Silicon Valley Poverty Is Getting Much Worse Amidst Insane New Tech Wealth Boom
businessinsider.com
businessinsider.com
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.
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.
http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=...
I don't know if that apartment is actually available at that price, but $2000/month for one bedroom looks doable.
Example: We own a gorgeous 1550 sq ft house, built in the mid-1700s with lots of character, complete with 800 sq ft garden in what we believe is the coolest part of Philadelphia… and we pay less than $2400/mo including taxes and insurance.
Right around the corner, there are tons of tech biz (the kind that make money) including all the entrepreneurs at IndyHall, AppRenaissance, the makers of Postmark, etc., and everyone's favorite ecommerce-dev-shop-meets-bar-restaurant, Weblinc/National Mechanics.
And: we really splurged on our house. There are very nice 1br rentals from the mid-$1k right here, with new kitchens and lovely architectural details, and you could rent for half that if you were willing to take the subway 15 minutes.
Philly has a great entrepreneurial culture, a welcoming network, and it's cheap. Bonus: a newcomer here has more of a chance to distinguish themselves because the local "market" isn't flooded with a bunch of clones. A city can only support so many "ambitious" 22-year-olds before it becomes a sea of sameness and the fight to be noticed outweighs any potential for "networking."
The ambitious will simply take their ambition somewhere else...
In that kind of atmosphere, I used my school library to learn web programming as much as possible, since our CS class was only teaching basic C++ (PHP just reached 3.0), and somehow, I scraped together enough cash (mostly borrowed) to put up a small website. By some miracle, I found work as a designer and with the basics I learned on several forums and with my pirated copy of Photoshop 5, I slowly made enough cash to pay rent and finally move to some place to stretch my limbs out.
It's a slow and painful transition that's impossible to do if you just "take their ambition somewhere else". No, I nurtured my ambition where I was until I could actually get somewhere else.
Empathy is a terribly scarce commodity it seems.
Not at all. The commenter was talking about something quite different than the article. The commenter was talking about the kids from the midwest etc. who move to San Francisco to strike it rich on the sweet oil fields of VC, which is the opposite of being stuck there because you are too broke to move.
So, yeah, the situation described was pretty much the same. As I said... empathy.
Perhaps I misread the thread but most everyone here appears to be quite empathetic to the problems raised by high housing costs.
I'm relatively certain the parent was referring to the entrepreneurial set rather than those who cannot currently (and will be even less able to in the future) afford to live in San Francisco.
If anything living outside SV might have made the process you went through easier if you could avoid a large portion of your earnings going solely to housing.
And I felt OP was being trite by only looking at it through his perspective (the entrepreneurial set), whereas the article was about the poor.
Seriously, Philly is great, but the crime is a real drag. I'm sure your neighborhood is very safe (comparatively) but is it safe compared to a typical SV neighborhood? (Let's not count Oakland. haha)
Now, I am comparing to SF, where all the technohipsters I know are spending thousands on rent. If you want to live in a suburb (which Mountain View etc are) then I'm pretty sure you have equally safe options here.
Granted our weather is shit by comparison, but you can't have everything.
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.
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.
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.
If that were true, why would people bother building so many apartments? Are investors just a bunch of idiots?
People want to live in Palo Alto because there is a cluster of a certain type of people there. If you allow more people to live in Palo Alto, those network effects become bigger.
Manhattan is the limiting case (at least in the US), and your scare story has not occurred. Rich people like living in NYC.
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/ )
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.
It makes me sick that people in Silicon Valley think you have to live there to get investment and run a start up.
you don't have to live in the bay area.
So the question is, why people even bother living in one of the most expensive regions in the US/World? What's wrong with living in some remote village, as long as basic life necessities are available? I know people (most of them senior folks) that live in our capital (Ljubljana), and whine about not having money while owning a house in a city center that's worth more that they could spend in a lifetime should they choose to live in an inexpensive countryside.
