The real estate market is chronically overvalued. After years of rising home prices, the value of the real estate priced in future rising prices of homes. You're looking at this in a 100% logical manner. However, in the Bay Area and other very prosperous areas people are willing to overpay to build their own castles. When you rent, you can't remodel and make a home your own. Economically, it doesn't make sense but it's been a reality for a long time.

The value of real estate is about supply and demand. There is no other way to determine 'value'. If I was from central Europe, I would probably not want to own, either, because one never knows what the government will do to control your property. As long as there is demand for owning homes in Palo Alto, the prices will maintain or rise. Looking at it in another way, an owner can stay for 20 years, send his/her kids to our schools, enjoy the ambiance, then sell and make a profit. Don't forget the tax write-off of interest payments vs. income. And the independence of ownership of property (no landlords). Who wouldn't want that bargain over throwing away rent money?

I started off renting in Palo Alto, then I bought a house. I can easily recommend the latter over the former. The real estate market in Palo Alto is NOT overvalued!

I wouldn't be surprised if the house that sold was bought by a developer. It will sit as is for quite a while and then be demolished and a large home will be bought there. You mention you are in a cul de sac and the house is 50sh years old. Probably the house is beyond just fixing up and not worth much in itself. The true value is in the lot and in a desirable location on a quiet street the eventual appreciation to a developer will be much more than you may think. I suggest you watch what happens, but suspect that a large house will appear which will be sold for possibly 3 times what it has just sold for.

Midtown Resident,

You're also thinking short-term in assuming that the rents will not go up. They can and do--the last big real-estate run was preceded by a big hike in rents--people saw their rents double in a year. Thanks to Stanford, there is always an active rental market in Palo Alto. If you've been renting a place for ten years, you are likely to be paying more per month than if you'd bought the same property ten years ago--and without getting the appreciation.

That you can itemize mortgage interest and property tax on your taxes. You cant itemize rent. So that gap is not teally 5k when you consider that. Also rent is forever, mortgage payments end once you pay off the mortgage.

I wondered the same thing when I bought my PA home in the mid-seventies for $35,000. I could have rented a similar one for half my monthly mortgage payments.

I knew the place would never sell for $50,000 in my lifetime, then never $100,000, then never $250,000, then surely never ever %500,000, let alone $1 mil. It's present valuation is $1.5 mil. I really goofed that decision, didn't I?

Most Palo Alto homeowners probably paid less than half what their homes are worth now. Even some fairly young people paid less than 1/4 of their current home value. You gotta remember that homeowners have little control over home prices. Most home sellers get multiple offers, so the price really is set by the buyers. If someone wants to pay me ten times more money than I paid for my house, I'll think about it.

I'd actually argue that Stanford has artificially pushed upped supply of rental stock. For a while they were leasing Oak Creek Apts at market value and turning around renting them to grad students at a loss to push down the cost of living in the area. Look at all the graduate housing they've built in the last ten years on campus.

I forgot to mention a really important thing: Inflation.

Inflation works to the owner's advantage, if the owner has a 30 year fixed mortgage. I personally believe that there will be major inflation, again, down the road, so I am holding on to my home. My kids are raised, and I am not particularly dedicated to PA, but I see no reason to leave now. If I want to leave, I will probably rent out my house...for a while.

Another thing: Equity. If you got it, you might want to use it.

As long as Stanford is here, and the weather is good, PA homes will continue to hold/increase in value. If you don't think so, then rent.

With a low down payment and an interest-only option ARM, the buyer can pay less than renting. Then when the payments balloon, the "buyer" can stop paying altogether. It will take over a year for the bank to foreclose. The "buyer" can then walk away after purchasing another property outright with all the cash they saved by not paying the mortgage.

Almost sounds like a pyramid scheme? Web Link

there is a cultural issue about owning a home here, versus renting - compared to Europe and other parts of the world where the rich often prefer to rent. It ends up being a personal decision, based on the various issues already mentioned - taxes, wanting control, outlook, and how long you will rent versus buy. Most of them favor owning, especially the longer you rent. Anyway, I agree with you, renting makes a lot f sense, but it does not seem to be a big market here.

Of all the arguments listed above in favor of buying I see inflation fears being the only logical and economically justifiable argument. And they are certainly well grounded. With the speed of US "printing" money and debts mounting I can't see how we can avoid inflation. In this environment real assets (real estate, gold) seem a decent investment class.

It all depends on how long you plan to stay. Under 5 years, it probably makes sense to rent.

Our friends rented in SF and had to move every year or two because their homes were sold or the owners wanted their relatives to move in.

Our in-laws moved to Ohio for 3 years and bought a house (with cash they pulled out of their CA home) and the market imploded and they lost a fair amount of money.

We bought in Palo Alto in 1991 and have stayed to raise our kids here so we're glad we didn't rent.

And being your own landlord has more than psychic value. I made the same argument in the NY suburbs (Hartsdale) 10 years ago and rented and then had to move three times in five years as owners sold the homes I was renting. It's terribly disruptive to the kids. If you live in a dedicated rental property like an apartment bldg, it's probably not a worry, but it's tough to find a larger rental if you have a big family . . .

Basically, you are right.

The math doesn't work for someone buying a house now as an investment, even including tax benefits, unless they are helped to buy the house (could be helped by US government financial programs or a financial institution needing to lend to you), or expect that they will have diminished capacity to take action for living in a rental (e.g. kids get attached to schools, friends, activities, or getting too old, etc.).

With interest rates so low how can you not justify buying vs. renting? We're locking in a 30 yr. fixed at 4.65% right now.

Renting makes sense in a community that expects and allows people to rent the same property for years (which I believe is pretty common in Europe). Most rentals in Palo Alto have one year leases, many landlords and tenants expect to move after a years time. If you have kids in school, a nice, long-term rental is often hard to find.

The inventory of houses owned by people who purchased them for several times less than their market price now and who can afford charging tenants $3,300 rent is slowly but surely diminishing with time, as these houses change hands and sell for market prices.
So what would eventually happen is rents would have to go up to justify investment in rental property.
Note that in order to afford an $8K monthly rent the family has to earn $28K/mo of gross income (if you follow recommendation of financial advisors that no more than a third of your gross annual income should go towards housing) or $346K/year.
Speaking of demand - how many families that earn $350K a year are looking to rent an old ranch house in Palo Alto for $8K/mo?

There is an elderly couple on my street who bought their 1,300 sq. ft. home for $11,500 in 1951. They rent it out for #3,000 a month!!!

re: mortgage deduction

Always the key, that is, until the tea-baggers get their way and pass a "flat tax". Libertarians somehow think Americans will stand for that bit of tax welfare disappearing!!

Taking a guess here, but I imagine Kent (the anti-European) might have thought the flat tax was once a good idea.....

;-)

Renting really made sense for me. I sold my home in Midtown in 2004, leaving behind a $7K per year property tax bill, a $3600/month mortgage, and significant pending expenses as a result of years of deferred maintenance. My family has been in our 3 bedroom/1 bath rental for 5 years. My rent has been stable at less than $2,300 per month. No rent increase. I work hard to keep up the property and have made improvements to make the house more comfortable including custom blinds &new plumbing fixtures. I maintain a good relationship with my landlord. There are three rentals on my block - all in the same price range. I could not have kept my kids in the Palo Alto schools had I not chosen to rent. I feel more financially secure renting vs. owning. I now have savings, and can withstand a layoff or salary reduction.

Looking at the original poster's post again--I don't think we can assume that the buyer's paying $8K a month. Property tax would be a bit over a thousand a month, but the mortgage could be much lower than $7K depending on the down. If it's not a starter home, then the buyer could have come in with several hundred-thousand.

In fact, one of the reasons PA real estate skyrocketed during the dot-com boom was IPO money--suddenly we had a large number of cash buyers or large down buyers.

So the rent v. buy situation applies to the rest of us--but a number of people in Palo Alto have a lot of money, even now, backing their seemingly ordinary lifestyle.

"Taking a guess here, but I imagine Kent (the anti-European) might have thought the flat tax was once a good idea....."

Willy,

I will leave aside your snarky remarks about my feelings about Europeans. However, you are on to something, but you probably don't realize it.

A flat tax, or any tax reform that does not subsidize the mortgage market, will result in lower sales prices. The banks figure in the subsidies when they make the loan, therefore they make more credit available than would be the case in an unsubsidized situation. Eliminate the tax subsidy, and there is less money chasing the existing supply of homes, thus less demand in the supply/demand equation. However, this would not change the distribution of those who can afford homes, because it would be across the board, and the relatively wealthy will stll get the homes.

The elimination of the mortgage tax subsidy would also have the effect of lowering property taxes, because assessed valuations would be lower.

We are probably stuck with the system that we have. Either way, it is still better to own than to rent, if one is looking long term, and can afford it.

Ohlonepar, check your own math or let me help you.
For easy math - assume you borrow 100% of $1,300,000. Downpayment money has opportunity cost as well, imagine that instead of putting 20% down you can have it invested in similarly risky asset class and earn similar interest. So assume you borrow it all at 5% , add to it mandatory flood insurance, if applicable, and house insurance and we are talking about $10K/month. Now first year tax savings due to tax deduction will be around $18K or $1.5K/mo, which brings down the after tax cost of buying this house to $7.5K/mo
But note that a 50ies ranch house priced at $1.3M in PA means it is not in pristine condition and significant maintenance costs are imminent.
I agree that it is definitely much more economically reasonable nowadays to rent in PA than to buy. If you have excess money just invest it, if you want to cash on real estate risk, invest it in REITs and thus you will have a chance to capitalize on RE boom if it happens.

correction - which brings down the after tax cost of buying this house to $8.5K/mo

Instead of building high density apartment buildings with affordable below market rate units Palo Alto could consider some form of rent control for landlords who bought "their 1,300 sq. ft. home for $11,500 in 1951".
These folks should be capped in terms of what they charge for rent. Not only do they not have to make mortage payments, but they pay very little property tax. This will be a way around Prop 13 unfairness.

PA mom,

The bottom line, for anyone, is to feel comfortable within the actions that they take. Why live inside a neurotic knot? Some people are more risk-averse than others. The relatively risk-averse should probably rent, because it is more predictable. However, the renters should not complain about those of us who took the risk, and bought our homes.

About ten years after I bought my first home in Palo Alto, I bought another one. My daughter wanted to raise her kids in PA, and I set up a payment schedule with her. She eventually got divorced, and moved out of town...I was 'stuck' with the house, as well as the mortgage. I could have sold out, at a small profit, but I decided to hold on. I became a reluctant landlord, and I must admit that I did not like it, but I got through it. When I finally sold that second home, the profit was enough to pay off the mortgage on my own primary home. Even though I was probably too old to buy another home, I took an option on one, a complicated deal, and the market went flat, even somewhat down. I lost a little bit of money on that one. The ultimate bottom line for me is:

I was not risk averse, and I welcomed challenges. I was in it for over 20 years. I ended up living for free in Palo Alto, in fact I even paid for my kids college education. If I sell my primary residence, I will be relatively wealthy, although not living in PA. My wife was risk-averse, and it caused tension in our marriage. She is now very happy to enjoy our relative comfort level, even though she insists that I could have been wrong. I just smile....

PA Mom,

You're assuming that 20 percent down is a stretch. My point is that many people can put down a lot more in cash.

Sooo, let's say you have options--you cash in the options and buy a house. Your company later tanks in the stock market, but you still have a house and relatively low payments because you had a huge down (or paid cash in full) in the first place.

This isn't the land of 100 percent downs, which is part of the reason you don't see much in the way of foreclosures and short sales here. You're not going to get a 5 percent interest loan on that size mortgage. Those nice low rates aren't around for jumbo mortgages--so that's not how the math would work.

I'm not saying that you can't come up with $8K payments a month on a $1.3 million house, but don't assume the buyer assumed that kind of burden.

So, yes, it makes no sense to buy if you have to do so in a risky manner--but if you don't, then real estate in Palo Alto offers a reasonably good return on the investment. In the case of someone cashing in options, it would be a better investment than the stock market has been if you bought high and sold low as many people ended up doing.

Or to put it this way, when I pay my mortgage, I am investing in my large purchase and getting a place to live. When I pay my rent, I get a place to live, but I will get zero return on that rent. Which is fine if you don't plan to stick around for more than a few years.

There are reasons to rent, but there are also reasons to buy.

Rent control proponent,

I used to live in NYC when there was lots of rent control--it made for a crazy and unfair situation. What you propose would reduce, not increase the number of affordable rentals--older landowners would be more inclined to sell if they couldn't get a market-rate income from properties, while renters would be more likely to hold onto "affordable" rentals. The expensive rentals would remain on the market.

To Ohlone parent. My point was that the amount of downpayment does not matter, even is it was 100% cash. This cash has opportunity cost. You can invest this cash in long term instrument that yields same 5%. Locking it in the house investment means you are not earning this interest, it means you lost opportunity to earn 5%/year on it. So economically speaking, it does not matter how much cash you put down, either way it is costing you. So my point is that there is a burden, even if you bought it all with cash - the burden of not earning interest on this cash. Plus if you pay with cash, you lose tax deductions.
Anyway, the original poster's estimate of the cost of owning a $1.3M house is correct. It is between about $8.5K /mo, not including maintenance costs. To compare apples to apples - you do not earn return on $3,300/mo that you pay your landlord, but you earn a return on $5K differential that you save every month that you would have spent if you bought. Makes sense?

"older landowners would be more inclined to sell" - isn't what Palo Alto would benefit from the most?
New owners would pay $$$ times more in property taxes and part of this money could be used for housing subsidies?
If you assume that the original owners of "1,300 sq. ft. home purchased for $11,500 in 1951" have adjusted cost basis of their house of about $65,000 today (at inflation rate of 3%)and pay annual property tax of $1,000/year, while if sold the new owners would pay property tax of $16,000/year. So there is $15K of new taxes that could be used to subsidize affordable housing, build new roads, schools, etc. It is not that bad of an idea after all.

"real estate in Palo Alto offers a reasonably good return on the investment" - this statement must come from a realtor.
Real estate in Palo Alto currently offers a hugely negative return on the investment! As someone said here it would make sense only if inflation kicks in.

If you assume, as most of us do, that after a market dump there will be a recovery of some sort or another, then look at it this way..

You put 20% down on a 1,000,000 house.

That is $200,000.

Ok, for the sake of understanding the concept, in one year the house is worth 1,100,000 ...which is a 100,000 gain on a 200,000 investment. Minus the interest rate you paid on the house, ( which was subsidized by tax breaks), plus whatever equity you put into the house above the 200,000 original downpayment, minus what you paid the broker to buy the house and will pay the broker to sell it again..and you have about 100 percent increase in your value.

I know the numbers don't actually work out that way, but I put this in to just give an idea of how smart it CAN be to buy versus rent..but the smart-quotient really depends on how much you believe the value of homes is going to increase over the life of the home you plan to buy.

Now, compare it to renting..you get NO return on your investment there, it is money down the toilet. You never know when it will be raised up. and You never know when you will be kicked out. You have no control over what the house looks like except to move to something you like better.

I prefer buying.

POV, you have to take into account the up keep of the asset as well as all the taxes associated with owing the home - all of these costs are guaranteed to go up in the future.

I don't buy your math.
Even if your $1M house appreciates by $100K in one year.
Suppose you sell it after on year to realize your "return on investment". You pay 6% of buyer's and seller's agent commissions, so $66K comes out of your $100K profit. Over the course of one year it costs you at least $50K in interest (paid on debt or not earned on downpayment)and you are definitely "in the red" on your investment. Of course you can be a dreamer and dream that your house will double or triple in value in a few years:)

It makes sense to buy in Bay Area ONLY ONLY as inflation hedge.

Remember that options based compensation is a thing of the past, large companies no longer give out lavish stock options to all employees, mainly due to changes in tax accounting for options introduced a few years ago.
The number of potential homebuyers able to purchase with "options money" is presently very small and will diminish over time.
A dual income professional family can barely afford a home in Palo Alto. What socio-economic class will drive further appreciation of $1M+ houses?
"Potential homebuyers will find reasons why prices should be lower; once they switch to being homeowners, many find thousands of reasons to justify why their home's value should be higher! However, when faced with such opposing forces, the decision to buy a home should not be an assessment of price, but one of risk. Can you afford not just the monthly mortgage payments, but can you afford it should the price of your home come down?"

"A dual income professional family can barely afford a home in Palo Alto. What socio-economic class will drive further appreciation of $1M+ houses?"

Answer: Those who can afford to do so.

When I first bought a home in Palo Alto, I was advised that the price was absurdly overpriced. My own father, and even my realtor, told me this. I thought they had been drinkin' too much moonshine. Palo Alto has great weather, and is next to Stanford. That was all I neeeded to know. I was right. They were wrong. OK, so what has changed?

Rich Americans and rich foreigners will love to live here. Double-income middle class folks can still make it. I worked two jobs, and my wife also worked. We made it, even though our income did not support soirees.

Isn't it a simple thing? If you don't have the hair, then don't go into the lair of personal risk.

