talent.  The need to be in silicon valley started to diminish for the chip makers.   Of course, this merely offloaded the problem to Austin and Boulder, two communities where today it is harder and harder to find affordable housing, even on a six-figure salary.  And so the process continues, until the pressures force companies to move to Alabama or somewhere.

Meanwhile, silicon valley has seen a new array of tenants, including Google, and some old tenants whose business has turned around (such as Apple, who at one time was teetering on the brink of bankruptcy, if you can believe that - before the iPod, they really had nothing to sell - such is the fate of tech companies!).   And we see the same pattern repeat yet again.   The die-hard valley fans, of course, insist that you have to be located in silicon valley in order to do business - creating an artificial need for office space and living space.  And Apple certainly has committed to the area, with its giant doughnut office building.   But others are less tied to the land - often leasing office space, or able to sell out and move away on a moment's notice if necessary.

Still others choose to expand into different cities and even countries, keeping a presence in the area but putting the bulk of employees in lower-cost areas - thus reducing overhead and salaries.

The ultimate conundrum is that no matter how much you make or how little you make, it seems that your biggest single expense in life is housing. And we'd all like to have more disposable cash to spend on stupid things like clothes, booze, and restaurant meals, rather than on a place to sleep.

As I noted before, it costs about $850 to $1000 a month to live in a paid-for house, when you factor in the cost of utilities, insurance,  taxes, and the like.  This works out nearly $10,000 a year. While this might not seem like a lot of money to some people, at this point in my life it works out to about one-third of my annual income.

Back when I was making over $100,000 a year and had a mortgage, you can guess how much I was spending on housing - again about one-third of my annual income, if not more.

The media likes to report that Millennials are upset that they have to spend so much money to rent an apartment or buy a house, as if no one ever had to go through the same experience, or indeed as if the rest of us aren't already going through this experience.

It seems that no matter what your income bracket is, you will spend at least one-third to one-half of your income on a place to live. So the trials and tribulations of Millennials are nothing new, nor are those of software engineers in the San Francisco Bay Area.

However there are ways around this conundrum. For example, oil workers working at the Bakken formation were smart if they bought a second-hand RV and parked it somewhere cheaply.  Others foolishly invested in buying homes in a boomtown area and later on ended up broke.

Washington DC and San Francisco are not much different. I went to Washington to seek my fortune, and found it, and left. Tech workers in the Bay Area should keep that in mind as well. Make all that money in your thirties and forties and put it in the bank and don't squander it on buying a "look at me" house in a place where you would likely never retire.

Odds are, your job with a tech company will not last a decade, and it is likely you probably will move to another city to work at another tech job, so why bother investing in real estate in a location you have no long-term commitments to?

A friend of mine has a son who just moved to San Francisco and is working at a job with an investment firm.  He and two buddies are renting a one-bedroom apartment, which is now three bedrooms, by making the living room a bedroom and a walk-in closet into a bedroom.  "My son is living in a closet in San Francisco!" my friend exclaims, as if this were some tragedy.  I tried to explain to him that it is hard for anyone to live in the closet in San Francisco, but he didn't get the joke.

But rather than a tragedy, it is an opportunity.   As I explained to him, his son is in his early 20's, with a good-paying job and living in an exciting city.   Who cares where you sleep?  Why the need for granite countertops and all that when you are rarely home?   Those are the exciting years to live - having nothing but hard work and dreams.   Things will come later - and you'll wish you never had half of them.

One reason I have been marginally successful in life is that I was able to escape from Fairfax County. I moved there in 1987 to seek my fortune.  I found it.  And then I was smart enough or lucky enough to leave.   You see, places like that are a great place to get an education, to get experience, to get a job, make money and all that.   In the long run, though, they are shitty places to stay.   The cost of living sucks up all your income. 

But many people forget the reason why they moved there.   They get caught up in the idea of keeping up with their neighbors in a competition of home remodeling and car-buying and forget to leave.   They start to think of the rat-race as "life" and think if they can stick it out for a few more years, they might "win" at it.  But in any race, there are a few winners and a multitude of losers.   Guess which one you will likely be?

A smarter move, in my opinion, is to expect to leave the big city eventually, and plan for it.  I only wished I had planned better, as our opportunity to cash out literally came overnight.   And I only wished I had spent less money on the rat race while I was racing it - throwing money at a home that would be bulldozed for its land, and buying vehicles to impress other people who I often didn't even know.