SV is great for 3 things:
1. Insane amount of capital to growth (and to exit big)
2. Access to $120k/yr+ salaried Stanford/MIT grads (among others)
3. Tech-savvy early evangelists
If your company doesn't need these things to survive, stay far away from SV. It's not worth it. There are however other areas that possibly have all 3, but not to the extent of SV. The ones I've personally identified are Austin (US), London (UK), Stockholm (SE), and Berlin (DE). What you get in return is cheaper cost of living (London and Stockholm, you just need to live further outside the city) and therefore cheaper wages.
Personally, I believe in finding the best team wherever they are in the world. But, unfortunately that's not an easy thing to do.
ps- just saw you are the creator of http://everytimezone.com/ I have it bookmarked and constantly use it. Thanks for developing!
And I never said a thing about Malaysia. I am highly skeptical about wage/currency arbitrage.
I'm talking about the smart people who'd prefer to live in their hometowns/states, or with their spouses/mates who need to move for their job, etc., around the US, Canada, and some other Westernized countries.
A dirty, crowded, expensive city isn't everyone's cup of tea. Not everyone gets a nerd-on about being surrounded by other "ambitious" 22yos in what is essentially a monoculture. Not a thing on earth could lure me to live in San Francisco, for example.
There are a lot of people out there who agree with me, and those people can't be hired for $15k, but they can be hired for $85-120k, and in most cases, if you are savvy about managing, they can produce great work remotely.
I've worked with more than a few terrible developers who have exemplary-looking college and startup pedigrees.
My point is that on a macro scale it does reduce risk. Otherwise these ambitious 22 year olds making $120k+ wouldn't exist...
SV is behind the times.
It's complicated though: people are still people, and interact with one another on a personal basis in ways that are higher bandwidth and more nuanced than can be done on line. And with lots of people doing stuff in the same place, the potential for cross-pollination and other random things emerging goes up.
This book talks about the issues involved and the economics behind them, at length:
The New Geography of Jobs: http://www.amazon.com/dp/B008035HQQ/?tag=dedasys-20
I found it quite interesting.
That said, I did my time in the Bay Area and don't feel like going back.
Technology rarely exists in a void - it is at its most useful when applied to dissimilar fields. See for example Uber, which has applied technology to the field of taxicabs, or AirBnb which has applied technology to the previously pencil-and-paper field of private B&Bs/renting.
When you're in a technology business that needs to interface with an established industry, you need to be where they are. Fashion startups in the US want to be in New York, rather than the Valley, for example. We are not even close to the point where the guy teleconferencing in from his country house is on the same footing as the guy who walks through the front door to have coffee.
You're discounting, once again, the point of connectedness. The senior folks you talk about - how long have they been there? Are all of their friends there? What would they do with themselves if they moved into the countryside - visit friends they don't have?
The connectedness of cities goes beyond business. There is a reason why major urban centers are a focal point for subcultures - the more fringe they are the more urban they get. It's the only place where these groups are able to sustain a critical mass to keep existing. For a great many people cities are the only place where they can be themselves.
[1] http://www.paloaltoonline.com/news/show_story.php?id=27136
I'm from a modest background in the Midwest. My first tech job was in Seattle (better than SV, but still not "cheap"). I then lived in Beijing, Boston, and Manila before coming to SV. I spent 1 year in Palo Alto, and now 2 years in San Francisco.
I was originally VERY against it. My wife basically dragged me here kicking and screaming. I've always thought of Silicon Valley as this giant bug zapper, where people are lured in by the promise of extreme success, and then get zapped by a culture of 95% failure at startups.
Now I'm a huge fan. Here are the main two reasons:
1) First, a mitigating factor. The salaries are actually pretty well adjusted for cost of living. You're getting a fair deal compared to other tech cities. Market forces are doing just fine.
2) The number of people in tech here is simply unparalleled. Head and shoulders better than any other city on the planet. That might not seem important, but it is surprisingly powerful. You have access to a huge network of people. Whether you're trying to get a job at big co, or doing a startup, access to a network of people turns out to be a significant contributor to success.