POV, what happens when that $1M house falls in value to $700,000 the next year? You lost 100% of the down payment and still owe the bank $100,000 more that the house is worth. Please don't buy into the notion that "real estate only goes up". We are in a period of deflation right now. Same as Japan in the early 90's was.

The original posted question can best be answered by this website: Patrick.net Web Link

I think the people on this forum would be surprised to learn how many negative amortization loans exist around here. There is a lot of pain coming this year. The banks know it, and they are worried. Look at the chart link I posted yesterday. Look how many option ARM borrowers were not even servicing the interest on their loans. Those loans are now going to recast before 5 years because the principal has increased so much.

We're in for more pain. There is no way out because there is no way for the borrowers to pay. They believed that "real estate only goes up".

Historically the monthly cost of renting the house or renting the money you used to buy the house has been similar.

When i bought my bay area house in 1995 owning was actually cheaper. I sold that house and now rent.

Now as is noted I can chose to rent an old 3/2 for 3300/mo or I can rent the money to buy it for 8500/mo.

If I really can afford 8500/mo I am subject to AMT so the tax deduction goes away.

If I rent I might have to move in a year. If I buy I probably can't move in a year without losing money due to the high transaction cost.

In fact unless the house is appreciating by about 5000 dollars a month I am saving money by throwing less away on rent.

Now where does it go from here? I think rent and mortgage will reconnect i.e. have about the same monthly cost. I think it is more likely that the mortgage cost will come down (prices will fall) than the rents will go up.

In any case, if the rents double then I guess I will be forced to buy. In the meantime my monthly cost is lower, my tools are rusting and if I want to repaint I do, maybe I lose my damage deposit but that is peanuts compared to the monthly saviings.

PA Mom,

My point is that real estate around here is one of the better long-term investments--stocks traditionally are supposed to be good long term, but not lately. Interest rates mean that other more conservative investments don't have the same yield that they did. And because they're conservative don't have the same potential upside.

You can lose money in real estate. However, providing you can avoid a forced sale and are in the area for the long term, real-estate in Palo Alto's a decent investment. No, it's not the late 90s and your house won't double in value overnight--but neither or most investments.

My point about older landlords selling isn't that there'd be no upside, but that there wouldn't be a benefit for renters.

Not a realtor,

Long-term--and this isn't a time to try to flip, Palo Alto real estate has been a reasonable investment. My stock portfolio's recovered somewhat, but it took a much bigger hit than my house did in 2008.

I don't know anyone who's lost money on PA real estate if they held onto the property for several years. I wouldn't buy, though, if I were going to be here for the short term. I wouldn't buy if I had to take out an idiotic loan to do so with ballooning mortgage payments. There are stupid ways and smart ways to invest in real estate.

Axel Merk,

There are still plenty of options around--and, specifically, in the case of Palo Alto, there's Google and Facebook--check out Google's Xmas bonus and you'll see what I mean. A tremendous amount of wealth is generated in Silicon Valley--and some of that wealth settles in Palo Alto.

bikes2work,

I know people are supposed to be stretched thin living here, but the fact is, even now, foreclosures and short sales, both of which drive down prices, are uncommon in Palo Alto. The PA market is stagnant and a bit down from its peak, but I don't see the bottom dropping out if it hasn't already.

Homeowners in PA seem, on the whole, to have enough equity and enough savings that if the market is bad they simply don't sell. Take a look, there's very little on the market right now in terms of single-family residences. You have the pile of townhouses in south PA, but a lot of single would-be sellers simply choose not to sell at a loss.

The lack of desperate sellers means you don't get plummeting prices here. We're a small city and housing stock is going to continue to be in demand.

I'm truly amazed that there still are people who are willing to argue that buying a shack for $1.5M makes any financial sense today, whether or not you compare it to renting. The only reason the prices went from $30K to $50K to $100K to $1M and more is the speculation, i.e. an assumption that at some later point, the house will be "worth" more. If you wanted to make that argument two years ago, it would be kind of understandable (after all you could argue there was no precedent to the opposite), but no less wrong. However, making that assertion today is simply silly and not worth a serious discussion.

Despite the housing bubble bust, Palo Alto is perhaps the best example of how far the American middle class standard of living has fallen in the last 50 years.

Consider the Eichlers. Cheapest post-war construction, targeted to blue collar workers. Now, even after the bust, they go for 7 figures. Only the richest 1% can afford what 70% could afford when they were built.

Yeah, I know I'm going to get a lot of rationalizations about the current costs of the Eichlers, and frankly I don't want to hear them. Those who would rationalize could use their minds much more effectively trying to get this country back to the point where 70% could afford an Eichler.

I live in Napa Valley, and the little community of St. Helena, like Palo Alto, defies the odds. I think when there are so few really nice places in CA, it keeps these beautiful enclaves valuable, whether it is Mill Valley, Palo Alto, or St. Helena. Just drive around the majority of the USA, and look at the ugly blighted subdivisions with strip malls and chain stores, and you can see why anyone with the means will opt for one of the ritzy enclaves.

Check out this website: Web Link

I wouldn't call Palo Alto a "ritzy enclave", at least if I compare it to Los Altos Hills, Monte Sereno, Atherton, Hillsborough where there are beautiful mansions and villas. But Palo Alto with all its track ranch houses and aging Eichlers? PA is not what it used to be and even Google founder has moved to Portola Valley or Woodside... I do not see what would keep drawing people to shell out millions to buy housing in Palo Alto. Only so that they could walk to downtown to have coffee in overrated Cafe Del Doge?

I'm not from PA but from SoCal (Los Angeles). Someone in PA paid 1.3M for a old crappy tract house??? This is more than 10x median income in the area. Well, this very well explains the near financial collapse we experienced last year. Unfortunately, we have become a nation of fools.

We now have a class society. The new serfs are the new "home owners" with zero or negative equity. The upper class are the bankers to whom they are enslaved.

From The Herald: "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation"
This is so true. Americans are overleveraged like no other nation and the next generation will have to pay for it.

Look at the housing prices chart
Web Link
Note that this graph completely contradicts the chirpy real estate agent advice that “home values always go up!” Home values tend to hold their value relative to inflation, which is no small feat. Your home also gives you a place to keep your stuff dry, which is something you can’t say about T-bills and mutual funds. However, significant appreciation relative to inflation was seen almost entirely in the housing bubble era.

We’re now in an era in which home prices are depreciating. Based on the graph above prices may have to decline an additional inflation-adjusted 15-25% to be back within historical norms.


As far as rich foreigners go - look at situation in Dubai...

When you buy an ocean front lot on Maui or in Santa Cruz, you are not paying for the nutrition in the soil or oil underneath it. (You are buying proximity to the ocean). Similarly, when you buy a shack in PA you are not paying for the building quality.

(You are buying proximity to the downtown homeless and into the attendance area of overcrowded schools).

Outside Observer,

It's not the Eichler, it's the zip code the Eichler's in. What we're paying for here is access to one of the rare good school systems in California, being able to live in Silicon Valley and in a city that has all the conveniences and a world-class university.

Basically, it's an issue of scarcity--Palo Alto has assets that can't be easily replicated and continue to be in demand.

Lena,

Palo Alto has a wide array of housing stock--including mansions. Not sure which Google founder to which you're referring, but Larry Page has been building right in the center--not far from Steve Jobs. The Palo Alto Hills has its share of multimillion-dollar estates.

No Palo Alto's not what it used to be--but not in the way you indicate--it's become increasingly unaffordable with tract houses being replaced by overbuilt McMansions. At least the tear-down trend is mostly on hiatus (though far from gone).

PA mom,

Be wary of applying info about the national real-estate bubble to what's happened here. The causes are somewhat different.

Midtown resident,
Your calculations don't include enough real-world costs. Rents in this town always push the limits of the market. They may be low now, but they will rise precipitously again, far outstripping changes in many renters' circumstances. As someone previously pointed out, most leases are for no more than a year. When you buy, if you get a fixed-rate loan, your expenses remain fairly constant over time. You can plan. Your raises are yours. If you rent, you're at the mercy of the market.

If you rent, you may have no ability to reduce enormous energy costs because of an old leaky home, moldy single-paned windows, outdated thermostat, water heater, and home heat. If you rent, you may have no ability to reduce hundreds every month in water costs to keep the landlord's landscaping in the condition your lease promises. You may have to rent storage space because you never know within a year whether you will still be living there and you can't make changes to the house to meet your needs. Renting comes with all kinds of unexpected costs and surprises.

Renting can be very transient. Moving every few years -- not of one's choosing -- is hugely stressful and can also be costly. Hugely variable rents and unexpected disruptions and costs make financial planning difficult. If you lose a rental during boom times, you might suddenly be competing with dozens of people to find a home so your child can stay in the same school.

We rented a home not so long ago in Palo Alto, where the landlord swore up and down that it was a long-term rental that he'd never sell. After 18 months and spending our own money finishing the garage, putting in new carpet, cleaning the air ducts, installing an alarm system, etc., we were given 45 days to find something else so the landlord could sell it.

The person who bought that house in your neighborhood probably had to put at least 30% down in this market, which for most people who buy these bottom-of-the-market homes is as much as they can afford. It may be more expensive for a few years to own, but once the market takes off again, renters really get the short end.

I had this same conversation with a friend who bought a home in Palo Alto during the last boom for $600,000. He just couldn't see doing it. But they did anyway -- family helped with the payments (something that either wouldn't happen or would be just lost with rent) -- and recently they sold for twice that.

I have elderly friends who rented for decades from a really reasonable landlord. They did save money because the landlord charged under market. But the landlord died suddenly and after all that time, the heirs served them 45 day notice to vacate. The disruption almost killed them, and I believe was related to ensuing health problems. Even there where they saved money, after all that time, they'd have been much better off had they owned the home, both financially and personally. There are some things money can't buy, and you certainly can't get stability in this area from renting. If you do, you're one of the few and lucky.

I am a renter and a former Stanford student.

To return to the original discussion, in an inflationary world, buying a house makes sense. It will be stretch for the first five years or so, but remember that the government understates the true inflation rate, which is at least 4% per year. Inflation rewards anyone with debt.

Remember also that the government will do anything to prop up house prices, including but not limited to printing money and buying mortgage backed securities.

Uncle Sam's current monetary policy can be summed up as follows: inflate until house prices stabilize. If you can't beat them, join them. I plan to buy a house within the next year so my young children will not be forced to move based on the whims of my landlord.

the houses around me that are selling for millions are worth zip in my book. I wouldnt buy a house now if you held a gun to my head... Prices will be going down.... Has anyone noticed all the layoffs in silicon valley and commercial space is renting for 50% or less from the height. I am selling my house at appraisal to the first idiot/fool who will buy it and am going to become a renter. Then I will take my profits and buy a vacation home in Hawaii. Silicon Valley is dying.. Deal with it.

So many owners here seem to be smugly jusifying their ownership. Everyone should have sold to a greater fool in 2006 , but most missed that boat. Many "good areas" in California have become glorified ghettos in recent years. I'm sure that Vallejo and Hayward seemed sweet in 1951. With California's problems , taxes may skyrocket and East Palo Alto may move west. I would sell , pocket the cash and either rent or buy in a few years if prices really fall. Few have quake insurance and an 8.0 quake could render your "castle" worthless. Cash out and live light!

Palo Alto sucks. I have relatives there, and it is a mind-numbing suburb of constant driving. I could almost understand living in SF, except it is equally overpriced, and flat out not worth it. You could probably live in Santa Barbara, or Obispo for less money, have more reliable sunshine, warmer beaches, see hot girls in bikinis all the time, and drive into the world's biggest oyster of LA in 90 minutes, although I would not choose to live in LA, where you pay just to not get carjacked by homies. CA is an unjust tax nightmare. Legacy owners get to pay nothing in property taxes while newcomers pay through the nose. I can't believe it hasn't been thrown out in court but there ya go. CA is overrated. Phoenix has most of the same amenities, the same problems but on a lesser scale, is way cheaper and way less a hassle. FOr that matter move to Flagstaff. Anyway, CA is overpriced period, the taxes and prices both.

From the above comments I see that many residents are desperate to defend the price they paid for their overvalued home. You can try to rationalize all you want, but you still have to find the greater fool that pays you a gazillion for your 50s ranch home. Given the current economy we're running out of fools, or at least fools with money. The tax deduction for your mortgage usually doesn't cover the cost of taxes, insurance and repairs to the home. What you you think will happen to taxes in Clownifornia given the current budget crisis? Yes, they will go up. After that, they will go up some more. After my lease is up I will head to greener pastures. You can stay in your million dollar ranch home paying $8K in mortage and an ever increasing tax burden while waiting for the greater fool to pay you 2 million. Sounds like a nightmare to me, but to each his own.

Re: housing values..

again, it depends on what kind of bet you want to make.

From 1980 to 2007, our house went from 120,000 to 1.6 million in value.

So, we watched in amazement as it did a steady state doubling every 5 years.

Even at the worst of the dump, similar houses were still selling for 1.3 million.

So the real question is..how much are you willing to bet the value of your home will increase, and by how much?

If you are willing to hold onto it for 10 years, I am betting it would be a heck of a lot better investment than renting.


Obviously, sometimes stuff happens. Anyone buying a home just a couple years before a 30% dump ( which has happened now 4 times here in the last 30-odd years...over the change in decade to 1980, 1990, after 9/11 into 2003, and now..). But people who have a long term view dont' look at their investments in the short "few years" view.

Investments are long term, not short term. And, so far anyway in California, the single best investment long term is real estate.

If I were in my 30s and ready to settle down, I would definitely be buying a home somewhere "good" now with an eye to keeping it at least 20 years...Some areas simply keep their value. Even if it doesn't return to it prior speed of increasing value ( which I doubt it will, but then again we heard that for the last 30 years "it can't keep going up like this!!!" also)..but still steadily increases in value even just at the rate of inflation, the leveraging of your investment is HUGE. $200,000 down on a 1,000,000 house..which increases just 3% per year ( which, though not a guarantee is certainly historically accurate for the entire century)..well, over 20 years what do you get on that 200,000 down as the home goes up 30,000 the first year and a little more each year after that for 20 years? And, in the meantime, you are increasing the amount that is "yours" in the house with every passing year, so that after 20 years most of it is "yours" which means you get more of the return when you sell.

Ok, nuff said. Those who can do the math and are willing to "take the risk" will do so, the rest will continue to rent, which make sense if you aren't sure where you want to put down your roots for the next AT LEAST 10 years.

But,whatever makes you comfortable, do it.

good luck holding these housing prices in Silicon valley over the next 20 years. with commercial RE in the 22% vacancy range and going to 30% plus, unemployment in SV at 16% going into the 20% range over the next few years, no job growth at all over the next 20 years, people are going to realize that 3BR 1500 sq ft homes are not worth 1M plus, let alone 3000 sq ft homes in the 2M range. prices will plunge by at least 50% all over SV over the next 5 years. And this comes from someone who saw and predicted the housing issue in the US and calif almost 4 years ago.

Prices can go up to whatever people are willing to gamble. Rents are limited by real monthly cashflow.

BTW U6 unemployment in SV is 16% - this is the real unemployed number... I have been studying the relationship of housing and jobs for almsot 4 years. the correlation should not be lost anyone. Check the decline in City, county and state tax revenues as well as Federal SS tax rvenues to see where things are going.

Silicon Valley ‘Bloodbath’ Leaves Buildings Empty (Update2)
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Dan Levy

Jan. 5 (Bloomberg) -- Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.

More than 43 million square feet (4 million square meters) -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space.

“There is a bubble bursting in much the same way as the residential market burst,” said Jon Haveman, principal at Beacon Economics, a consulting firm in San Rafael, California. “None of those towers will fill up anytime soon.”

Unemployment in the San Jose-Sunnyvale-Santa Clara metro area that includes Silicon Valley was 11.8 percent in November, down from the August record of 12.1 percent, according to California’s Employment Development Department. Applied Materials Inc. and Sun Microsystems Inc. in Santa Clara and Adobe Systems Inc. in San Jose announced more than 5,000 job cuts since October amid falling sales of computer chips, software and equipment.

Commercial property foreclosures will at least double in 2010 and job growth won’t return for two years after that, held back by U.S. consumers who are saving more and “getting back in line with sustainable spending habits,” Haveman said.

Domino Effect

Bloated inventory and tight lending standards will curtail office construction in pockets around California for “the next several years,” said Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles Economic Development Corp.

“That means there won’t be jobs for construction workers and hence no tax revenue from sales of construction materials,” Kyser said. “It is the ultimate domino effect.”

About 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise so-called flex or research and development space for offices or manufacturing, CB Richard Ellis said.

More than 4 million square feet of speculative office projects opened since 2007 as developers anticipated that companies would move from flex space into new towers, according to CB Richard Ellis. Empty Class A offices totaled 13 million square feet and vacant flex space was 30.5 million square feet as of Oct. 1, the Los Angeles- based broker said.

“Many of these assets have lost half their value,” said Dan Fasulo, managing director of New York-based research firm Real Capital Analytics Inc. “That’s a bloodbath.”

