Monday, February 4, 2013
This is slightly off-topic for this blog but I needed to do it for reasons of my own, and I thought it would be of interest to at least some readers. The above graph shows a rough-but-mostly-right estimate of the ratio of the median price of a single family home to median household income in the San Jose-Sunnyvale-Santa Clara metropolitan statistical area (aka Silicon Valley). The data run 1975-2012.
This was much harder to construct than it should be and I had to make a few approximations. Median house prices by MSA are available for the last few years only at the website of the National Association of Realtors (older data you have to email them and pay for). I extrapolated that backwards using the house price index for the San Jose MSA from the Federal Housing Finance Agency. Then median household income since 2005 is available via the Census Dept FactFinder. Income data for a few older years can be found also from the Census (plus 1999 from here), and the inflation adjustment there can be reversed using BLS CPI data. For years between those, I interpolated the income data using the assumption of constant growth rate.
Given the approximate rule of thumb that borrowers with decent credit should be able to buy a house worth about three times their annual gross income, then things were pretty affordable back in the 70s - the median income household could afford the median house. During the eighties and early nineties, the ratio hovered around 4 - rather marginally affordable. Then in the late nineties, it took off into the stratosphere, reaching a peak over 9 in 2005 - indicating only a small minority of buyers could get a conventional mortgage on a median-priced house. Of course, at that time, most buyers were using highly unconventional mortgages.
With the collapse of the housing bubble, the ratio declined again, but has now stabilized at a still extremely high value around 7. There's no sign of further downward trend.
I think the best way to think of the Bay Area currently is something like a modern day goldrush boomtown. House prices are being supported by people who join a successful tech startup and then are able to cash out with substantial stock options. If you don't strike it rich this way, there's no way to buy a decent house in a decent area on a middle class income.
Personal note: I moved to the Bay Area in 2004 and left in 2010 (but still work for a Silicon Valley employer).