PG's essay on SV is spot on. I scoffed when I first read it, but he is right. (http://www.paulgraham.com/siliconvalley.html)
The main problems as mentioned by the original article:
1) Homelessness – IMO, this is due to lack of proper institutions for mental illness and substance abuse, not housing. SF is a ridiculously liberal city, and there is plenty of low income housing.
2) Real estate prices – If you are buying a home today, it is very painful. However, due to CA's limited growth property taxes, it is quite affordable for the majority of residents who have been living here for life. That results in a clever form of progressive taxation.
That's not progressive taxation. Most long-term homeowners in expensive areas of California do, in fact, own at least one extremely valuable asset, which makes them wealthy. Since these wealthy people are paying low property taxes, other people need to pick up the cost of city services: younger, poorer folks with less home equity (the form most middle-class wealth takes) or none at all. That sounds like regressive taxation to me.
Also, it will let entrepreneurs and startups live on ramen noodles more.
Check out Tokyo (the largest suburban parts) for what the valley could look like with a bit more density; there still wouldn't be that many high rises. Tokyo also has a bit more fresh water to work with.
One important reason is the lack of core infrastructure like a centrally planned transit system. The thing to remember about the bay area is that it's not one city like NYC. It's a number of smaller cities and counties each with their own local governments, rules and constituencies. See San Mateo and other counties opting out of BART. Another example are various communities with maximum density regulations.
This is the kind of thing where you need a strong central hand to force these issues if you want your community to scale, but it's not clear that any local community would cede that power.
Three key issues raised: homelessness, racial inequality (referring to Hispanic wages), and general income distribution inequality.
General income inequality and the racial flavor touched are likely related to several factors, such as education/line of work and workforce mobility. While you can ensure that people have better jobs through education/training programs, combined with job placements (both extremely non-trivial), people from poor areas will always gravitate to wealthier areas. This has nothing to do with racial/ancestral traits or anything other than people seeking employment in the wealthier areas that are more likely to provide employment opportunities. So, effectively, no matter how good your programs are, you will always have some group that needs help. This is why it's important to focus on a long term, sustainable approach to education and training. There is no silver bullet here, unless you can magically impart that knowledge on every living human.
Homelessness is a completely different can of worms. If you have ever worked with long term homeless you will know that only some actually want to return to "normal" life. I put the word normal in quotes because the perception of what normal shifts. In a conversation that stuck in my mind, one person I spoke to referred to how I live as slavery to money/worldly possessions. I'm sure this is not the sentiment shared by the majority, but it illustrates the complexity of the issue. If we truly pride ourselves in having a free society, we then cannot force a certain way of life on people. What we can and should do is offer support and a way back if people so choose.
Personally, I'd like to see us provide more incentives to wealthy individuals and corporations in supporting educational and other programs to help. An extra tax benefit for keeping the money in US and a solid dose of public support and encouragement. Somehow as a society we love stories of billionaires donating money for causes in Africa or another impoverished place. This public opinion is a strong incentive. If it shifts toward more support at home, the money will follow.
And yet, I can't help but compare one left-wing enclave to a right-wing one.
The Bay Area always shocked me as to how segregated it is, with whites and upper class people living in their suburbs with almost all blacks living in Oakland and the lower-income whites living in suburbs that are oppressively distant from job-centers. And the Bay Area has a housing affordability crisis, while at the same time being surrounded by plenty of land and low-density building that could be built-out to increasing the housing supply and thus affordability. But, this doesn't happen because the local incumbent populations are extreme NIMBYs.
NYC deserves a mention, too, because while they are limited on space on which to build, there's still lots of low-rise stock that can be replaced with much denser development, but gets blocked due to NIMBYs and historical protections. I can sympathize with wanting to preserve the historic aesthetic, but we could at least find a few locations to build a massive development to disrupt the housing supply and bring down prices.
I compare these with the so-called right-wing bastion I grew up in, Houston, TX. In Houston, whites and blacks live in close proximity, they shop at the same stores and malls, they actually interact in daily life. Wealthy neighborhoods are directly across from lower-income neighborhoods. More importantly, housing is affordable. There are almost no restrictions on the housing market: you can tear down and build almost anywhere. Middle class families can afford to buy houses.