Start of Shakeout

Silicon Valley is in the “early innings” of a commercial property shakeout, said Erik Doyle, president of Cornish & Carey Commercial, a property brokerage in Santa Clara. The number of jobs in the information-technology sector that includes software and Web portals fell more in the prior year than in any industry except construction and mining, state data show.

Some technology companies are taking the opportunity to upgrade their space. Palo Alto-based Facebook Inc., the most popular social-networking Web site, signed a 135,000- square-foot office lease and a 265,000-square-foot flex lease. Solar-panel maker Solyndra Inc., which filed Dec. 18 for a $300 million initial public stock offering, broke ground on a new plant in Fremont in September.

Facebook will move into its new space in the second quarter, taking over four renovated buildings that used to house a medical-device company, said spokesman Larry Yu. “Several hundred employees” will occupy floors where lathes and centrifuges were once fabricated, and the company plans to keep its current office lease through 2013, he said.

Tenant Pressure

Property owners are feeling pressure from tenants who want to lease for at least 10 percent less than published rates, said Michael Grado, a CB Richard Ellis broker. That makes this market worse than the dot-com bust after 2000 because back then defunct Internet companies continued paying rent despite a 60 percent vacancy rate, he said.

Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis.

“You’ll see buildings turn over,” said Grado, whose listings include Riverpark Tower II, a 318,372-square-foot empty high-rise completed in July and owned by Foster City- based Legacy Partners Commercial Inc.

‘Cyclical Churn’

Riverpark II is the second-largest 100 percent vacant Class A office property in Silicon Valley. Oracle Corp.’s 381,000-square-foot tower at 488 Almaden Boulevard is the biggest, acquired in the 2008 takeover of BEA Systems Inc. Both properties are in downtown San Jose.

Moffett Towers, a complex in Sunnyvale with 1.6 million square feet, has partially leased only one of its six buildings. Owner and developer Jay Paul Co., based in San Francisco, completed them in 2008.

Legacy is showing the building to prospective tenants, said Lisa Morrissey, vice president of marketing.

Deborah Hellinger, an Oracle spokeswoman, and Matt Lituchy, a senior vice president at Jay Paul Co., didn’t return telephone messages seeking comment.

Silicon Valley may need new industries to emerge from the property slump, according to Doug Henton, director of Collaborative Economics Inc. in Mountain View, California. Clean technology and social-networking are driving what little job growth exists amid a cyclical “churn” where layoffs at large companies lead to new jobs at start-ups, he said.

“We’re at the end of the bubble,” said Steve Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. “It will take a long time to get the momentum going.”

To contact the reporter on this story: Dan Levy in San Francisco at [email protected]

Palo Alto shacks are gradually disappearing. In my neighborhood many if not most of the shacks being sold are being razed and new large homes are being built instead. Sometimes this is being done by a developer or someone who is not interested in living in the new home, sometimes it is bought by someone with no intention of living in the home until it is rebuilt.

Areas of Palo Alto with tract housing were built for blue collar workers. They are now owned by well educated white collar high tech workers, often from overseas, who are moving to Palo Alto primarily for the schools.

When we talk about the housing situation in the Bay Area, we are not talking about Palo Alto because what happens elsewhere is not the same as what is happening here.

The only people touting owning are home owners, Realtors, and suckers...bwahahahahahah!

Housing is a cost of living expense and incomes have not kept pace anywhere...yes, that includes PA. PA is set to be absolutely crushed when the Alt-A crisis is in full swing by the end of the year and into next year.

70%+ decline is in your future.

Cheers!

Californians wake up - You have the highest state budget deficit, the 3rd highest unemployment rate, the highest cost of living, the highest commercial real estate vacancy rate, the third highest foreclosure rate, the highest per capita debt ratio ...and the list goes on and on.


But according to the "homeowners" on this blog, plunking down 1 million dollars for an average home you could buy anywhere else for quarter of the price is still a "wise investment". The reason housing costs are so high in Ca is not due to "supply and demand" but due to the high level of stupidity amongst the populace.

There are some large houses here and there, but on average Palo Alto is 50ies ranch houses and Eichlers. I recently drove my friend visiting from Switzerland around town and she was very surprized at how old and unappealing most housing in Palo Alto is, especially considering the cost. There are a few exceptions in Professorville or Crescent Park, but on average Palo Alto housing looks depressing.

First off, The home price inflation in PA and many local towns started 10-12 years ago. (1998) when many flush with inflated new IPO stock gains (eventually worthless dot.com stock) overpaid for homes. None of these buyers really cared for price negotiations. After all.. it was like winning a jackpot and it wasnt their money. As the motto went "its free money after all". In the aftermath of the tech-stock bubble most used ARMs in hope that another round of IPOs would bail them out. THere were some 100 companies that went public with highly inflated stocks. But many never made it over the long run. Unless you have another round of inflated stock prices as in the mania back in 1999, you will PA prices fall over the long term. This time, i dont think you will find many who would pay 100x EPS.

Checking on current stats
Preforeclosure 44
Auction 51
Bank Owned 16
Total 111

MLS 50

There are several reasons for why a person would make the irrational decision to buy in Palo Alto rather than rent. Primary among them is shortsightedness. Now days, people have been cultured to have a "want now, get now" mentality. Combine that with with a "need to own a home to feel good about myself" insecurity and you get a "willingness to leverage at any price" desire. (However, it is banks that allow absurd overleveraging that is the true problem, but that is another story.)

In any case, if buyers were looking at the long term, they would realize renting in Palo Alto is better. Let's group the potential buyers. 1) Single young unmarried people- there is no reason for these people to buy other than status. 2) Couples with or planning young families. Their primary concern is schools for their children. Over the long term that is ususally an 13-20 year commitment through high school for the kids. These people can rent for the needed number of years and use the saved/invested money to buy a house outright in a more reasonably priced area. 3) The I have a local job families- Professionals usually plan a 30 year career before retiring. If their objective is to live in that area for the rest of their lives, have no real income to spend for 30-35 years, have a gambling addiction to appreciation, and they start at the very begining of their career (about age 26), then sure it might make sense. However, if you a professional and plan on working your 30-35 years, you're disciplined with your saving and investing, you ARE WILLING TO LIVE IN NICE COZY AREAS that are not central to the the commute (i.e. Milpitis, Union City, South San Jose, Santa Cruz,Seaside, Monterey), then it is better to rent and buy outright when you retire and your kids have used the schools in Palo alto for their education.

In addition to short-sightedness, there is also a strong element of a lack of education. Comes in a couple of flavors: 1) Foreigners coming for the jobs in the area, having more money than they have ever had, not studying market price compared to rent, and essentially being taken advantage of. 2) Home grown professionals who are experts in their field, but suffer from pride in not admitting they have not become educated buyers.

To be fair, there are those that are just plain wealthy. But most of them have people to do meanial task of negotiating prices for homes they buy.

I got this link from "Patrick.com," a site that specializes in highlighting the still delusional mindset of homeowners. The title of the link was "Palo Alto Owners Grasping at Straws, Trying to Defend Prices." It is so refreshing to know that there are still so many "not in my neighborhood" types who think that THEIR home is the exception. And the fact that you are Californians makes it all the better! You are, after all, the state that accounts for about a fourth of the bad loans in the country, and so many more to come!
Please continue your discussion, I have to go get some popcorn.

I agree that the era of windfall stock option gains is over. VC market is ailing. Yrear end bonuses at Google can't carry real estate market.
There is not much wealth from abroad coming here or to US in general, US dollar is weak and weakening. World has changed.

Now the question is whether US will have to unleash inflation or it will go Japan route and suffer from years of economic stagnation and deflation. Infation is much easier to manage than deflation. Inlfation will be good for those who bought before it kicked in and bad for renters. Deflation will be the other way around.

"The reason housing costs are so high in Ca is not due to "supply and demand" but due to the high level of stupidity amongst the populace."

The hype that has been generated in the past few years over living in PA now is beyond belief. Most of the new buyers have relocated from the east coast. As such they have built PA as some enclave. But only in their minds.

The local tech economy is less forgiving. As we have seen when prices of labor goes up, local employers go shopping for labor elsewhere. It is no wonder that many tech companies have moved and expanded operations elsewhere. Todays local tech headcount/employment is a fraction what it was in the 80s. HPs Mark Hurd has taken a spedgehammer into cost cutting and many long time HP employees find themself with lower salaries in different and unappealing jobs/careers.

"Inlfation will be good for those who bought before it kicked in and bad for renters. Deflation will be the other way around."

Our local economy is all about deflation. It has been for decades. Have you ever known any tech company which can boost prices because of inflation and pass it to their customers? It was easy to pay higher salaries when we had a boom in young industries back in the 80s and 90s. Eventually all industries reach a peak and ours was back in 2000.

Raw materials that go into tech products have gone up, but the end product prices have always been declining. It brings no joy to HP or Dell to sell Netbooks for $300-400 producing lower margins thus having to move further with cost costs (labor).

"And the fact that you are Californians makes it all the better! You are, after all, the state that accounts for about a fourth of the bad loans in the country, and so many more to come!"


Depends who you call Californians. Many who overpaid for these homes with bad loans were migrants from the east coast who bought into the hype. Its just like the Gold Rush of 1849. It would be incorrect to call them "Californians".

"Eventually all industries reach a peak and ours was back in 2000."

Correct - I am sure all the people in Detroit thought their empire was impenetrable as well and housing was, I am sure, selling at a premium.

And dear Clueless Californians (which I was for 20 yrs) please spare me the comments about "the weather" I moved to the NW and we have great weather with the exception of 3 winter months, at a quarter of the cost.

I detect a certain bitterness here from the renters. If renting is your thing, why on earth rent in Palo Alto at all? Rent a house in San Jose for ~ 2 K per month and use the savings to send your kids to better private schools (if you have kids).

Thanks for your concern and advice.

FYI: I have the Deed on my home, and we home school.

I believe the point here is to dispel the myth that "owning" a home is a store of wealth, and that housing prices "go up forever", that is a lie foisted on the younger generation by the selfish Boomer generation, but it is not flying so much anymore.

Palo Alto is so 5 minutes ago. Quaint, but dying.

When we rented in Palo Alto we had to pay taxes every year. Now that we own, we not only get money back each year, we can have our dogs.

A sign of things to come:

Recession Hits America’s Solar Industry
January 6, 2010 - 8:38 AM | by: Molly Line
The recession is having a glaring impact on America's solar power industry.
Demand for solar products has dropped globally, prices have plummeted. Complicating efforts to expand, the industry in the United States faces intense competition from foreign governments making massive investments in what many see as the future of energy.

Facing the difficult economic reality of competing on the world stage, Massachusetts based Evergreen Solar, Inc is turning to China. Lauded as a leader among green energy businesses in the state, the company is taking advantage of the subsidies, cheap labor and production costs offered in Asia.

It's a simple matter of dollars and sense......

New technologies are not being developed or produced in this country and Yahoo and Google are not going to need overpriced Silicon Valley .com workers to run thier Porn Search Engines when they can get them in India for 1/4 the cost.

"That you can itemize mortgage interest and property tax on your taxes. You cant itemize rent."

Yes, you can. It is called a home office deduction. Secondly you don't deduct the whole mortgage interest and property tax. No way. No no.
Otherwise how banksters would made their living. Study the tax code better...

Back to the original post, the differences b/w renting and buying here are not quite that extreme. The vast majority of mediocre rentals are advertising $4500 and up if you want a house, not an apt, and prefer to avoid green countertops or postage stamp yard. If you have a pet, please go really downscale, or pay up even more.

Frankly, there are MANY locations in the Bay area with excellent schools & neighborhoods, palo alto is far from the only good one... just go to the API results to see them all, and if you were to look at the East Bay (I know, god forbid), you can get a $600k 4/2 in a top rated district. I like PA just fine, but I think we'll buy in Belmont/San Carlos eventually because it's a much better deal AND great schools AND closer to SF.

Renting does suck, but shacks on little lots in PA are also not worth $1.3m+. Does anyone really think they'll be double again in 5 years? $2.6m for that shack? Not in any market.

Wow ... lots of comments, and lots of good comments.

I own my modest little home in Palo Alto, but If I were
thinking of buying today I would not buy, and the number
who can afford to buy minus the number who could afford
by have something better, ie. more profitable, to do with
their money is probably growing daily, sad to say. I would
downsize, there is not need for me to be ostentatious,
but that is just me.

For a short time I rented a house in Palo Alto too.

But, it is not fair to compare the rental and owning
experience, or at least take into account the differences.

If you rent you are likely to pay close to top dollar and get a
house that is not in very good shape. Many have moved or
upgraded and rent out their old houses instead of selling
them scrimping on maintenance and upkeep. They are not
in the best of shape, and some are really in the worst of
shape.

However, if you buy that which you do not like you can fix,
or rebuild if you have any money left over.

Trying to rent a house that is immaculate and perfect I don't
think many would be able to pay the rents or think that it would
be worth it, so the experience is not the same really.

Another thing I am reminded of from a radio program last
night is that in the past CA schools, from public through
community college to university used to be the best deal in the
country, so the cost of living here had benefits for those who
that was important to. According to a statement I heard CA
now ranks 49th in the country for education. Or course that is
not Palo Alto, but the schools are not as good, and the community
is not as close I think.

Not to mention the increasing traffic and airplane noise that I
posted a comment on a while back. The parks are not as nice
as they used to be as well, some of them are just embarrassments.
But we have lots more rich people behind gates. Drive up to
Foothill park if you have not in a long time and every inch of the
road is construction now.

I love the smugness of the owners on this forum. If you bought 30+ years ago - good for you. You rode a bubble and made a killing. (I would sell before it goes down any further - because it will!)

For those who repeat that tired old "supply and demand is all there is" argument: while that is a key factor, I have another law of economics for you: the law of diminishing returns. You think that $1.3 mil Eichler is going to $2.3 or $10 mil someday? Good luck. Demand is diminishing because prices are too high. Market economics 101. Prices are too high because of ridiculous loan products, and sellers have not adjusted to reality yet. I spoke with a guy from Santa Cruz in 2006 who believed his $1 mil shack that he bought for maybe $350k would be worth $10 mil within 10 years (i.e. 2016). I wonder if he still believes it.

To he who is proud of "not being risk averse" i.e. so very smart to have made a purchase 20+ years ago. Being lucky doesn't make you smart. The fact remains you made out on a bubble. Pat yourself on the back. Would you buy your own house for $1.3 purely on an investment? Would you buy it at this price at all? Put yourself in the shoes of someone coming in and then tell me why you think your price has support long term. Look at incomes and explain to me how someone making $100k (or even $200k) can afford $1.3 without an interest-only, ARM or other bubble-era toxic mortgage? Show me income data to explain what people can afford (don't worry, I have it).

Some make out on bubbles. Others buy in late and get crushed. The original post was talking about buying in NOW. I am in the buyer category in terms of income and stability of lifestyle, but I am not a fool.

Someone said that "the differences b/w renting and buying here are not quite that extreme and mediocre house rentals are $4500 and up " This is simply not true.
Check out craigslist rentals in Palo Alto and you will see that a 3 bedroom 50ies ranch house or Eichler - the one that sells for $1.3 M - rents for $3,200 on average.
So the difference between renting it and buying it are currently quite vast. Question is - what happens in 5 or 10 years....

Marcus, great post!

Midtown Resident

So maybe a 3 bed 50s ranch or Eicher are not what someone wants to live in. The one that sells for $1.3m can be razed and a very nice custom built home can be built for what, perhaps half that again. Then you have a very nice home built just the way you like it on a quiet street where you would like to raise a family. Alternatively, you have a very nice home on a quiet street where you could rent it out for %4500 a month. That sounds like quite a good investment.

Resident of Another Palo Alto neighborhood,
What is a good investment? Buying a $1.3 house, razing it and spending another $500-$700K to build a newer nicer house? So you end up with a $2M property that you plan to rent for $4,500/mo while the cost of owning a $2M house with property taxes and cost of debt would be $15,000/month???? So how is it a good investment?
You should invest in housing only if you can at least break even, but here we are talking about tremendously cash negative investments. It is a drain no matter how you look at it. The only thing that can reverse it is high inflation that would reduce your nominal debt in real terms, or another phenomenal dot come expansion.

PA Mom

I was actually making a light hearted statement at the end of my post.

What I am trying to say is that by buying a cheap tear down and building a custom designed home the investment is really invisible in that you are investing in the type of home you would like to live in rather than the cheapest rental property on the market. Buying a cheaper ranch house in a nice neighborhood and turning it into the ideal home for your family may be the best deal.

The cheap tear downs are little more than student rentals, or at least short term rentals for those who have to move out of a home for remodeling.

Many of the families moving into Palo Alto want a nice home to raise their children in. A nice home sends a message to their children that they are valued as well as teaching them how to look after their things better. Living in a home that is in poor condition sends a message of "not being quite as good as everyone else" when they see their friends' homes or nicer homes next door. A home that is well maintained gives children a better sense of wanting to keep their belongings, or themselves, well looked after.

