Comment by api | Hacker News Reader

Comment by api | Hacker News Reader

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.

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.

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.

Their neighbors are slightly worse off, and 20 people have a place to live. But I guess those 20 people don't count, right?

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.

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.

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.

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

This is a great read:

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.

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

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.

It probably takes a while before everyone notice. Problems like this usually stays around until after we hit the end of our growth phrase.

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.

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.

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.

Wow, sounds like you lucked out.

You, too can be this lucky (adjusted for inflation):

http://sfbay.craigslist.org/search/apa/pen?zoomToPosting=...

Just browsing through the first Google hit for "one bedroom mountain view" got me this: http://www.apartments.com/California/Mountain-View/Avalon-at... One bedroom for "$1565-1725".

I don't know if that apartment is actually available at that price, but $2000/month for one bedroom looks doable.

Nope. The ambitious will simply take their ambition somewhere else. There will be a tipping point (and we must be close to it) where the market cannot bear it any more, and the market will fracture/move. "Disruption" on the geographic level instead of corporate level.

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...

Easier said than done.

"Easier said than done" is itself easier said than backed up.

I've been where some of these people are. I haven't been outright homeless and sleeping outdoors, but once upon a time I did have everything I own to fit basically in the same area as half a mattress. In the town I was in at the time, the only comfort was that I knew were food and basic services were. You just don't up and leave those behind cause it "might" be easier elsewhere.

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.

"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.

I came to the U.S. for exactly the same reasons. I could have stayed where I was and lived a fairly comfortable life without too much worry, but there was gold in them hills and I aimed to get it.

So, yeah, the situation described was pretty much the same. As I said... empathy.

"I've been where some of these people are. I haven't been outright homeless and sleeping outdoors, but once upon a time I did have everything I own to fit basically in the same area as half a mattress. In the town I was in at the time, the only comfort was that I knew were food and basic services were. You just don't up and leave those behind cause it "might" be easier elsewhere."

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.

That's the thing, we don't all often have a choice of leaving where were presently are. Its easy to think about leaving SV (or NY for that matter), but even if most of your earnings are going toward housing, moving isn't easy.

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.

And if you're really lucky you can have the wonderful experience of getting your ass kicked by a flash mob of asshole teenagers.

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)

Nobody here has talked about flash mobs for about a year… they got boring and they appear to have stopped completely. A few white middle class people got beat up, it's true. But there aren't many places in Philadelphia you would go on a daily basis that are half as scary as the Tenderloin at night… nor as easy to wander into, nor as close to tourist/business attractions. Also, frankly, I have never seen human feces on the street after living here part time for 2 years and full time for 1… which is more than I can say for a week-long trip to SF. For better or for worse, those parts of Philly are quite segregated.

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.

That's pretty much on par with a lot of places in New York. It's still possible to found a startup at 22 with those kinds of expenses, but your margins are basically non-existent. And as you say, it's does weigh heavily on the ambitions of many. Your enthusiasm will also go out the window when you're debating whether to spend money on food and utilities vs a roof over your head.

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

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.

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