I'm not arguing for one philosophy or the other; nor am I saying I'd rather live in one place or the other (I'd live in the Bay if I made $200k, I'd live in TX if I made $50k), I'm only pointing out the irony and that a lot of these political diehards are full of crap.
There are simple solutions to the affordability crisis in SV and SF, but NIMBYs and protectionists would rather see the poor suffer rather than risk a decline in their property values.
And the kicker of it all is that the average family salary is a laughable $70k.
The ratio of rent to purchase price is low, which means for those who cannot afford to buy (which is, at this point, nearly everyone who isn't an oil sheikh or Chinese industrialist) the renting path is not bad at all.
The rent "per bedroom" is not $900-1000. It's only $900-1000 if you want to live the urban lifestyle in Yaletown or the West End. For bedrooms in suburbia the proportional rent (i.e., per bedroom) is lower. Which is to say, the run-up in Vancouver rent (what little there has been) has mainly impacted those who can afford it most (read: those without children).
Median family income in San Francisco is a "laughable" $72K, while studios run north of $2500 and one bedrooms bust the $3000 per month ceiling. That is a wealth gap. The demographics in that city have become "tech workers" and "everyone else", with even basic subsistence in the city becoming untenable for many who have been there for decades. Vancouver is (delightfully) free of such a stark dichotomy.
Seriously, you guys live in a veritable paradise - economically, socially, and yes, in rent too. It gets much, much worse out there.
Why is it that people are expected to live in the suburbs when they have kids? I find this to be a uniquely post WW2 North American view, and a stupid one at that. For those of us with kids who would like to live a walkable life style, these rises in rent are not limited to "those who can afford it most."
In Vancouver, families go into the burbs - whether or not this should be the case or what we can do to change this reality seems orthogonal to the main point: that rent increases are not impacting families as much as singles.
Also, keep in mind that Vancouver's urban core is really, really small - roughly 2.5 sq. mi by my estimation. In this core is the hub of the city's nightlife and a huge attraction for the bridge-and-tunnel crowd - not exactly the most family-friendly environment. There is a substantial lack of urbanism in Vancouver that is separated from the lifestyle of early-mid 20-somethings.
How much of that is due to money though. I have a kid, live in an apartment in the city and shudder at the concept of moving the suburb. However if you want at least 3 bedrooms, a reasonably safe, kid-friendly neighborhood and access to good schools then you have to pay a lot of money, certainly more than I can reasonably afford with burying myself in way too much debt. Everybody I know (with one or two exceptions) who's moved to the suburbs has done so for largely financial reasons. Had prices in attractive areas in the city been lower they quite probably would have stayed.
I think that, similar to the way New Urbanism was viewed in the 1990's (no demand, so why build it), urban family living is a case where the demand appears as soon as the supply is present. But good luck getting a real estate developer on board when they can just stick to the tried and true of sucking in the yupsters. The closest thing you get to families in a lot of these place are BF/GF with a dog.
Just a bit to the south, Seattle is a bit cheaper.
If not you're pretty much screwed. You're in California, which is a bad place to do business in general - think insane regulations and a 10% state income tax. And in the Valley in particular, tech workers will cost you significantly more than in other parts of the country, let alone the world.
Perhaps an Airbnb exclusively for new startup founders which offers affordable long-term housing in SF/SV in return for a small amount (1~2%) of equity?
Given that this is a huge problem that all of us here face or have at least had to contemplate, and will only continue to get worse, it seems worth trying.
"Somewhere else" in the USA is the difference between "when can I try out your product?" and "you quit your well-paid job at a stable company to DO WHAT?"
Entrepreneurship can be a lonely life, do you really want it to get lonelier?
The concentrations of people who "get" startups in the US is also closely aligned with its expensive cities: SF, NYC, Boston, Seattle, etc.
If you are into tech, the Valley is the best place in the world to live right now, the price is being driven up by demand for a reason.