The invisible investment is in the attitudes the family has by living in a well maintained modern home. Similarly, a modern car with modern safety features is a better family car than a beat up clunker without seatbelts or airbags from the 60s.

there are 3 primary reasons house prices skyrocketed here over the last few decades. 1. Income growth was huge as Silicon Valley went from no-place to tech center of the world. 2.The interest rates have been on a decline for decades. 3. Lending standards have also been on a decline, starting from heavy down payments and income checks and ending with zero down liar-loans.

Now let's see how the future looks. Silicon valley, save just a few great, new companies is moving out of here to Asia and the rest of the US at a furious pace, so likely not much income/job growth if at all for the future. See outsourcing trends. Interest rates can only stay the same, or much more likely go higher in the future. Lending standards cannot be any lower than the last few years, so money will not be any easier to borrow in the future, much more likely rates will go up.

With all that in mind, the only way houses will prices will skyrocket here again is if there is hyperinflation or collapse of the dollar.

I am a prospective home buyer who might be interested in Palo Alto. Let's look at the facts. As posted in Palo Alto Online today,

"A house on Cowper Street in Palo Alto sold for $1.1 million on Dec. 3, 2009. The home previously sold for $920,000 in June 2004."

In just over five years there was +90k appreciation. Hooray!

But,

-$65k closing costs
-$60k taxes
-$70k interest payments. (Remember if you can pay for a $900k home you are in the AMT zone and there is no mortgage interest deduction.)

Ooops. That is a $105k loss at a minimum, more than $20k a year. And because I now have only $100k left for my down payment, instead of $200k, I can only afford a $500,000 home when I move. That puts me in ghetto land anywhere in Northern California. So I buy for $900k in Palo Alto and 5 years later I have a $500k home. Tell me again why I should buy in Palo Alto?

Wow, there's some serious snark on this thread.

Couple of things--I was a very long term renter in Palo Alto with an undermarket rent. Unfortunately, it still would have been smarter to have bought. I used all those arguments the renter crowd is using--guess what? It may be idiots who keep up the home prices here, but there appear to be an abundance of idiots with enough money to buy.

I'm a native Californian and I can't remember a time when non-Californians weren't predicting the end of the Golden State. Sorry, I know the Northwest well--and, yes, the weather really is better here.

So, I do think the state government is a MESS and we need to revamp the state constitution so we have something that's actually governable. That said, the state has basic attractive qualities to it that will continue to draw people. And Palo Alto pretty much has most of them.

I don't say that with a great deal of pleasure because as a native I have my moments of wishing a large chunk of you would, er, go away. Out-of-staters who come here and whine nonstop are really irritating.

But I look around and I still see opportunity here and energy and inspiration. So, yes, there are office vacancies--in large part because there are strong incentives for commercial landlords to keep a building empty as a write-off instead of lowering the rent to a level where they can get a tenant--the vacancy rate is somewhat artificial because of that.

And, yes, a company like Google can indeed have an effect on local real-estate values. And it has.

"Remember if you can pay for a $900k home you are in the AMT zone and there is no mortgage interest deduction."

Uh, no. You can still deduct your mortgage interest under the AMT regime.

In any case, you can look at the $105K loss and compare it to renting. That's paying $1,750/month over the 5 years. Of course, that doesn't include insurance (~$1500/year) and taxes, which are around $10.5K/year for $920K. That still comes out to another thousand a month.

$2750/month for that house. What would be the rent for it?

Drawing a straight line though the past 30years of home price appriciation is not a good way to predict the future, which is what everyone seems to be doing. The trend is your friend, until it's not, you have to remember. The fact that housing here has outperformed many other investments in the past makes it more and more likely that in the future this investment will *underperform*. Housing prices here can grow faster than elsewhere in the US for only so long until the price differential cannot increase further....the PA houses are already 3-5x more expensive than elsewhere in the US where incomes are similar, how much higher can this ratio really go?

How does building or owning a McMansion communicate to your children that they are valued? Excuse me, but the acquisition of material wealth in the form of over-the-top housing or "toys" seems to send the opposite message, i.e., that you are only as important as the things you can show others you have. OMG - get a grip and real values. No wonder our children think they're entitled to everything without having to do anything.

Never said anything about McMansion style homes. Just that a well maintained modern home is better than a shack. Have you seen some of the shacks that are rented out? I think that the message one of those rentals gives is very negative to children.

A decent, modern, well maintained home, is very different to having the latest Iphones, BMWs, designer clothes or whatever else the current trend is. You can buy a nice home, but that is different from giving your kids everything they want.

Don't make assumptions. A nice home does not equate with materialism or toys. I think I would do my family a better investment if they have a nice home. I think I would do my family a grave injustice by giving them all the expensive junk that is out there.

Dear Parent -

Different people have different definitions of what makes a comfortable home. Our family believes that while a house is an investment, a home is a place to be comfortable, accepted and loved. Owning a home is an emotional decision, in addition to a financial one.

When I compare the homes of friends who are in rentals vs those who are in homes which they own, there is a huge difference in terms of updating, maintenance, decorating, landscaping, updated appliances, bathrooms and kitchens. To some this does not matter, but to many, having a comfortable home means having some of those things - or at least having the opportunity to invest in them. Most rental homes (not apartments and not the $6K-15K rentals) in Palo Alto are old, with old kitchens, baths, appliances, etc. I have a few friends in long term rentals who have been allowed to update as they saw the need, most have to put up with 15 year old appliances, worn out lawns and flowered wall paper. That may be a little thing to some, but important to others.

Just like having clean, neat clothing makes a statement, having a comfortable home does also. I'm not talking about McMansions and wealth but a comfortable family home where you have holidays, birthdays and memories.

We just sold our home because we still had lots of equity remaining, and ours wasn't the home we wanted for LITERALLY the rest of our lives. We don't know what the future will bring, and didn't want to be trapped in the wrong place.

We are currently renting a home that was purchased by its owner for $1.3M this past summer. Our rent is $3000/mo. People who think typical new rents in Palo Alto are $4500/mo. are dreaming. Even if (perhaps) that's the average asking price, just watch Craigslist for a while and notice that those prices stick around for months and then get dropped and dropped until a renter finally agrees to take the lease.

Ron Popeil was exactly right in his post. Sale prices are controlled by the buyers, and rental prices are controlled by the renters. With companies closing, salaries dropping, and renters leaving the area in droves, no one should expect a rental price boom like the dot-com era provided.

As renters, we can't believe how much money we're saving each month! It has actually given us pause about our plan to buy again. As it stands, we still plan to do so, but ONLY a house that we would be willing to live in until we die. This means we are taking our children and our future elderly selves into account simultaneously as we consider which home to purchase. That way, the investment will be relatively sound, regardless of unpredictable (or predictable) downturns in the market. Even if our home never appreciated at all, we would eventually pay it off and still be where we wanted to be. All of the homeownership advantages mentioned above (stability, predictability, right to modify, etc.) are real.

All of that said, it's kind of surreal witnessing all of the self-reassurance going on here in this discussion. There are no guarantees! I don't wish for anyone's dreams or investments to go sour, and confidence in one's decisions is great, but it's REALLY important to remember that nothing is truly certain, especially in real estate.

Thank you, Owner-to-Renter. What a gracious way to conclude this blog. Thank you all who responded to my original post.

Rent versus buy is the wrong question. Do you think we had a housing bubble that caused a 500k house to appreciate to 1M, or is this normal demand/supply appreciation ?

If you think it was the bubble - all bubbles from tulips to railroads or tech stocks are similar - when it is fully deflated, the 1M house may become again a 500k house, if we're lucky and it doesn't overshoot. It was a great investment at 500k - it is an equally bad investment now. Sure - the Fed is doing all it can to keep it at 1M, at least until next elections - so the question becomes if you believe
in markets or in government intervention, and how long can the government manipulate the interest rates. Eastern Europe lasted for >20years, maybe it'll work that long here too.

If you think there was no bubble and house prices will continue to appreciate, or that enough people will still believe that when you want to sell - then buying is the right choice.

Inflation is tricky - if food/gas prices increase it doesn't mean house prices or incomes will increase as well. I think house prices go up only if people have more money left for housing - inflation also means higher interests, I doubt a lot of people will be able to see an increase in income big enough to compensate for higher cost of living and higher interest rates.


If you can afford to lose your downpayment money - than yes, it is only a question of comfort. If losing few 100k matters for you more than an old carpet/appliances - renting may be for you.

I bought a house because I was lucky to have enough savings (after renting and investing for many years) that I can survive losing 300k - keep in mind that you only lose your down-payment and credit score, Fannie and the Fed and the taxpayers are taking most of the real risk if you buy. That's besides the taxpayer subsidy in tax deductions. The big question is how much more can the government borrow and what will happen when we have to pay for all this, because us or our children may eventually have to pay the debts.

"In any case, you can look at the $105K loss and compare it to renting. That's paying $1,750/month over the 5 years. Of course, that doesn't include insurance (~$1500/year) and taxes, which are around $10.5K/year for $920K. That still comes out to another thousand a month."

Even less. He already included taxes on the initial loss (that's where the $60K in taxes comes from since there would be no tax on the capital gains. By the way, that $60K would be deductible as well, so it actually wouldn't cost that much).

If I was able to afford an $8k month mortgage, I'd live in a motor home in a dot com parking lot, shower at the YMCA and retire in one or two years.

Besides, I don't see many Gen X or Y on the positive income track to buy out these homes at the coked-out appreciation rate in 10-20 years. Inherit maybe (with bucket loads of estate tax tacked on). Buying? No.

I think Resident and Palo Alto mom both get at the other reality--a house is not just an investment, it's where you build a life.

A lot of you would have loved the rent on my long-term rental, but in order to keep that rent down, we were leery about asking for improvements. We had a really nice landlord and an excellent relationship. Nonetheless, our kitchen was ancient, the bathroom fixtures were chipped, the tile broken, the foundation cracked and the carpet stained. The carpet was replaced, but we went more than 10 years without a paint job and no central heating.

We took care of the place and made various upgrades and repairs ourselves. It was, however, a dump in a good zip code. I had friends in nicer rentals, but numerous times they had to move--rent hikes they couldn't afford; the owner decided to sell; the owner had kids to whom they want to lease the place.

Every time they moved, there were moving costs and some sort of rent increase. Yes, things are better now--but the rental market here can turn on a dime and has. If you're raising a family, buying means you can make plans.

Do I expect record increases in value? No, not at all. Do I see a huge drop coming? No, sorry, I don't. I don't see indications that the city has been overbuilt in the way the Central Valley, Las Vegas and San Diego have been. We're still a place with more jobs than residents.

The one thing that I could see really hurting my home's value is, ironically, fixing the state government so that there are decent schools across the state instead of in just a few enclaves. It would probably, however, make Palo Alto a nicer, more community-oriented place to live.

I rent a VERY nice place, very much a home. The appliances were brand new when we moved in, and are very nice stainless steel, it has close to 2000 sq ft, a two car garage, beautifully landscaped courtyard and shared areas (it's a townhouse). The master bath is huge, it has a whirlpool tub and a walk-in shower with glass walls. Two decks, one with views of the entire SF bay (and open space on the other side), brand new carpet when we moved in (that was nearly three years ago, and rent has not gone up). Not PA but very close, up the penninsula a bit. The owner paid nearly $1 mil in 2006 and we rent for $2750. Even if this person put down 20% and got a conventional mortgage we pay less than 1/2 the cost of owning. They also have HOA of $435, taxes, insurance ETC. Sure there's a write-off, but it barely makes a dent compared to all that.

So the arguments about rentals being crummy and owners houses being better - well, must I go on? Sometiems that true so the renter needs to shop a bit - otherwise it's all a rationalization and if it makes people feel better, that's fine.

Owning is great. Making a permanent home is wonderful. Doing it as financial suicide, not so much.

A few facts:
1) If you sold a house 3-4 years ago and then rented you hit the jackpot. You did not have to eat the loss on a new home.
2) If you sold a house 3-4 years ago and bought again you gained nothing. In fact, you lost. The more expensive the house you bought, the more you lost.
3) Newer neighborhoods have more defaults because the houses were purchased nearer to the peak of the bubble, but the drop in house values is across the board.
4) There are enough houses that will be foreclosed on in California alone to fill a medium size city.
5) The price people will or can pay for a house will continue to drop.
6) Housing is a good investment until it's not.
7) Now it's not.
8) Renting is good.

The comments from all of you outside of PA - it is very true that in most places you can rent a very nice home. I have friends in San Carlos, Belmont, San Mateo and Mountain View who have nice houses that they rent. The people I know who rent in Palo Alto for around $3K live in run down houses. 1950's bathrooms and kitchens (with the occasional dishwasher connected to the sink by a hose), old, stained carpets, cracked driveways and either flowered wallpaper or really old paint.

There is no contradiction at all - $3,300 rent gets you in the house that otherwise sells for $1.3M and costs you $8,000/month. $4,000+ rent gets you in a nicer house that otherwise sells for much more and costs you even more.
The point still stands that there is about $5K of additional costs if you buy.
Property values might not have a decent price floor and won't drop significantly, but they won't grow 10% a year perpetually either.
The gap between cost of owning and cost of renting has to narrow, but not sure how. Renters who rent now for $3k - $4k/month can't afford paying $8K rent to allow new owners to break even. Don't see salaries doubling in any near future either.

yes, $1.3M buys you a pretty crappy house in Palo Alto to begin with, with 1950's bathrooms and kitchens... totally drab looking.

We own a 1950's Eichler that has been remodeled extensively. We bought it for $300,000 in l992 and today houses in our neighborhood go for $1.6-1.7 million. But there is considerable maintenance with a house this old. New roof - $15,000, new heat $ 20,000, new hardwood floors $15,000, new driveway $10,000, New double paned windows $35,000, remodeled kitchen $35,000, three remodeled bathrooms $35,000 and that is just the basic list. There are still many more projects to do ... so if you are not willing to sink a lot of money in these homes then don't buy in Palo Alto. We love the community and its people but for $80,000 you can buy a brand new huge home on a large lot in the midwest - St. Louis, Indianapolis, or Kansas City.

One of the things that's not getting factored in here on the rent v. buy argument is the cost of schools. Yes, you can buy and rent cheaper in Mountain View, but you can't count on every school in the district giving your kid a solid education. MV parents do workarounds--some got into the charter, others I know started in the public system and switched to private.

I have friends who bought in Sunnyvale--they're looking at 13 years of private schools. I have a friend who has a large house in San Jose--kid went through a supposedly decent public elementary school only to find out that her child was about year behind her peers in Palo Alto and Saratoga. She paid for tutoring so that she could pay for private school. She also seriously looked at renting in Palo Alto and renting out her own home.

In other words, the uneven quality of the schools around here means you jump through hoops. You have to get your kid into the private school and then you pay $20K to $30K a year to keep them there.

So back to real-estate math--you have two kids in private school--that's $40K to $60K a year for 13 years off the top followed by college tuition.

There's your mortgage difference right there--and unlike private school tuition, you have a chance of getting your investment back at the end of it.

So, given the school tuition issue, you're then back to the rent v. buying in Palo Alto. Renting can make sense--particularly if you have to take out a reckless mortgage to buy here--but renting longterm means that you can't take advantage of any market increases in value and you can get hit by some pretty nasty rent increases. And, once again, your rent is gone--you don't have a chance of seeing that money again.

But you do if you buy and don't have to sell under pressure. For that matter, you can actually sell at a slight loss and still end up ahead of where you would have been with just renting and taking a hit on the stock market or buying elsewhere and absorbing the private-tuition loss and the even greater drop in home equity.

So is it a good time to buy right now? Depends on the deal you can get. There's no point in talking about the state as a whole--buyers in Modesto and buyers in Palo Alto aren't the same group. The better question is to consider whether there's enough of a price differential between Palo Alto and a comparable area but with less-consistent schools to make it worth while to buy in another town and then foot the private-school bills.

It's going to be different for different families. But if you have three kids close together in age then that 1.3 million ranch house is going to look better than you might think if you've no kids. And, yeah, if you're an empty nester it makes no sense to buy in Palo Alto.

And guess what? Empty nesters don't.

"One of the things that's not getting factored in here on the rent v. buy argument is the cost of schools."

Cost of schools is the same if you rent or buy.

Yup.

OhlonePar, I can't follow your logic.
Firstly, you can't use school argument in rent vs buy decision. Either way you get to use PA schools. One even can argue that it is better to rent until your kids graduate from school and then move to lower cost area where there won't be such a huge premium because of schools.
Secondly, you are saying that "renting long term means that you can't take advantage of any market increases in value and you can get hit by some pretty nasty rent increases". Value increases is a questionable thing by itself, but you seem to completely ignore incremental cost of owning ($5k/mo of additional costs, as mentioned in aboev examples) and opportunity cost of money. You need to realize that money has opportunity cost, even downpayment money could be earning interest depending on the risk profile of the investment they are put in.

I have never bought into the rationale that the reason properties in Palo Alto are so valuable is because of the local k-12 schools. I think it is about the weather and Stanford (and other Bay Area universities). San Francisco has very high property values, but lousy public schools. The rich and upper middle class in SF send their kdis to private schools. If PA schools were to drop in quality, it would have a barely perceptible effect on local property values. It might even have the opposite effect, since many people try to rent in PA, in order to get their kids in our schools. These renters and even dense condo developments act to lower property values in PA. Think of it this way: Close all the public schools in PA, and what happens to property values? I say they go sky high.

