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> 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".

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.

Nobody: middle class Americans

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.

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.

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.

A major renovation like this on a starter home would likely trigger a reassessment.

I've heard if you keep one foundational wall even for an otherwise complete teardown it is beneficial from a tax standpoint. I'd love to know more details about how that works.

Using data from here: https://www.bayareamarketreports.com/trend/bay-area-market-s...

It looks like ~3% of the housing units in the greater Bay Area sell on an annual basis so if the top 3% of income earners can afford today's prices the liquidity cliff can hide.

That's actually a really good way to look at it. If turnover is really small, you only need a very small number of wealthy buyers to keep driving the price higher. Everyone else kind of doesn't matter.

Using the rule of 72, every home turns over every 24 years.

The top 3% aren't buying homes every year.

I'm not going to argue with you but I'll point out a hole in your logic here:

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.

I agree with this statement, and as I see it, if the houses that were offered for sale were "unaffordable" then they would stay on the market for sale waiting for that special person who could afford them. Instead, what we're seeing is that houses sell, on average, in less than 30 days. So as callous as it might sound, people looking for homes are finding them and buying them. In Santa Clara county at a rate of about a 1,000 a month or 12,000 a year[1]. There are some interesting differential equations you can write that describe how quickly every home in the county will have changed hands at least once, but suffice it to say the narrative that a bunch of "grey hairs" who have bought and paid off their houses are just sitting in them is inaccurate.

As someone who lives in a home and neighborhood built in the 60's I can tell you, nothing motivates Grandma to move to Arizona faster than being able to cash out a million bucks into the savings account. We have exactly one original owner in the neighborhood and they are here because their kids (and grandkids) are also in the neighborhood, otherwise they would have moved as well.

[1] There were 482 homes sold in Santa Clara County last month. The average since 2000 is 987. -- https://urban.realtor/market-trends-report/

> As someone who lives in a home and neighborhood built in the 60's I can tell you, nothing motivates Grandma to move to Arizona faster than being able to cash out a million bucks into the savings account. We have exactly one original owner in the neighborhood and they are here because their kids (and grandkids) are also in the neighborhood, otherwise they would have moved as well.

Well, the effective property tax rate in SF is 0.68% out of a nominal 1.19%, due to Prop 13. That indicates an awful lot of people who have held onto their houses for a long time.

How did you arrive at 0.68%? I pay a lot more than that.

It's the effective tax rate you arrive at when averaging over the fair market value of all houses. It's much lower than the tax you or I pay due to Prop 13.

The figure is from https://smartasset.com/taxes/california-property-tax-calcula...

Yeah well that stat isn't relevant because that's not the rate I actually pay. Literally couldn't care less what others pay. All stats are local.

When people say housing is “unaffordable” they don’t mean literally no one can afford it. Obviously there is a lot of demand for housing and some people are willing to pay quite a lot for it.

> We have exactly one original owner in the neighborhood

This is not a good thing. Having whole extended families get priced out of a large region and only the wealthy or well-paid professionals able to move in, so that people performing all manner of support jobs need to commute from further and further away and live more and more precarious lives, is inefficient, socially/environmentally destructive, and makes the place less pleasant for everyone to live in.

The whole Bay Area would benefit from housing prices coming down quite a bit after building a whole lot more housing units and transit.

Though, ironically, the migration might be the only thing that keeps the schools running, because it results in more Prop 13 reassessments.

One problem is that quite a few people (myself included) have entirely written off the idea of "actively searching to purchase a new home" in the Bay Area because the prices are so insanely high even for the "affordable" properties.

Maybe the most accurate & sympathetic interpretation is "me and everyone I know". In other words, the people inside your bubble who also can't afford it, and reinforce your perception.

This is completely ridiculous. Housing is usually 33-60% of most people's discretionary budget.

The cost of housing can be drastically different depending on when you bought a house. And ESPECIALLY with prop 13 in California.

If n people live in an area, it doesn't mean n people can afford to live in the area at the CURRENT housing rate.

I think a lot of frustration comes from how insanely different 50% of your COL can be in the course of 3-5 years.

