Why is Resi RE near Silicon Valley so expensive??

I’ve noticed that Residential housing in the Silicon Valley area is extremely expensive, you have starter houses like in the link below selling for $3m+ despite being 1 floor 3 bed, kind of small

What types of people are buying these homes and how do people out there afford to buy homes? Was under the impression software engineers in general don’t make more than 400k/year

https://www.zillow.com/homedetails/3815-Grove-Ave…

 

That’s wild. Curious as well. Its more expensive in those areas than Greenwich or Long Island etc, but people out there aren’t making HF/PE money aside from a handful of entrepreneurs / early tech startup guys who cashed in from selling their shares 

 

No higher income is not why, think about it. Even if it's a higher income area (median HH gets 194k), starter houses like the one in the link above are 1.7k sq/ft but selling at 3m. How can people pay for houses like that when they're only making sub 200k? Meanwhile fields like Software engineering has a lower ceiling usually around 300-500k for most, so you have way fewer people making 7 or 8 figures yearly out there from jobs like you see in places like NYC

NYC and plenty of areas nearby seem to have median HH incomes at a similar or much higher range but prices are nowhere near as high as silicon valley, especially on a sqft basis on suburban homes

 

No higher income is not why, think about it. Even if it's a higher income area (median HH gets 194k), starter houses like the one in the link above are 1.7k sq/ft but selling at 3m. How can people pay for houses like that when they're only making sub 200k? Meanwhile fields like Software engineering has a lower ceiling usually around 300-500k for most, so you have way fewer people making 7 or 8 figures yearly out there from jobs like you see in places like NYC

NYC and plenty of areas nearby seem to have median HH incomes at a similar or much higher range but prices are nowhere near as high as silicon valley, especially on a sqft basis on suburban homes

That is not a "start house" in Silicon Valley.  Palo Alto (not including East Palo Alto) is one of the most expensive towns in the area.  Starter houses are found in Santa Clara, the less desirable parts of San Jose, Redwood City, and those who can stomach long commutes live in Hollister and Gilroy.  Palo Alto/Saratoga and a handful of other towns are going to be exorbitantly expensive for ranch style houses with under quarter acre lots, and those SWEs making 500k do not live there.

 
Most Helpful

Yes it is. Along with other factors like scarcity of housing supply (California is famous for being NIMBYland and has had a housing crisis for decades), relative desirability (California, and Palo Alto, is literally paradise from a weather perspective and the schools are top notch), the amount of money that people in the area make will without a doubt drive up home values.  

You say that this is a "starter home" and that people make "sub 200k" but I have no idea where you got those numbers or those beliefs. This is not a starter home location and people making "sub 200k" aren't out buying homes in Palo Alto anyhow - they're renting or buying way out and driving in. 

NYC is not an accurate parallel because the housing supply is so different for instance - you can't buy a suburban single family home in the heart of Manhattan. Meanwhile, this house is 10 minutes from Stanford, 10 minutes from the water, and 20 minutes from the Apple Campus. It is genuinely difficult to imagine a more desirable location. 

I also have no idea why you mentioned "fewer people making 7 or 8 figure yearly" because it does not require anywhere near that to buy this house.

Let's just do the math on this. Keeping things easy and ignoring some Tech VP paying this in cash with the intention to tear it down or renovate it, 80% of $3M gives you about a $15k a month mortgage payment and throw another $5k on there for fees and taxes. That's $240k a year. Ignore that people in CA regularly spend over 1/3 of their income on mortgage/rent and just stick with 1/3. The family needs to make $720k a year to live there comfortably, so if it is a couple, each needs to bring home $360k. 

You said yourself that "software engineering has a lower ceiling usually around 300-500k for most." Well, if your numbers are correct, two more senior software engineers making on the lower end of your "ceiling" can live here. Shit, maybe one of them got a big bonus or they inherited some money, or they sold their last house. A $1M downpayment instead of just 20% cuts that to only needing to make a little north of $300k a year for each of them. If they only mortgage half the property instead of 80%, they only both need to make $250k a year. All of this is completely doable. 

Commercial Real Estate Developer
 

OP and the first poster, it would be good for you both to familiarize yourselves with how a distribution curve works. 

Secondly, there are way more liquid rich people than you think. A huge percentage are not from the big tech or hot startups that everyone knows. People living here even forget that there are tons of unknown but successful firms serving some B2B or government niche. The founders and employees of these firms cash out big time when these companies get acquired.

 

I also thought this post was a joke when I read and then I saw that someone seriously replied in equal disbelief.

Average incomes in SF are way higher than they are in NYC. Once you narrow this down to silicon valley, and then palo alto, you're looking at an even higher income demographic. What SWEs lack in a salary + bonus (which isn't shabby at all), they more than make up for in equity. While the IPO market has considerably slowed, everyone in the SFBA knows that following a big IPO is the shittiest time to buy a house.

Sure the hedgies in NYC can make $50M+ in a year, but that isn't really a whole lot of people. 