That $8K/month cost of ownership number is exaggerated. People quoting this number must be assuming 5% down. With ~30% down, mortgage will be ~ $5.7K/month (including ~1K/month that you are paying to yourself in the form of principle payments) and property tax is completely offset by mortgage interest tax deduction. Difference between rent and buy will be ~ $2K ... possibly a lot less if you have more than 30% equity. As an example, if your mortgage balance is under $730K, you can currently get no cost fixed 30-yr loans at ~ 5.25% ... makes mortgage cost ~ $4k/month... or $3.2K/month in interest. How much do you think rent will be in 10 years, 20 years, 30 years? "opportunity cost" of equity tied up in a house is hard to determine as it depends upon future trends in interest rates, house prices, rents, tax policy, stock markets, etc. Your house is leveraged so a 2% increase in the house price corresponds to a 4% TAX-FREE return if you have 50% equity in the house. Other alternative investments might do better or worse in a given time period ... and taxes will take a big bite out of gains in the future. Of course leverage works against you if house prices decline so you shouldn't prudently put all of your money into leveraged real-estate. You can argue all day about financial and intangible aspects of renting vs owning, but anyone who says the financial aspect is a "no-brainer" hasn't done a very thorough analysis or else is over-confident about their ability to predict the future. It may go either way depending upon your individual situation and what the future holds.

If PA schools were to degrade significantly in API scores ... property values would likely sink, at least in the lower to middle part of the PA market. These homes are being bought in large part by families with children for the schools. Check the ethnicity of the majority of recent buyers and you'll find a significant influx of asians in South PA... they are not coming for the weather. Is the weather or proximity to Stanford really that much better than in Mountain View, Sunnyvale, San Jose, etc.?

Kent,

Yeah, it's the schools--not the only thing, but that's a big part of it. Proof? Look at the prices in areas that are comparable except for the schools. Redwood City has lovely weather.

It's not just here, it's something you can track in other areas as well. Schools add value.

Resident, nothing-makes-sense,

I'll clarify--if you rent, you're not investing, you're not building up equity with that rent money. Long-term that doesn't work well for most people. To build up enough of a nest egg for retirement, you pretty much need the leverage gained through a house purchase. Putting it off for 15 years while you rent in Palo Alto to put your two kids through school is 15 years of lost equity.

So, it comes down to this for people who aren't wealthy and have kids:

1) Buy in an expensive area with good schools. Disadvantage--huge investment that may not pay off. This is where questions of affordability come in. And the numbers are different for different people.

2) Buy in a more affordable area with poor schools. Disadvantage--if you care about your kids' education, you pay for private. There will be no financial return on the hundreds of thousands it will cost to send your kids to private schools.

3) Don't buy, but rent in expensive area with good schools. Disadvantage--you get no possibilty of a financial return on the hundreds of thousands of dollars you pay in rent and you put off building equity through home ownership.

Basically, it makes sense to rent, not buy, if you're convinced that the real-estate market here won't recover during your intended time of home ownership. On the other hand, if the local market performs anywhere near its historical norms, we'll see down cycles followed by booms that average out to a nice gradual increase over time.

One other thing, if you're convinced this area will continue to tank, I'm not sure what you think the good investments are (the ones that will compensate for the money lost in rent payments) given how closely tied the home prices in this area are to the overall performance of the tech sector.

"If PA schools were to degrade significantly in API scores"

Take those same Asian students, with their parents, and the API scores will go up at any school on the Penninsula. Palo Alto attracts hard-driving as well as wealthy Asians, due to Stanford. Just shut down all public schools in PA, and the Asians will still come here. So will hard-driving and wealthy individuals from other cultures.

Palo Alto citizens have always wanted to think it is about them. It is not. It is about Stanford, and it always has been. And it will continue to be so.

Don't forget the weather. And don't forget to purchase a home, if you can. If you do, you will end up very content.

Of course it is the schools why people move here. But, of course it isn't the schools themselves.

Let's face it. The schools are good because of the people who live here. The type of people who are attracted here because of the schools are the same type of people who are already in the schools making them the attraction they are.

It is a bit of a chicken and an egg situation, really.

Close down all the public schools in Palo Alto, and the property values will increase. Close down Stanford, and property values go to hell. Pretty simple, really.

Redwood City is not next to Stanford. Menlo Park and Palo Alto are. More importantly, Stanford professors like Palo Alto and Menlo Park and Atherton more than Redwood City. San Francisco is the proper example of the elite driving up property values in the face of bad public schools...they just send their kids to exclusive private schools.

The question isn't whether it's better to buy or rent in Palo Alto (clearly it was a good idea to buy 15 or 20 years ago), but whether it's better to buy or rent RIGHT NOW.

With that in mind, I think it's safe to say that paying 1.3M for a modest, 60 year old home that rents for 3300/month is a very bad idea. Many people mentioned the intangible advantages of owning, but there are also many advantages to renting. For instance, as a renter, you sacrifice stability for flexibility, and with the economy the way it is, I think many people would rather have the flexibility to move or lower their monthly costs if either becomes necessary.

Reading through the comments on this site, I was struck by how similar they were to what you'd hear in every other bubble inflated neighborhood. You hear all the same stuff in Irvine or Solana Beach or Santa Monica or wherever. Most of these people either refuse to acknowledge the housing bubble, or simply believe that their own neighborhoods were unaffected by it. Even here in San Diego, I have friends who still believe their modest, suburban tract house is worth the five or six hundred thousand that they paid for them. The lower tier homes dropped by as much as 50%, but they don't think the same thing will happen in their neighborhoods.

I also want to add that my parents were renters before buying a home in the early 90s. As a kid, it made no difference to me at all. Some of my best childhood years was spent in a Palos Verdes rental with a beautiful view of the ocean. The owners of the house were lovely elderly couple that took me and my siblings to museums a few times. I'm sure some rentals are really awful, but you can always move if you don't like it. And rental laws, for the most part, seem to favor the renter over the landlord.

If you have young kids, you may want to consider some areas which are attracting a younger, well educated, population. Palo Alto is not the epicenter of the universe and in fact the culture may not be healthy for growing up anyway. I think a kid who is in the top 10% of their class at X high will have a better foundation than the same kid who will be average at Paly.

The problem is home prices and rentals are still overpriced throughout the peninsula. It's a drag spending almost all of a professional income on a garbage post WWII tract house and subsequent overpriced utilities.

Housing is historically 2-3x income. Palo Alto median household income is about 150k. The median home will drop from its current value of 1 million to about 450k. The housing market should eventually bottom out sometime between 2027 and 2033. It's all about cycles, folks.

Is it just me or are rents going down? This is my impression for Saratoga and it seems the media has picked up the story as well.

Mortgages are unlikely to go down from here.

Last time before the big boom in real estate it seemed to me that rents spiked prior to real-estate ramping up.

At that time everybody was moving to SV to participate in the dot-com boom. People were even forced to stay in hotels, it was that tight. Rents spiked in response but real-estate was still in the doldrums from the previous crash in the early 90's.

At that point it was cost-effective to step over from renting to owning. If you did so then in the following years you would have been rewarded a big runup in real-estate. Right now the situation is the reverse. Renting on a per square foot or per quality basis is far less than owning.

The real wonder to me is that anything at all is available to rent. If I owned the 50 year old 3/2 I would definitely try to sell for 1.3M rather than rent it for 3300.

Kent,

By your reasoning, there shouldn't be a huge difference between housing prices in EPA and Palo Alto. Both are close to Stanford.
And, honestly, Stanford faculty isn't in a position to drive housing prices around here. They're not buying those $1.8 million homes--why do you think Stanford has a faculty ghetto? (And has for decades?)

Hate to break it to you, but Palo Alto had good schools prior to the recent influx of Asian immigrants. It's always been an academically oriented community (in that sense, yes, Stanford matters). Also, key, however, is the willingness of Palo Alto residents to pass bond issues and measures to pay for their schools.

Asian families that care about schools come here because the community's willingness to pay for schools in a city that has sustained a strong school system.

Basically, it's one of those odd long-term effects of Proposition 13.

San Francisco's not a good comparable--it's a city that attracts singles. Palo Alto attracts families. Though I do know a couple who bought in SF a few years back because they couldn't afford Palo Alto--they just put up with really long commutes. (Kids are grown.)

Resident, yes, of course it's self-perpetuating, people who bother to buy here care about education, which means they fund it, which brings more and so on.

Which is an argument in favor of PA not seeing a huge drop in housing prices--decent school districts are scarce in California because of the funding issues.

Also, because schools are a big part of the equation here, people with kids can't really wait for the optimum time to buy. They buy when they can.

san diego observer,

Why buy right now--low interest rates and a buyers market. Yes, prices are softer than they were and some people are delusional about the value of their homes. That said--the original scenario said the ranch house sold for $1.3 million--if it sold recently for that then that's its value.

Is Palo Alto a great bargain? No, absolutely not. It's reasonably solid as real-estate markets go, but other places will see a steeper rise.

no brainer,

You're ignoring some basic stats here--Palo Alto has a large senior community--their incomes are low, but their assets high. Palo Alto also has a large number of students--lower incomes, but transient.

Remember, Palo Alto is not a large city--there's only a limited amount of space on which to build. Most people are predicting inflation, so I wouldn't expect a million-dollar home to drop to $450K any time soon.

And the housing cycles in this area are much shorter than what you suggest. More around 15 years overall.

freeyourmind,

Because it costs so damn much to buy here, people will hold on to property if they think that it's at all likely that they'll come back. Plus, there's a steady demand for rentals here--Stanford, people renting for the schools--that if you've owned the house a long time, it's a decent income generator. If renting more than covers your mortgage why not hold on to the house you bought 15 years ago for $250K?

I would guess that there are many people living in palo alto who are subject to alternative minimum tax.

This may partially account for the amount interest people are willing to pay to banks in order to own their home, among other factors already noted above.

After all, why would you give money to the government for nothing, when you could give it to a bank and get a house?

renting is probably better for people who have to stretch to try and get into a good school district.

or perhaps purchasing a brand new D.R. Horton townhome.

as to the $1.3m Eichler... where is it located, what is the lot size?
it might be worth it to someone...

:)

Dan in Midtown definitely needs Finance 101 refresher... Amount of downpayment does not matter, it is cost either way. Downpayment has opportunity cost - you can invest it in 30 year bonds yielding same 5% or real estate investment trusts, if you want real estate risk or higher yeilding corporate bonds. It would be "apples to apples" comparison as long as risk profile is similar.

I grew up in Palo Alto as one of the few Asians. Academics has always been a priority for parents here. There are just more Asians coming to America now and they prefer public education and they look for the highest API scores. Those who can afford it, move here. Otherwise, they move to Fremont or Cupertino. Close the public schools and I can guarantee they won't be interested in Palo Alto, nor will any other young families be interested in moving to Palo Alto. Home sales would decline here if there were no public schools. With PA mortgages, many could not afford to send their children to private schools.

It's a shame that in the 1970s we had 7 additional elementary schools which were either razed or not being used as elementary schools: Garland, Greendell, Van Auken, Crescent Park, DeAnza, Ortega, Ventura.

We really could use Cubberley as a high school again but without a nationally known reputation, parents won't want their children to attend.

Re the initial topic, I wouldn't want the instability of renting or the lack of flexibility of updating the house.

"I wouldn't want the instability of renting or the lack of flexibility of updating the house" - perfectly fine argument, though in my books instability of renting is not worth incremental $5K/mo. As far as flexibility of updating the house - I am sure any landlord would be happy to let you remodel on your own dime.

Owner,

Doesn't make financial sense to do an extensive remodel on someone else's property--and, no, a landlord is not going to let you build an addition or add a bathroom on your own dime. Get real. You're going to float a $100K loan to do an extensive remodel on someone else's property? And banks are going to give you that loan?

The $5K, again, is a dubious number. That's what someone would pay who couldn't really afford a $1.3 million home. The $8K a month is more than double my own mortgage, but $1.3 million isn't double what I paid for my house.

In some sense there's some confusion about affordability here. It doesn't make financial sense to put everything you've got into your house in Palo Alto--and I do know people who've done that.

If, however, buying a house in Palo Alto doesn't mean tapping out your other investments then it's not a bad place to buy and live. You do trade house size for convenience and good schools--but people have made that kind of trade for a long time--thus, we pay more to live in Manhattan than Rochester.

So, rent v. buy--the choice is between giving away $3300 a month and investing the remainder (In what? Gold?) v. investing $5K to $6K a month in a single property.

Again, the pro-rent crowd is assuming that there's a very good investment somewhere that will make up the $3300 a month you're losing in rent.

So what investment of $60,000 offers a return of $40,000 on an annual basis?

Beware of OhlonePar (a realtor) promising a return of $40K on $60K real estate investment in Palo Alto housing!!! Run!

"That said--the original scenario said the ranch house sold for $1.3 million--if it sold recently for that then that's its value."

Well, that just about says it all, doesn't it?

[Post removed by Palo Alto Online staff.]

I'm not a Realtor--in fact, I'm on the record saying that I avoid voting for them.

But it's not a question of promising a $40K to $60K return on real-estate--though, actually, by the time you sell a place--a $40K to $60K profit is actually pretty small--less than a 1 percent increase on a million-dollar home's value in an area that has averaged 3 percent annually.

My point, however, was very different. If you pay 3300 a month in rent, you're paying close to $40,000 a year in rent and getting none of it back. Period. One of the things people are arguing here is that it makes more sense to spend $40,000 in rent and then invest the remaining $60K saved from not paying for a mortgage to make up the difference.

My point is that there's a big difference to be made up--and the rate of return on that $60K has to be pretty high to make up the difference of giving away $40,000 a year to your landlord.

It's basically all about leveraging--providing you're in a place where the bottom didn't fall out of the real-estate market--which is a real if.

Kent,
[Portion removed by Palo Alto Online staff.]

Stanford did, in fact, collapse in an earthquake--the 1906 one--too much unreinforced adobe. They rebuilt, which is what, of course, would happen now. Though, of course, there's been a huge effort to bring Stanford up to code--it also sustained damage in the '89 quake. That was a nuisance, but had little effect on Stanford.

As for the schools, the proof's in the historical pudding--Palo Alto had high scores long before the recent Asian influx. [Portion removed by Palo Alto Online staff.]

I do think one of the things that does factor into the high housing prices here is that both whites and Asians feel comfortable sending their kids to schools here. People prefer not to have their kids be the token minority of whatever hue. Some Asian parents have also said online that they don't want their kids to attend all Asian schools because they want them to know how to get along with non-Asians and they, themselves, don't like the grades-and-Stanford-at-any-cost attitude associated with some schools in Cupertino and Saratoga.

OhlonePar,

You are right. I am not from Palo Alto. However, I did move here in 1965. I raised my family here. I have seen a lot trendy things in PA. How 'bout you, when did you arrive? What do you really know?

Adding to the pointmade by Ohlonepar about people prefer not to having their kids be the token minority of whatever hue, but also majority of whatever hue. Palo Alto parents truly value diversity here and white parents wouldn't want their kids in an all-white school. Same goes for Asian parents who wouldn't want their kid in an all Asian school. But the premium people pay for the great schools is not that high as some argue. Take the better part of Menlo Park as an example. They have not so great high school yet as expensive housing as in Palo Alto.

Kent, [portion removed by Palo Alto Online staff]

I value good ethics/morals and hard work, period, regardless of "grouping".

Every period in this great country's history has given us an injection of yet another group of hard working, good people. I don't care where they are from or what the color of their skin is, I am simply grateful we keep getting better.

May as well start stereotyping on Astrological birth signs for all the worth of your post. Are you a Gemini by chance?

Kent,

There are high tech companies around here, Cisco and Juniper as examples where you enter and your jaw simply drops at the sight of the work force!

90% of the employees are Asian. Yes let me repeat 90%. Folks who are not in the tech industry have not seen this sight and are simply oblivious to this. BTW these are legal immigrant Indians/Chinese. If you have never entered one of these buildings you will never know.

These are few high paying jobs left in the bay area and requires focused attention to education. Demographics have changed in the bay area with Cupertino (Asian) and Fremont (Indian) having schools better than Palo Alto.

Kent your comments are NOT appalling. The facts are appalling.

A recent town square thread from someone seeding advice about moving to Palo Alto for the schools Web Link speaks to some of the Palo Alto school issues, much of it seems to boil down to depends on your kid, depends on how much support you can give them, it's highly competitive, and it's not for everyone.

So I think we have the answer.
Those who chose spend the extra money to buy rather than rent, seem to have a few different motivations.

-Financial, they believe that since PA real estate has been a good investment in the past (ignoring the last year or so) that it will be a good investment in the future.
They are speculating that the 1.3M 50 year old house will build equity enough to justify the extra money thrown away on interest payments and maintenance.