More money is wasted on credit cycles than any other human activity. Pretending everything is demonstratably fine is a joke.

>relatively small

But I think part of grandparents point was that there enough people willing to meet the price that sellers aren't left with an unsold home, meaning that relatively large numbers of people if you consider it relative to the number of homes for sell. You could use a different measure for the relativity, but the ones I considered (for all of two minutes) don't seem as informative as the one grandparent used.

Right: the problem here is that there aren't enough homes (Prop 13 + local zoning + high cost of construction), not that the ones that exist should be cheaper.

In the past, it was easy to point at prop 13. With the new tax regime, that's less of a thing.

It’s still easy to point at prop 13. It prevents all manner of people from moving or do other things so they can keep the current tax rate. I would love to move from our smallish home, but our current effective tax rate is 0.70% dropping since we purchased 5 years ago. Our property tax would practically double if we moved so best we can do is expand the home. But in doing this I have now priced my smaller home into a bigger home taking it out of reach of someone wanting a smaller home.

You can afford to pay more for a larger home but can't afford double the tax? That doesn't make sense. The mortgage jump should be a bit a lot more than the taxes considering market moves.

I think the new tax regime has more to do with tax unaffordability than the actual tax rate.

> Nobody goes there anymore. It’s too crowded.

wasn't that a Yogi Bera quote.

The Yogi Book. New York: Workman Publishing. 1997

https://www.amazon.com/Yogi-Book-Berra/dp/0761154434

"Nobody goes there any more. It's too crowded." -Yogi Berra

>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.

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.

>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.

"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." - Can you ELI5? I recently sold a home that I bought for $600k a while back in a decent school district for $1.15M and bought a $1.8M home near Sunnyvale. Was that a stupid thing to do?

Maybe some of that jargon went over my head, but I'm not convinced that his option for investors to "prune their portfolio and keep the accrued equity gains" ... "When the bubble pops and speculators are suddenly underwater" is practical.

Are said investors not themselves speculators who would be underwater post bubble pop?

If you have a high confidence that "the correction isn't going to be quick, nor is it going to be soon", then sure, it makes sense to lever up and take on more debt - IFF you're similarly confident that you can get out before prices drop!

Re: your situation - I wouldn't call it stupid, but you do now have a ~50% larger share of your assets in your home, and so you're now that much more subject to future shifts in home prices in your area.

>Are said investors not themselves speculators who would be underwater post bubble pop?

Not really? A lot of the institutional money sloshing around is being invested as a de-risked hedge against more volatile returns. They don't really care if the market goes down temporarily, because their other options would have gone down even more. Additionally, there's a significant chunk of money that's being laundered through these home sales, so they don't really care if they lose 20%. They care that they can now show a source for the capital when they want to funnel it into other investments that have AML requirements. Home owners who are underwater have a disincentive to sell, but functionally unless their income is tied to their home valuation, they can just ride out the downturn, like most people do with their other equity holdings. It only sucks if you're forced to sell.

That said, for the actual small to mid sized speculator, the 'being underwater' fears only hurt if you commence your leveraging the year before the bubble pops. You can just sell some of your portfolio to cover the loss and still end up ahead.

The comparison is between owning 20% of 10 properties vs. 85% of 1. Even if your portfolio takes a haircut, the total volume of equity you build dramatically outstrips the more conservative approach.

There are many who bought second or third homes using the equity from the first home. That's how I understand that comment. At least, you sold it and bought another one.

I think what he's saying is the smart move for investors is to keep the process going (buy property, see appreciation, capture gains upon sale, re-invest gains to buy at even higher price point) until it goes bust. By "continuing to pump in capital and re-leverage based on equity", the prices will continue to go higher until they bust.

When prices go bust, you take your hit on your portfolio, but even then you probably made a ton of money in the process even if you lose some equity at the end.

It's a little different for a homeowner since you need a home to live in (if you don't want to sell does it matter if your home drops in value?). However, it will still suck if the housing market bubble pops and that $1.8M house you bought is now worth $1M, but you still have a $1.2M mortgage to pay.