Also, this house is a tear down. It says so in the details. Someone is likely buying this lot with the intention of putting a 2-3 million bucks into it and building a forever family home. Palo Alto is also one of the nicest, most desirable, and poshest towns in America. 

 

What you just asked would be like someone asking why is this 1,370 SF apartment in Greenwich Village so expensive to rent?

https://www.zillow.com/homedetails/780-Greenwich-St-APT-4F-New-York-NY-…

It's because people get PAID in Palo Alto. You may say yes but that's in NYC whereas this is in Palo Alto - but many Palo Alto residents work in SV as there are tons of very high paying tech jobs nearby and residents value things like weather, access to outdoors, safety, etc. 

 

Yeah I agree with OP. If you compare a place near Silicon Valley like Palo Alto (or some other generic town near there) to a place like Scarsdale in NY, look at the income data:

Palo Alto average household income is 272k while it’s 516k in Scarsdale, so how could “high income” be the main reason why suburban houses out there cost 3x the price on a sq ft basis compared to towns near NYC?

I’d imagine income out there is lower on the median, average and upper end compared to towns near NYC, so income can’t be the main driver of higher pricing…

 

It is not suburban in the way that you are thinking. People here live 10 mins from their office.

We can dissect borders for how you are pulling average HH incomes, but the fact remains that people in Palo Alto are extremely wealthy. Santa Clara and San Mateo County are among the highest (if not the highest) HH incomes in the country and the world. 

Palo Alto is #3 in the below link as an example:

https://www.usnews.com/news/national-news/richest-cities-in-the-us?slid…;

I'm starting to wonder if people are going to think I'm the moron for arguing with the morons. 

 

You can still find < 1600 sq foot homes with just one or two bathrooms for less than 2M. Maybe not in Palo Alto proper, but in nearby locales in the east bay and san mateo. 

nicole
 

At least in San Francisco, the MLS listing shows the size of the house (# of bedrooms, sf) per the permitted area.  However, the majority of homes have in-law units that are just not permitted and thus do not show up on the MLS.  That can skew the price per sf. 
 

For example: 2 bedroom / 2 bath row house in SF at 950 sf.  In reality, that is a 3 bedroom / 2 bath because the downstairs in-law is not permitted to be counted as a bedroom for MLS, plus add 300 sf.  Does it look like a room, yes. Estimated value: $1.3MM.

For entry level homeownership, San Francisco is actually pretty good value.

 

Regarding school districts.  In SF, school placement is by lottery system (to provide more equitable access to the best schools).  In the Bay Area cities, such as Palo Alto, the school placement is by district.  This piles more homebuyers into a limited geography to attain top school district enrollment.  It is a major consideration for SF families with young children to get into a public school of their desire, or look at private school options or move to a city where they know where their kids will attend school.  Palo Alto has a great public school district, but other parts of San Mateo County doesn’t, so that piles people to limited areas. 

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

Stock options folks, lots of tech employees got rich in the 1990s, 2000s, and 2010s just working in tech and accumulating options. Plus, people in the SF Bay Area spend more on their homes as a percentage of their wealth. This isn't Miami where people with 50k net worth drive around in leased Lambos. Many people with $2-4m homes in the Bay Area will drive around in Pruis' or Model 3s.

Plus a lot of people like my parents who bought in the 1970s,1980s, and early 1990s when prices were low and are holding on until they die and the get the step up in basis.

 
multifamilydev133

Plus a lot of people like my parents who bought in the 1970s,1980s, and early 1990s when prices were low and are holding on until they die and the get the step up in basis.

not from USA but is it the case that a lot of those people (e.g. close to retirees who might have been public servants) are forced to sell because they cant afford the property taxes once homes get revalued? or do they release equity etc?

 

Voluptas eligendi facilis placeat. Dolorem nam autem hic quia ratione dolor.

Deserunt at nemo placeat harum minima. Delectus minus nesciunt quidem nesciunt corporis odio. Rem porro eligendi maxime sint iste voluptates ex.

Laudantium earum dolorum nam quidem reiciendis quod. Illum molestiae praesentium vel.

Tenetur atque autem modi qui ratione laboriosam iure unde. Necessitatibus impedit sed architecto repudiandae quisquam.

Career Advancement Opportunities

February 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Lazard Freres 01 98.3%
  • JPMorgan Chase 05 97.7%
  • Perella Weinberg Partners (++) 97.1%

Overall Employee Satisfaction

February 2024 Investment Banking

  • Harris Williams & Co. 28 99.4%
  • JPMorgan Chase 11 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

February 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Credit Suisse 04 97.7%
  • Moelis & Company 06 97.1%

Total Avg Compensation

February 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (81) $263
  • 3rd+ Year Analyst (12) $184
  • Intern/Summer Associate (32) $172
  • 2nd Year Analyst (60) $169
  • 1st Year Analyst (193) $159
  • Intern/Summer Analyst (139) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
dosk17's picture
dosk17
98.9
9
Kenny_Powers_CFA's picture
Kenny_Powers_CFA
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”