-Social Some apparently feel that owning will make you feel a better person. Wow, that's a lot of money to feel good, all it takes me is a sixpack. Some feel that your kids will feel better about themselves if their parents are owners. So the extra money is spent to impress an eight-year old? Personally I want my child to realize that the world is a big place and on the scale of things he is extraordinarily lucky as it is. He will just have to suck it up when he has to be driven around in a Jag instead of a Bentley. He will have to conceal his shame when he realizes his parents are only renting the 3500 sq ft McMansion in a great school district instead of renting the money to pay for a tiny ancient shack in same school district.

-Stability This is in the only argument that makes any sense to me. I personally doubt the financial argument, am appalled by the social argument but can accept that if you rent you may have to move from time to time. Is that worth the premium? Not for me.

geez,

[Portion removed by Palo Alto Online staff.]

Asians dominate the sciences, because they value science education more than other peoples. They work hard and focus. I think the US Postal Service should make a new stamp celebrating the Asians in this country. The rest of of could certainly learn from them.

The fact remains that Asians, specifically Chinese and Indians, are improving our school system. Asians will dominate Palo Alto real estate within one generation. Maybe at that point they will also dominate the local politics, and we can finally get some pragmatic thinking on our city council.

If other cultures want to succeed in the high tech industry, they will need to compete. Affirmative action does not work in that environment.

Palo Alto's future is an Asian future. That will have the effect of maintaining or increasing property values in PA.

Kent,

"..... Asians, specifically Chinese and Indians, are improving our school system. Asians will dominate Palo Alto real estate within one generation. Maybe at that point they will also dominate the local politics, and we can finally get some pragmatic thinking on our city council."

I disagree that any particular ethnic group improves the system.

Some Asians may be improving the test scores, but I'm not sure that means the teachers are getting better because of Asians, or the curriculums, or the average experience for kids who now have a hyper competitive environment, to barely keep up with the tutoring and pumping up that many high test scores of ALL ethnicities are known for.

As for politics, are the Asian political systems superior to the American system? They would bring pragmatism? Two recent school board votes from the two Asian board members on the Everyday Math controversy were mostly politics.I guess it was pragmatic for them.

expensive,

In an unkowing way, you are proving my point that Asians will continue to dominate in Palo Alto.

"the average experience for kids who now have a hyper competitive environment, to barely keep up with the tutoring and pumping up that many high test scores of ALL ethnicities are known for"

If your average kid(s) do not develop a competitive attitude, they will not continue to live in Palo Alto, unless you set up a trust fund for them. Trust funds do not, generally, last for more than one generation, if the recipients are not willing to compete.

Asians are defintiely improving the system. To deny this is to ignore their great efforts, thus denying them. What other ethnic/cultural groups are competing with them at this moment in history?

I am not Asian, but I do detect a certain racism in trying to declare Asians no more successful and driven and focused, compared to any other group.

The bottom line, going to the original post, is that Asians will preserve and increase property values in PA.

Kent,

"Competitive attitude" these days is also related to crash and burn. You are real old school, you pick an ethnic group and choose which one will increase or decrease the value of your property, fair enough.

As far as I can tell, it is much better to rent than to buy in this situation. And that is despite all of the ridiculous mortgage interest deductions our government allows us to take out. I used the NY Times calculator to determine the differential between owning/renting.

You can check it out here:

Web Link

My assumptions:

Monthly rent: $3300
Home Price: 1,300,000
10% down payment
5.1% mortgage rate
Rate of return on investments: 3% (conservative given longterm outlook for US right now is poor)
Income tax rate: 35% (you must be loaded to own this home)
all other assumptions have been left at their default values

Over 30 years, there is no advantage to buying.

expensive,

Yes, I am old school, because I am relatively old, and have experienced quite a bit. I am not impressed with trendy atttitudes that deny the reality that is front of us.

I haven't noticed that Asian kids are crashing and burning. Mostly, it is the non-Asian kids doing that. There will always be some exceptions, but I am very impressed by the Asians. The crash and burn types will need to move out of Palo Alto, and apply their skills to practical endeavors other than high tech. At a certain point, not too far in the future, they won't even be qualified to run for our city council.

I certainly do pick the Asians to increase my property values. What is the problem with declaring the facts, as they are?

BTW, I have been remiss in not including the Vietnamese in the Asian group, along with Chinese and Indians. I would bet that one of the most common names in top level science fairs, in the Bay Area, is "Nguyen".

Hi All,

Has it ever occurred to any of you that the phenomenon of high prices in the bay area (especially palo alto, los altos, cupertino) is a phenonmenon of naiveness?

And being a foreigner (1st ot 2nd generation) is highly correlated to being naive.

It's like coming to stanford in the year 2000 thinkging: I'll have my own microsoft. (most foreign students felt like that) Or like buying a house in cupertino in 2007 for 1M thinking: I'll make 300K in 3 years! (most foreigner home buyers were certain of this).

Face it ppl. It's not so samart to overpay for something. It's just plain naive. (and it's pretty easy to be naive having only 1 generation of experience in this country)

so now PA Online deletes an innocuous statement like "I am appalled at your comments, which I see, at the best, as stereotyping "??

What in the name of all that is good is wrong with stating an opinion that someone is stereotyping?

Heck, it is a significant sight better than the word "racism", which I have never seen deleted and which is freely thrown around and accepted when someone is disagreeing with POLICIES, when those policies happen to be promoted by someone not-white.

All I can say is..Good Grief! I think you need to re-think your deletions policy. It is a bit over the top.

Tell you what..to make a point here..simply to show a little of what is appalling..assume for a moment the absurd, and let us pretend that the "asians" were 80% of the prison system, on welfare for all needs, had a 50% HS drop out rate and 70% of all their children were born out of wedlock.

Would it be acceptable to classify "asians" as responsible for destroying our schools, economy, security from crime and property values?

Or would we be quick to remember that each person is an individual and we need to judge each one on his or her own merit?

this is just me, speaking as an old-fashioned liberal.

You also need to consider the ratio between income and house prices. You'll see income steadily rising but nothing compared to housing prices which if you see a line graph, it's like shooting straight up to the moon. If you bought a house in the 70's early 80's, both income and house increases are somewhat following each other. It's not like that anymore. So what is going to happen, will the house keep skyrocketing, while income is flat. It really comes down to who will be the fool to purchase that multimillion dollar house. I for one won't and if you're a younger couple looking into a house, you're neighbors might not be neighbors you are looking for.

One of the reasons why larger sized housing is becoming so popular is the number of 3 generational households wanting to live here. Many of the new townhomes are designed for this, with very little community space, but decent sized bedrooms - big enough for a queen sized bed or a desk plus other furniture and often with their own bathrooms. They no longer have living rooms, family rooms and dining rooms, but just "great rooms" which even incorporate the kitchen. The idea is that families spend less time together and the bedrooms are becoming the den for its occupants rather than just a place for sleeping.

The 3 generational family is becoming as much the norm as the single parent family. Once again, the traditional idea of 2 parents plus kids is fading.

Therefore, the attractions of a 3 bedroom ranch is even less apart from the lot.

Resident - are you referring to 3 generations living together in PA? I only know of one family who has a grandparent living with them.

Kent,

I was born in the Bay Area and have been in PA--as a renter and an owner for more than 20. I'm also a school parent.

If you've been here since 1965, you should know that Palo Alto's history of strong support for its schools and strong scores isn't because of an influx of a particular ethnic group--though certainly the situation reinforces itself by attracting people who care about school quality.

As for Asian kids crashing and burning--you should check out the rates of depression and suicide among young Asians. Burn-out is one issue; the other issue, which happens more later, is social. If you spent your teen years focused on grades and scores, knowing how to date and mate can be a big issue.

But you're also missing something else here--which is that Asians are not a single group. Fifth-generation Japanese-Americans don't really have tons in common with a Chinese immigrant who arrived ten years ago.

Joe,

Your comparison leaves out a couple of things--increasing rent--no reason to think it will be flat for 30 years, the cost of renting and the need for another investment to bring in an amount that makes up for the money lost in rent.

Home ownership is really the only way most people can leverage enough money to make a chunk of it--i.e. a 3 percent return on 1.5 million is going to be more money than a 10 percent return on 200,000.

I don't think, by the way, the returns on PA real-estate are going to be that high. On the other hand, I don't know what great investment will give you that 10 percent either--the stock market historically outperforms other investments, but it's way too risky to invest all your assets.

Why buy instead of rent, despite all the math arguments?

Because we wanted to establish roots in a home that we owned, because there is high value for us in being able to decorate/modify/use our home as we please, and because we no longer want to worry about some of the unpredictability and instability renting can create (e.g. landlord increasing rent, having to pack up and move a lot - whether because we're forced to or choose to because the landlord is being unreasonable, a landlord that likes to micromanage the property and/or snoop around - privacy is very important to us).

If you plan to live in the house for a very long time, then why beat yourself up over buying at a price that may or may not be more than the home's value X years from now. Unless you're psychic, there's no way to really know what's going to happen. You can spend your whole life waiting for the "absolute bottom" and most likely will miss it every single time.

geez,

"assume for a moment the absurd, and let us pretend that the "asians" were 80% of the prison system, on welfare for all needs, had a 50% HS drop out rate and 70% of all their children were born out of wedlock."

Absurd indeed. Asian kids are too busy studying and winning science fair awards to get involved in paths toward prison. It is the Asian culture, itself, not the individuals within it, that produce such great results.

Somebody said that Asian foreigners are naive. If so, then so am I, and I have been around for a long time. The way I look at it, Asians see opportunity, and are willing to work hard and focus on exploiting that opportunity. It is a no-brainer to buy (vs rent) in Palo Alto, if one can possibly afford it. And more Asians moving into Palo Alto only reinforces that fact.

PA Mom

Yes, I mean grandparents living with the family. It used to mean when an elderly parent was too old to live alone that they moved in with one of their children. Nowadays, it often means one set of grandparents who are still fairly active but sharing living expenses with an offspring and family.

There are a few families like this in our neighborhood, but some of the new developments of townhomes are where these 3 generational families are moving. It is also very apparent at drop off time and particularly pick up time at our elementary schools and also at the park playgrounds during the weekdays that it is grandparents who are looking after the children while both parents are out working.

Kent,

"Asians see opportunity, and are willing to work hard and focus on exploiting that opportunity"

are you saying Palo Alto is an opportunity at these prices? I think even Asians will hold off for awhile. No API score is worth that much, or the allure of Stanford.

are you a realtor?

Maybe you should query some people who bought their homes in 1980 and paid them off versus others who have rented. I think you'll find that that homeowners with no mortgages (about 1/3 of people in Palo Alto) are quite happy with their investments. The big assumption here is that the average person would SAVE the difference in rent/mortgage and reinvest without LOSING on their investments. I think this would not be the case for 99% of people, they would either not save the money, or would lose it in poor investments.

that's the difference between rich and not so rich - rich can think of it as an investment, so maybe the answer to the post depends on how rich or poor you are?

Kent,

"Asian culture"--what the hell's that? The largest and most populated continent on the planet is not a single culture--not by a long shot.

As much as anything, what you're seeing is a narrow self-selected privileged group of emigres. Half of China consists of peasants. Do yo think we're really seeing peasant emigres here?

And I have to agree with the comment about recent immigrants being naive--they don't know the ins and outs of American cultural nuances--why would they? So they do the best they can and, to some extent, buy brand names as a sort of guarantee of quality. And that's some of what we get here.

So, I'd agree that on a basic level PA is overpriced in a sense because of this. However, as long as the affluent immigrant factor affects the market here, the investment in a house here may be a decent one in that there will be a continued demand for homes here.

I think old palo alto and expensive either way bring up good points. Most people aren't shrewd enough or lucky enough investors to get their other investments to make up the difference. Expensive, I think, touches on the affordability issue. Fact is, a lot of people buy here who can't really afford to do so. By affordable, I mean that you have enough money left over from your mortgage and living expenses to invest in other areas and keep a balanced portfolio.

Consider the opportunity costs for Warren Buffett. His statement makes more sense than financial arguments. Homes are about long term stability.

According to Warren Buffett, “Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refinance possibilities. And the home purchased ought to fit the the income of the purchaser”.

"are you saying Palo Alto is an opportunity at these prices?"

Yes: Think about inflation. Current prices will look like a bargain in 20 years.

"are you a realtor?"

No. And not even indirectly connected with realtors.

""Asian culture"--what the hell's that? "

That is a big subject, but here are a few pertinent points: 1. filial piety, work ethic, propensity to save, emphasis on education, respect for authority, strong family values. If Chinese peasants were to be given access to the USA, today, they would probably be as successful as the Vietnamese immigrants who came to America, following the Vietnam war.

I think Asians also have an appetite to gamble. This can be a bit of a good thing when taking a risk. Risk averse people should not buy a home in Palo Alto, because they will not sleep well.

Kent,

What would be missing from your definition of Asian culture, to be relevant to this topic, is that they are either price insensitive, or rich, or have a very good job nearby. And that many more of these jobs are growing in the area. All the piety in the world does not buy a million dollar 2 bedroom.

Using Buffet's quote, if it's a sacrifice to buy it, you can't get much enjoyment, and in Palo Alto if it costs 1 million you probably have to add another bucket of money to get utility out of it. You can buy gold for less if you are worried about inflation.

Expensive...you're right. Not everyone has the right to live in Palo Alto. Just as not everyone has the right to live in a penthouse in midtown Manhattan. If one can't afford it they should live elsewhere. The issue is people who can't afford a house are trying to figure out how to live in Palo Alto. It's easy, rent. But with renting comes the insecurity of having to move every so often. If that tradeoff is worth it to your family, then rent. If not, then buy a house elsewhere.

When I came back from college in 1990, the paper stated that 50% of PA houses were rentals. I believe now much much less. Late 90's owners sold during dot com era and made oodles (especially South PA). The little houses were torn down and huge monsters were built by contractors. I was upset because of the loss of "starter" houses. Felt I could never buy a house.

It takes more rent than any sensible renter would pay to cover the cost of a mortgage, taxes and service fees on a $1.3m 2-bed house.
You only get "accidental" landlords, or those willing to take the hit to buy-in to the market with the expectation to move to Palo Alto some time in the future, willing to pay and rent at today's prices.
The monthly loss of a $3,300 rent on a newly bought $1.3m house just isn't worth it. There are much better property investment opportunities elsewhere.

Kent,

In other words--Asia, to you, is China. Specifically, the small educated segment of China.

Asia, like every place else, has a wide variety of people. Not all Asian immigrants, in fact, do do well. The Laotian tribal groups who ended up in Fresno also ended up on welfare.

Here's the deal--the kids of Chinese immigrants do do well in school--however, there's a cost to it. As I mentioned they have the highest rates of teen depression. Because the United States is a very individualistic society without much of a social safety net, a lot of these kids get a bit lost once they hit college. The high grades and excessive studying means the kids get shortchanged in other ways--the kids aren't expected to do anything that doesn't pertain to education and they have to learn a certain independence the hard way. The definition of success can be very, very rigid and the pressure to succeed enormous.

You say Asians like to take risk. If anything, I see a hesitancy about risk-taking among east Asian kids--in part because of the high expectations. Yes, the Chinese engineer is a local cliche, but with the exception of Jerry Yang, you don't see east Asians running the big start-ups. In contrast, Indian-Asians were involved in founding a huge percentage of the dot-com start-ups.

Really, not a single culture--and when you mix those cultures with the American culture you get quite different results.

Expensive,

I agree with you. People stretch to buy here whether it makes sense for them or not. Either renting or buying adds up.

leverage,

I don't think anybody buys single-dwelling rental properties here--but a lot of people do hold onto properties and rent out. *That* can be very profitable--I lived in a house that the landlord had bought for $30K.

Also, there are a large number of infills--cottages in the backyard, in-law unites, converted garages that people rent out.

"the small educated segment of China"

Maybe as a relative percentage of the population, but the population is large. My guess is that the number of engineering graduates in the world are majority Asian (which includes Indians, btw). Certainly, if you look at top universities in the USA, the engineering classes are dominated by Asians. I have heard some amusing (to me) 'horror' stories from American white kids stating that they drop out of engineering because they cannot (or will not) compete with "all those Asians". Perhaps those white kids were too busy developing their mating skills. In the end, those white kids will report to those Asian kids. That's the way the world works.

You can also expect the legal profession to become dominated by Asians, especially in the tech environment. Then you will begin to see Asians dominating the startup venture capital stuff, perhaps with help from China and India investment funds. Along the way you will see Asians take over the local politics. All of this is music to my ears, because I believe in hard work, and sacrifice, not to mention a healthy infusion of working capital in Palo Alto.

The future of Palo Alto is Asian, and it is a mistake to try to fight it.

That's funny. Most of my neighbors are white. Old ones too. Maybe that's why they call my hood OLD Palo Alto. Yep, good old Prop 13 ossifying neighborhoods around California.

In any case, most "Asians" (as Kent would say) are actually looking to be in Asia, where there's the perception (valid or not) of being able to be more successful there. I know of many who have moved to Shanghai, Beijing, Bangalore or Mumbai because that's where the opportunities are.