>I think what he's saying is the smart move for investors is to keep the process going (buy property, see appreciation, capture gains upon sale, re-invest gains to buy at even higher price point) until it goes bust. By "continuing to pump in capital and re-leverage based on equity", the prices will continue to go higher until they bust.

Close, but it's even easier on that. You don't need to sell to extract value from the currently financed properties. Selling incurs transaction fees. You don't want that!

Instead, you just use repaid principal/appreciation to lower the cumulative LTV against the entire portfolio of properties. This means if the market in your area is going up 10% yoy and your down payment is 20% to avoid insurance fees, you basically get .5 house downpayments per year off appreciation, before rent.

Do that for a few years, and suddenly you own a lot of property.

The issue is that demand isn't from 'households'. It's from REITs, speculators and foreign capital.

I would love it if you could forward a source for this statement. Speculators I understand, and they are out there and every down turn burns a bunch out. But REITs and Foreign Capital is less clear. There was a big "the Chinese are buying all the houses" narrative that went around on Nextdoor and elsewhere so we analyzed the County Assessors data base of tax assessments to try to identify how many homes were owned by companies vs individuals. Only a small percentage of homes were owned by corporate entities. But that was just one county so if people have done this in their county and come up with different results it would be great to see them.

>I would love it if you could forward a source for this statement.

You can look up any of the mortgage and housing industry financial reporting pieces. I normally use the ones produced by RBC when looking at the issue, because they're well put together. There's a few put together for assets in the US and EU that I respect, but they're a lot more work to sort through - maybe who has good material for those areas could chime in?

To your second main point: 1) you don't need to be a majority owner of the market to move the market. 2) Foreign laundered capital is not channeled through corporate entities.

I think the published literature is conflicted but leans towards what I'm saying, but there's a lot of behind the scenes things that make the picture s bit more clear, but I can't disclose more for professional reasons.

There’s no way to know how many of those were Chinese nationals because the only group with that data is FINCEN. So how exactly did you do this, and which county was it?

The county tax assessor records are public in California. They include the person or entity who is on the hook for paying the property tax and their address. Most homes in Santa Clara county are owned by the people who live in them and their name and the address of the parcel match the title (also a public record). Companies and property managers have the tax bill sent to the company office. Typically (but not always) LLC ownership included the "LLC" in the name so "Snow garden LLC" was a good sign that it was owned by an LLC but if it went to the same address as the parcel we counted it as being the owner. Similarly for trusts (a lot of people put their property into living trusts) and they have the same sorts of rules.

It was possible to just crawl the web for this information however California has tightened things up a bit and made it harder to do so, you can always go into the county clerk's office however and get access there. Realtors use a service which collects this data and I got access to it through a friend who owns a realtor's license.

Van is a global housing market, not a local one, which throws out any kind of real microeconomics.

If there weren't a huge number of foreign buyers, I think your point would make more sense.

But it's complicated by zillions coming in from elsewhere.

I have lived in Vancouver since the early 80s. Vancouver has always been extremely expensive. The prices have only gone up since the 80s. Our house went from $250,000 which was 50% more expensive than our Toronto house to $1.4M when we sold in 2010.

So unless you are talking geologic timelines, Vancouver sustained unreasonably high housing costs for 3 decades or more (it continues to be high) with no significant pullback and no discernible industry like Silicon Valley.

In the 1980s they blamed Hong Kong immigrants. More recently they blamed the Mainland Chinese. Now is it foreign investment? There has always been a bogeyman in the minds of Vancouverites but they have always been wrong. Regardless what the reasons, the costs have always been hard for regular Vancouverites to afford and yet the prices kept going up for decades.

> 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.

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.

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.

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.

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.

Even without regulations, it takes a while to physically build a large number of houses and create enough infrastructure around them (roads, parks, schools, shopping, etc.) to make them appealing to consumers. It's not like you can print out entire subdivisions at a moment's notice.

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.

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....

> Houses cost what people are willing to pay for them

The cost and availability of new construction also influences that.

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.

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.

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.