Unfortunately for us, California is no longer the shining example where people want to move to. We can debate why (I have my strong opinions), but that matters not.

So, Kent, perhaps you don't have to worry about learning Mandarin or Kannada to buy something at the grocery store.

"So, Kent, perhaps you don't have to worry about learning Mandarin"

Why would I worry about that? What a strange comment. Asians are smart enough to know that English is the major language of commerce. That is why they sutdy so hard to learn it.

I must say that there is some real fear about Asians taking over Palo Alto. I welcome Asians, but many do not, apparently.

Kent,

Toady was making a reference to the Mandarin-Immersion wars in the schools.

Anyway, Indian culture and Chinese culture are very different--religion, social organization, language--you name it, it's different.

We've had a large percentage of Asian engineers in this valley for more than 30 years--basically, the start-up thing should already have been happening. And it hasn't. Or, rather, Indian-Americans have been extremely active in starting up companies, but Chinese-Americans have not. The question is why? It's really not a matter of a lack of Asian-American lawyers; it's not like there are huge numbers of Indian-American lawyers either.

So, two immigrant groups with technical prowess--what's going on? I'd say one thing that differs is that Indian-Americans tend to be a) more at ease with Anglo-based cultural norms. Yep, a weird benefit of colonialism (along with fluent English). I think, too, it's a culture more open to creativity.

Toady's right in that a lot of activity right now is in Asia--immigration of all sorts has dropped since the 2008 financial debacle. Enough so, that the coming Hispanic majority in this state has now been put off a couple of decades.

Also, the children of immigrants assimilate--and, uh, end up scoring pretty much like the rest of us. That's why I made the point about there being a big difference between fourth-generation Japanese-Americans (who tend to be very American, just like any other fourth-generation American) and Chinese immigrants who came here for grad school. I doubt you meant it that way, but lumping people together by skin color as having the same culture is more than a little iffy.

As for the bulk of engineering students--well, one of the reason Chinese students come here to study is because China lacks world-class universities--it has one. There's a similar issue in other Asian countries as well. Coming to the U.S. means you have an easier time getting into a university, which is also more highly ranked than what's at home. India does have some excellent schools however. As does Russia (thought I'd throw in that other big provider of immigrant tech talent.)

As for Americans--well, until recently, if you were among the mathematically gifted, finance was a more lucrative career option. Engineering doesn't make a lot of sense--particularly with so much of the grunt work being outsourced to Asia.

OhlonePar,

Your comments are both insightful, in the abstract, and humorous in their obtuseness.

I keep bringing up the science fairs, because I have a neighbor who is a judge at one of the major fairs in this area. I can assure you that the best projects are done by Asians, with only a few exceptions. That is a fact. These talented students will become the next generation of engineers and business talent in this area, just as Hewlett and Packard were back in the day.

This should not be a hard thing to understand, but some people seem to deny this simple fact.

Kent,

For all your "compliment" about Asians, and Science Fair students, I agree with geez that your comments are of stereotyping, and kind of creepy.

For this topic, the only ethnicity that counts to buy a house in PA is how rich you are.The rest belongs in another thread.

"I don't think anybody buys single-dwelling rental properties here--but a lot of people do hold onto properties and rent out. *That* can be very profitable--I lived in a house that the landlord had bought for $30K."

I do! After figuring the appreciation over time, tax benefits, and rents, it's one of my better investments. And I own many types of properties including multi family and commercial. The play for single family homes is equity build, not cash flow.

I am fascinated by the fact that there are almost 10,000 hits on this thread.

Obviously a topic of interest.

Bottom line..if you are certain you can pay the mortgage for at least 10, better 20-30 years, and clearly want to hold onto the house for that period of time..buy (the usual sage advice is "buy the cheapest house/least well maintained house in the neighborhood" and then fix it up over time)

If you aren't sure you can really and truly stick with it for at least 10 years..maybe better not to risk it. Depends on how risk sensitive you are.

Do not, unless you are willing to literally bet hundreds of thousands of dollars, buy for a "turn around" of 5 years.

The housing market in Palo Alto will likely be driven by future creation of companies especially in the South Bay (Palo Alto, Menlo Park, San Carlos, Los Altos, Santa Clara, Sunnyvale, San Mateo, etc.) that create large amounts of millionaires. We can thank Yahoo, Google, eBay and many many others for increasing the value of our homes over the last decade. We've got Facebook, Twitter, SilverSpring Networks and many others to help us in the future. But, the Golden Goose needs to be fed, not scorned and slowly strangled.

If the supply of these new multibillion dollar market cap companies dries up in future years, then the housing market here will dry up. You need companies to make many hundreds of people rich at a time, not just a few people rich at a time. Over $1.5 million Houses in Palo Alto are bought with options and stock gains, not salaries. The local governments need to take notice of this by making their downtowns friendly to start ups. Our Federal government needs to remember that keeping capital gains rates low in order to incent workers to move to private companies where majority of their compensation will occur assuming a successful outcome. Our state government needs to keep regulations in check on businesses of all size and keep tax rates low on its residents in order to keep businesses forming in our state.

The Bay Area's had a magical run over the past 50 years as the electronics industry has built our economy. The magical housing returns - turning $30K into $1.5 million or more are a result of the magical run of the technology industry. Weather, Stanford, and scenery are all important parts of this ecosystem, but without semiconductors, software, and the Internet our houses would be worth half of their current value.

Well said George. Past performance is no indication of future earnings and that is especially true in today's unprecedented global economic climate. While we love it here, we seriously doubt that the last few decades will repeat themselves in Palo Alto, not for real estate.

To the people who bought 30 years ago >> Good for you, but would you seriously buy your house again at today's market price? Think it through before answering. If not, please don't feel superior to people who currently rent.

Unless one has another million $ to balance their portfolio and sleep well at night, the numbers at TODAY's Palo Alto prices in TODAY's economy just don't add up vs. renting. The world and US economy is far from being out of the woods and diversity, flexibility, and liquidity are key.

We rent a $1.4 mm house for $4k/month. It is a nice house and our landlord is lovely. We were unexpectedly relocated here for work. When you have a mortgage and kids, you go where the good jobs are. That said, we plan to rent even after we sell our primary home in another state. Multi-year leases in good quality PA homes are possible, and I think we save a bundle in living without certain upgrades and remodels. Been there, done that. For me, home ownership at today's prices is over-rated. Our financial advisors back us up on that one.

Jumbo rates, while low historically, are not less than 6% and a family would need to tie up $400k as a down pmt along w/a $1m loan. Can anyone tell me what income and portfolio you need on hand for a bank to loan you said $1m at that 6% rate? Assuming you have that lined up in addition to the $8k/month before maintenance - good for you. We're still not sure it makes financial sense. At most, you re-coup $1-2k/month in tax reductions when you have the HH income required to buy these houses. Plus prop taxes for this house are $16k. People who so smartly bought in the 70s should share what they pay on their high value homes. Equity growth needs to outpace rent after factoring in expenses for maintenance, upgrades, re-models. Not sure that will happen anytime soon.

We figure it takes a portfolio account of $1-before real estate to comfortably buy a house and remain diversified, unless your salary is $500k/year. Barring that scenario, a multi-year lease is a smart and flexible strategy for these next few years of uncertainty.

Correction:
We figure it takes a portfolio account of $1 million - before real estate to comfortably buy a house and remain diversified, unless your salary is $500k/year. At that income, however, the tax benefits are reduced by high income phase-outs.

What keeps prices high in Palo Alto are many things, but one of the most important is the low turnover rate. Only 3% of the housing stock sells in a year. So, the incremental supply is small, demand is high, therefore prices are high. If this were to ever change for some reason then prices would drop. But the creation of new millionaires or not, will probably not affect prices very much for the nominal house.

Kent,

It is off-topic--but science fairs are your measure here? You just happened to pick the one thing that various schools ban around here because the parents get over-involved.

Anyway, the posts are interesting--there are arguments on both sides. I agree that it's not wise to buy for the short-term unless, yes, you have a nice chunk of change.

George is right in that housing prices above $1.5 million here aren't driven by salaries, but by options. I think, though, that the option-rich aren't the only buyers.

One of the things I've seen are families that bought a starter house or condo in the late 90s in a good, but slightly less desirable city--Mountain View, the hills of Redwood City--then when the house appreciated, they sold and used the profit for the down on a house in Palo Alto. The climb in real-estate prices was such that a number of people were able to do this.

Old Palo Alto is right in that the low turnover rate is a factor--Palo Alto isn't large and it continues to be desirable. There are more people who want to live here than who can. At the same time, the lack of motivated sellers means that sellers simply won't put their house on the market unless they get a certain return.

I don't think prices here will do anything like they did in the late 90s, early 2000s--in part because a lot of people were able to afford Palo Alto because of the money they made on their previous house. We'll be relatively soft as long as other local markets are down--we won't crash, though, simply because owners can afford not to sell in a bad market.

"We figure it takes a portfolio account of $1 million - before real estate to comfortably buy a house and remain diversified, unless your salary is $500k/year. At that income, however, the tax benefits are reduced by high income phase-outs."

Luckily, there are LOTS of people who meet that criteria, easily. And, they want to live in Palo Alto.

"You just happened to pick the one thing that various schools ban around here because the parents get over-involved."

OhlonePar,

You continue to make good points, while missing some big ones. The science fairs do indeed get the parents involved. You think that is a bad thing, apparently. I think it is a great thing. However one looks at it, the winners of these fairs will control our local economy in a generation or two.

Your other points are reasonable. I sense that you agree that holding a property in Palo Alto for 20 years is a good deal.

Kent,

No, I'm really not missing things. If anything, I seem to be more familiar with the whole science-fair issue than are you. When I said "over-involved" I was being a bit tongue-in-cheek. Various elementaries cancel science fairs because parents doing the project became too big of a problem.

Back to the real topic--

Boiled down's point about nearly 10,000 hits say to me that a lot of people are interested in Palo Alto--I don't think that kind of readership would be purely local. My experience, over the years, is that people who come here tend to consider Palo Alto first--then pick some place else if Palo Alto's too expensive. Expensive being relative--in one case I knew someone who bought an estate in Woodside because the same amount of money in Palo Alto just got you a nice house.

It's also true that once people decide to live elsewhere, they'll often wonder in retrospect *why* they were so particularly interested in Palo Alto in the first place. I suppose in that sense, Stanford is a factor--many people first come here as students at Stanford and Palo Alto does take on a bit of Stanford's aura.

I don't think it's the factor that determines Palo Alto's housing prices--lots of great universities are surrounded by slums--New Haven, anyone? But it does give Palo Alto a little something extra glamorwise. And practically, too--Stanford is a historic center of innovation--the next big thing always has a chance of coming out of some grad student there.

Kent,

the reference was to over involved parents, as in the parents doing work themselves.

George,

you brought up the best point, it's companies that make a real difference, but a Palo Alto garage is not what it used to be, and what Palo Alto used to be know for is now turning into a different picture, a rich enclave.

thank you George,

excuse the snobbish comments from Old PA (who knows LOTS of people with million dollar portfolios that want to live in Palo Alto) - it goes with the territory.

snobbish?

no...there ARE lots of people with million dollar portfolios. Frankly, a professional who has worked here for the last 30 years and DOESN'T have a million dollar portfolio made some mistakes along the way.

to believe that is "snobbish" shows that you may not understand wise investments/purchases over the life of 30 years of professional working.

The really wealthy are no longer buying houses in Palo Alto, they buy in Atherton, Hillsborough, Los Altos Hills, Monte Sereno. I predict a gradual decline in prestige (and pricing) of Old Palo Alto and Crescent Park once the aging VCs who reside there approach end of life. New money are not attracted by overpriced 100 yr old houses on relatively small lots lacking privacy. It takes forever to find buyers for such houses... Not to mention ugly track ranches and aging Eichlers.

"I do! After figuring the appreciation over time, tax benefits, and rents, it's one of my better investments. And I own many types of properties including multi family and commercial. The play for single family homes is equity build, not cash flow."


Old PA, that may have been the case if you bought a while ago but not in today's market.

A timely link on the Palo Alto market (yes, I know it office space but it's a sign of the times): Web Link

Amazing # of posts on this issue. I'd say it's a definite hot-button. Here's my take:
If you buy rather than rent, and suddenly discover that you would like to move, or need to move, for whatever reason, you are TRAPPED. I have noticed a lot of houses for rent in our area which normally would have gone on the market. I suspect these owners would prefer to sell but can't get the price they wished for.
This lack of mobility has contributed greatly to the inability of the workforce to adjust quickly to economic imbalances around the country. If you own, it is very painful financially to just pack up and move. If you rent, the worst that can happen is you have to make good on your remaining lease terms, which I suspect most landlords will negotiate rather than watch someone stiff them outright.
I cannot believe that anyone in his/her right mind would expect to achieve the kinds of returns experienced in the California bubble economy. It is simply unsustainable, especially given the current economic mess we are in.
Prices, especially home prices, tend to be sticky. No one who thought they were going to get well on the sale of a property is going to give up on that easily, so they hunker down or rent the property out. This, more than simple supply and demand mechanisms, is holding prices up. Unless they lose their source of income and are forced to move, or as in the case mentioned, have to move for health or other reasons, people hang on. When they have to move, that is when prices suddenly drop.
If anyone is depending on the statistics generated by the real estate industry to acquire your peace of mind, more power to you. I wouldn't spend much time researching how easily those statistics can be skewed to give inaccurate pictures of the market, however. Your bubble will soon become less stable.
It would be interesting to see what the per capita income levels are now in the Bay area, versus what levels they were at at the peak of the boom years. I think that will tell the tale of where property values are going in the future.
How could a teacher or any other individual or family with a modest income possibly afford to buy in this area? I think we will see more renters, not less.
It is also worth pointing out that when you buy rather than rent, you haven't escaped renting altogether. You are just renting money, rather than real estate.

With the newly proposed parcel tax for the school, renting seems to make more sense.

Aren't you already paying this parcel tax? Isn't it an extension of the existing one albeit with a $96 cost of living increase?

Maybe it's now about money. maybe it's about ownership and having the ability to create the home that you want rather than being at the mercy of a landlord who may or may not be willing to maintain and/or improve the home the way you would like.

and then there are the tax deductions....

I didn't know Larry Page was an old VC.

Woodside and Atherton have long been wealthy enclaves. That said, from what I can the super-wealthy like to own homes in both areas. Yes, your lot is smaller in Green Gables, but a lot of wealthy people, just like the rest of us, like a certain convenience. And, since many of them did not grow up wealthy, like being in a neighborhood that's reminescent of where they grew up.

A house in Palo Alto and sending your kids to the public elementary schools--creates a semblance of a normal life. And that's valued by a surprising number of very rich people around here. Much more so than, say, on the East Coast.

You're also more likely to be closer to work and in walking distance of a restaurant.

Steven C.,

Yes, buying if you think you're going to move around is foolish. But a lot of buyers here plan to hunker down for at least 12-15 years--i.e. what it takes to get a couple of kids through the school system.

So is it foolish to buy if that's your time frame? Historically, no. In the future, yes, I'd say it's hard to guess.

On the other hand, enclaves like Palo Alto with nearby jobs and walkable downtowns are projected to hold their value more than exurbs--this has been true recently and I suspect it will continue to be true.

i rented our little Crescent Park bungalow and then bought it when it became available.

i still don't know if it was a wise financial decision or not.

but this is what i gained: a place my daughter is proud of. she helped me chose colors and paint the exterior. we redid her bedroom. we landscaped together and pulled out a yellow linoleum floor and put in hardwood. new paint and hardware all around. after years of instability, we had a permanent home.

it's been home to SO many happy parties and gatherings that it never was before.

she's in college now - got a great education and friends at Paly - and will soon be launched.

i wouldn't have traded those happy high school years, and our lovely little Palo Alto home, for anything in the world.

there's a lot of emotional stuff from the pro-buyers

if money is no object, of course it's whatever makes you happy

"Old PA, that may have been the case if you bought a while ago but not in today's market.

A timely link on the Palo Alto market (yes, I know it office space but it's a sign of the times)"

Well lets see....in 2000 the dot.com crash predicted a mass exodus and market crash. I bought several houses around that time at the peak, that are now worth 2x what I paid for them. I'll buy the lows and the highs over time, my holding period is forever.

From the front page of this website. Will it continue? I have a friend who's lived here since 1959. According to him that's always been the question.

REAL ESTATE: Palo Alto house sells for $1.3 million
A house on De Soto Drive in Palo Alto sold for $1.375 million on Dec. 23, 2009. The home previously sold for $360,000 in February 1988. Palo Alto Online's real estate website features a listing of homes sold in Palo Alto and surrounding cities.

Old PA said "Well lets see....in 2000 the dot.com crash predicted a mass exodus and market crash. I bought several houses around that time at the peak, that are now worth 2x what I paid for them. I'll buy the lows and the highs over time, my holding period is forever."

Old PA, The year 2000 was not the peak of the housing bubble. Things were just getting warmed up back then.

"Old PA, The year 2000 was not the peak of the housing bubble. Things were just getting warmed up back then."

Really? Ask any residential builder if things were getting warmed up in 2000-2002. Prices corrected down about 10-15% in that period and much more for high end construction.

To make a 1,000,000 rental house in Palo Alto break even you have to put down about 500,000. Houses in Palo Alto have appreciated at about 7% for 50 years. So, let's assume half that going forward, 3.5% per year. My return on investment is about 7% on my 500,000 based on tax deferred appreciation today. But two factors people forget are rents go up and the mortgage balance goes down over time. I'll spare the details, but based on 3.5% property value appreciation and 3% per year rent appreciation borrowing at 7% fixed interest fully ammortized, my cash on cash ROI is about 12 - 15% per year over 30 years (depending on vacancy factors and other things). And that's on a single property. The great thing about real estate is it throws off income streams that grow and can be borrowed against or saved to acquire more either with or without leverage. So, the real cash on cash return over time with multiple properties can be 100s of percentages. Why do you think the Forbes 400 is filled with real estate investors (Warren Buffett included). And, it's not secret that real estate investors, including myself, are notoriously frugal. That's because every nickel goes back into buying more and holding for long periods of time.

"The great thing about real estate is it throws off income streams that grow and can be borrowed against or saved to acquire more either with or without leverage."

what if you buy a house to own and live in it ( supposedly the reason it's better to buy) - will it also throw off income streams? which house does that, I want to buy that house

Old PA: But what if going forward it goes -3% in average for the next 50 years (inflation-adjusted) ? What goes up can also go down, many things go in cycles.

Prices are determined in large part by how much money people can spend on housing out of their leveraged income. Interest rates can't go much lower - but they can go a lot higher, so for a given income less money will go to principal. Taxes are likely to go up, either explicit taxes or just taxation-by-devaluation, i.e. printing. It's quite likely to see increases in all import prices ( gas, food, etc ) due to the printing - so even less money left for housing. Incomes can't go much higher with the current unemployment. And don't forget CA has budget problems and can't print - so at some point higher property taxes too.

All the reduction in people housing budgets will affect both rents and house prices.

I think the consensus of the thread is that it's a great deal to buy a house for 200K, with a high interest rate, and refinance and wait until it gets to 1M. Some people seem to believe that it's also a good deal to buy it a 1M, even with low interest rate and no chance of refinancing - maybe it will continue to increase at same rate as before, so soon it'll be a 5M house. The magic of compound interest.

Let me clarify: any landlord who rents to a tenant for a year or more has to give 60 days notice to vacate to the tenant.

What amazes me is that all calculations are made in the best case scenario. It is true that with the US population pressure, demand increases and in general real estate is a good investment. My house in Palo Alto gave me a really nice tidy profit whichever when I sold. If there is a destructive earthquake, the schools become too crowded and less attractive or the economy sours for a prolonged period real estate it's not a good investment at all. Look at the period between 1930 and 1940. Though there was more demand, housing prices deflated.

Part of the reason why rents are cheaper than buying is because of prop 13. People who have a million + parked as their house may pay less than $1,000/year in property taxes. Any reasonable amount of rent will let them profit handsomely with very little downside.
Actually prop 13 is the part of the reason why real estate is so expensive in nice cities. Instead of downsizing, it's much much cheaper just to stay put. And if in addition your property is part of a trust the very cheap property taxes will continue after your death. Your heirs will have a out-of-this world tax break forever.
Prop 13 biggest beneficiaries will not liberate their houses to the market and as consequence the demand outstrips the offerings.
Palo Alto used to have great schools and that was a good reason to live in the town. But now, I would rather buy elsewhere. In fact I moved to Menlo Park where I rent in the nicest
area in a professionally managed top rated, top rent complex where I have amenities galore AND I do not have to take care of anything. Thanks to the fact that prop 13 also applies to commercial properties, the rent is not outrageous (2500/month ). This rental was going to be a in between houses. I was looking for a different type of property and now I am reconsidering buying.( I also have another house elsewhere, so I am okay as far as real estate investment.) It is SO nice to live where I live now...In fact, I talked to other people in the complex, those who like me came just for a few months and ended up staying 38 years. It's just hard to leave this great community. The young families in the complex just love our local school.
But this decisions are individually made. If you have to sell for whatever reason an you afford the risk that the market may take your profit away and more? Are you happy go lucky? How old are you? Then measure your needs and your risk . That's it.

Several of the houses in my neighbourhood that were bought in 2006 declined in value by 20%. My neighbour who bought his house in Midtown 3 years ago for $1.9M had to relocate for his job and put his house on the market for $1.75M, or $150K less than what he paid for and couldn't sell it for almost a year. He was offered $1.5M but couldn't afford a $400K loss, so he pulled it off the market and renegotiated with his company so he would not relocate. So all of you who are only talking about perpetually rising housing prices - get real.

"So all of you who are only talking about perpetually rising housing prices - get real."

As long as there's inflation house prices will increase. I don't see inflation going away.

If you pick up the average Palo Alto house and move it to Iowa it would be worth about 50,000. So, why the high price? Because there's a community of high earners who want to live in close proximity to each other. If that changes, prices will go down. I'm betting that will not change soon. And, in fact will increase. Home prices in Palo Alto relative to Paris, Shanghai, etc. are a bargain. I believe there's plenty of room for price appreciation.

I'll submit my findings in 30 years!

"what if you buy a house to own and live in it ( supposedly the reason it's better to buy) - will it also throw off income streams? which house does that, I want to buy that house"

Sure, when you sell it in 30 years it will throw off a very big income stream, as most seniors now realize it's the biggest part of their retirement.

A lot of people who can not affort to own in Palo Alto just keep trying to put down arguments to say the home prices are not justified here. If they know how much money people (a lot of people) are will to pay for tiny condos in prime cities and locations in Asia, they would say Palo Alto homes are very cheap.

it may be because those tiny condos in prime cities have jobs nearby. but you're right - only people who can afford Palo Alto justify the prices. But if you own in Palo Alto, why do you think it's not worth renting here?

Palo Alto worth says:
"So all of you who are only talking about perpetually rising housing prices - get real.
As long as there's inflation house prices will increase. I don't see inflation going away."

Really, where have you been in the past 3 years?
Inflation has nothing to do with price. Price is determined by demand, offer and affordability. employment has something to do with it.

"If you pick up the average Palo Alto house and move it to Iowa it would be worth about 50,000. So, why the high price? Because there's a community of high earners who want to live in close proximity to each other. If that changes, prices will go down. I'm betting that will not change soon. And, in fact will increase. Home prices in Palo Alto relative to Paris, Shanghai, etc. are a bargain. I believe there's plenty of room for price appreciation."

What wishful thinking. Relative to Paris, Palo Alto prices are very high. Paris is actually a good example of a big city in which prices have remained stable for the past 20 years (due to the flight to suburban communities). In real terms prices in Paris have declined.
Price comparison with places abroad is made with today's dollar value. But in any case it's demand for a location that creates value, only that. And what people do in Shangai , Singapore or London is not at all relevant.



I'll submit my findings in 30 years!

For those who keep listing tax break as a reason to buy: Taking out a loan to buy a house can easily double the cost of the house, depending on the type of loan and the rate of inflation, because of the interest that must be paid. The fact that you get a small tax break on that interest does not change the fact that you are adding a huge additional cost to the price of the house. A house that cost $100,000.00 and $50,000.00 to finance cost you $150,000.00 dollars, minus the relatively small tax deduction you get. Add on taxes, insurance and maintenance costs (which homeowners always seem to exclude from their calculations) and a house does not seem such a wise financial investment (especially now), although it can be emotionally gratifying for some people.

"With the newly proposed parcel tax for the school, renting seems to make more sense."

Nope. Taxes have a tendency to move around from where it is intended. In the end, the final consumer pays all taxes. Your rent increase will be from that.

(which is why focusing of taxing businesses is really stupid because it ends up hurting the consumers more, but that's for another thread)

OhlonePar. I agree with your comment on time-frame of ownership. My point is that all bets are off if the time frame is taken from you by circumstances beyond your control, job-loss being the most relevant in today's economic climate. I believe that this contributes much of the impetus for the condition of the real estate market, and affects the number of non-traditional rentals on the market as well.
It would be an interesting statistical study to see which variables weigh in as more significant in determining home values in high priced areas. Off the top I see many counterbalancing factors: number of long-term owners, location relative to jobs and amenities, quality of public schools in the area, current economic conditions, socio-economic mix, understanding of the concept of opportunity cost. I'm sure there are more that I cannot think of.
If I were to bet the farm on any of these, as far as families are concerned, I would put quality of schools at the top of the list, and location relative to work, next.

I think the school quality issue is key here because in many ways, it is a proxy variable that encompasses most all of the other factors. I am biased somewhat because it was the driver for why we live where we do.
The school quality issue is, as previously pointed out, a 'chicken vs the egg' situation. Regardless of how the quality of the school developed, it acquires its own momentum once established. Smart people try to place their children is the best educational situation they can afford. Smart people are usually more affluent, and they will pay the premium to live where they can get the best education for their children without having to pay for private schooling.
In many ways, quality of schools is the new "snob zoning" of our era: better schools drive up property values, or at least hold them up. It becomes a self-fulfilling prophecy of sorts.
Busing in of children from outside the neighborhood doesn't really change this much. It only changes if families relocate to the communities with the better schools. In general, that shouldn't dampen property values either though, as smarter families seek out the best schools, and smarter families generally are stronger economically, and bring smarter social characteristics as well.
There may be a caveat facing owners who are renting out their properties in hopes of salvaging boom time paper profits, though: if they rent their properties out for too little money, they risk devaluing the neighborhood by attracting families who normally would never be able to afford to live in the community, and may not bring those smarter social characteristics with them. In the sense that "block-busters" proliferated in the de-segregation era, these properties tend to drive down the values of all properties in the neighborhood.

I know this is a politically incorrect opinion that is abhorrent to many. But it is a fact of life. It is not necessarily racial. People prefer to be around people with similar interests and backgrounds. It is the reason why we have gated-communities, communities with gated-homes; it is why the Castro and Provincetown are Meccas for gays. Wealthy people are the most socially conscious of all. In fact, this can be a downside of relocating for better schools and better neighborhoods: students from families perceived as not wealthy can be shunned by the wealthy students, at least outside of school. Anyone who thinks this is not the case should treat themselves to a reading of "Richistan", a book about the habits of the rich and famous. NPR did a great series on this a couple of years ago. It may not be just affluence that creates a negative environment either: the size of the fish in the academic pond may come into play as well, the level of competitiveness achievement-wise. It can be a slippery slope. Having said that, I'll wager most families will take their chances for the hope of a stronger education.

It seems to me that most people would prefer to own rather than rent. Where we live is where our 'home" is. Home is an inherently emotional concept. It is hard to move that emotional hook from something you "own" to some thing you rent, especially if you have owned before. It is also hard to invest much, time or money, in a property you may never hope to own. But as any lawyer worth his salt will tell you, sometimes you really have to act rationally, and let go of the emotional drivers. Economists are partial to this view as well. However, very few people take the advice of their lawyers, and even fewer understand the reality of an opportunity cost, much less the reality of a sunk cost.
I think this explains most of what is driving the difference of opinion in this thread, because it seems to me that the renters are coming from the most rational, pragmatic side, while the owners are counting on a lot of blue sky in the future.

"A house on De Soto Drive in Palo Alto sold for $1.375 million on Dec. 23, 2009. The home previously sold for $360,000 in February 1988. "

I'll bet that buyer wasn't around here in February 1998. De Soto Drive was hit pretty hard by the flood. Next week might be a repeat of that event based on the weather reports.

"Inflation has nothing to do with price. Price is determined by demand, offer and affordability. employment has something to do with it."

Inflation is a general increase in prices in an economy. This means demand for money goes down and demand for real assets goes up. It has everything to do with prices.

The comparison to other world cities is relevant from a historic comparison, as an economy matures, real asset prices tend to increase.

Actually, I wish more people would rent! It would drive up rent prices and help me pay my properties off faster.

Bottom line: no one knows what's going to happen to any asset price. You put your money in and hope it grows. If it doesn't, you shouldn't be in a position that you would lose everything. That is gambling, not investing. For a homebuyer, if stability and the benefits of home ownership are not important to you, then you should rent. Preferably from me, at a high price!

What justifies to some extent the huge premiums people pay to buy into Palo Alto is its residents.
I usually try to avoid generalizations, but in my personal observation Palo Alto residents are much more educated, liberal, tolerant, sophisticated, well read and intelligent than the bourgeois Los Altans, not to mention stuffy and snobbish Athertonians. Even though housing in Los Altos and Atherton offer much bigger lots and nicer houses, Palo Alto still attracts people who could otherwise buy in posh Los Altos Hills, but instead chose to live in a much more modest Palo Alto.

Berkeley,

Your stereotype has some truth embedded in it. Of course, that formulation makes them susceptible to PC propaganda, like global warming hysteria. There are other problems, too, like the inability to enforce it own rules, if it means upsetting feelings. Let's not forget the green gestapo and nine-grain nazis that increase our cost of doing business in PA. However, it probably adds to property values, because trust fund children from rich liberal families like to live here, thus increasing the demand for a limited supply.

I enjoyed reading your post(s), and wish I had had the savvy to have a real estate portfolio that you describe. However, as this discussion goes, you are coming from an entirely different real estate perspective than the original drift of this post. It's one thing to debate buying or leasing a property for a home to live in, another altogether to buy property as a business for people to lease as homes.
As an investor, it would be foolish to argue against the wisdom of buying real estate as a long term investment. Many fortunes have been made(and kept)that way. And many regret not having bought and held properties they could have acquired years ago, for pennies on today's dollars. Count me as one who passed on opportunities that would have made me wealthy. As the saying goes: they just aren't making anymore land these days.

"As an investor, it would be foolish to argue against the wisdom of buying real estate as a long term investment". Yes, but the question is where and at what valuation levels. I can see how buying housing in North Carolina or Idaho as a long term investment makes sense. I can even see how buying housing in Bay Area priced under $1M that a family with a joint annual income of $200 - $300K/year can afford.
I can't see what would support and drive valuations of Palo Alto housing priced at $1.3M and above.

Steve C...I assume you're talking about my comments?

My advice: It's not too late to start building your portfolio. An example: If you would have bought Coca Cola stock at it's IPO you would have paid about $40 per share. In 1929 you would have seen your investment go down 50% in the stock market crash. You then would have seen sugar rationing in WWII, turmoil in the 1970s, etc. There would always have been a reason not to buy and people telling you you're crazy, etc. However, that one share today would be worth about $5MM.

Same goes with good real estate. If you buy for the long term, and without too much leverage, in the end you'll win. In my case and in my planning, if all my properties went to zero, I'd still win as the rents would support me for life, once I pay them all off. So in my view, appreciation is just an extra, albeit, probably a significant one.

I think the same is true of a homebuyer. You pay more than renting, but once the asset is paid off you have essentially a free place to live. And, it forces you to actually save the money by paying off the mortgage. The marginal savings rate in the U.S. has been zero for a long time, so people who use the alternative investment argument usually just blow their money and have nothing to show for it.

MBA..."Yes, but the question is where and at what valuation levels. I can see how buying housing in North Carolina or Idaho as a long term investment makes sense. I can even see how buying housing in Bay Area priced under $1M that a family with a joint annual income of $200 - $300K/year can afford.

I can't see what would support and drive valuations of Palo Alto housing priced at $1.3M and above."

MBA, you're forgetting we live in an inflationary economy by design. Remember studying Keynes in B-School? The Keynsian belief is that fiscal and monetary stimulus is essentially a small tax that provides relief in terms of real human suffering during a recession. That small tax is inflation. The family making 200-300k per year (this was ALOT of money just 10 years ago) will be making much more than that in the coming years. The real question is where will those families want to live. My bet is more of them will want to live in Palo Alto than either North Carolina or Idaho.

You can tell from my numerous posts, that for me, I prefer to buy a superior locale at a fair or even inflated price, than to get a good deal on an inferior location. Anecdotally, my friend who bought good deals in Phoenix and Florida etc during the boom are wishing they would have listened to me and bought in Palo Alto. I bet they will feel this way again in 10 years.

Kent,

You really, really need to quit stereotyping people. Global warming is neither here nor there in this discussion unless you're concerned with chunks of Palo Alto ending up under water when the Arctic melts.

stevec,

From my observation, the relocation issue isn't a huge one for people who buy here--couple of reasons for that. One, they tend to be in professions such as law or medicine where you build up a practice and don't get relocated or they're in the tech industry, which is very, very centered in this area. Yes, people get laid off, but they also find their next jobs in the area.

I do know of cases where people bought here and then were relocated. However, the relocations often seem to be of a specific length of time and the families hold on to the house and then return. They can do this because the run-up in both rents and home prices was such that rents can cover mortgages.

I won't dispute that it makes no sense for some people to buy here. But as I recall the original poster wanted to know why *anybody* would buy. And there are people for whom it makes sense.

Having been an endless renter in Palo Alto, I'd say that the renters in PA fall in to a couple of major categories--grad students/young professionals who are reasonably transitory, but also well-educated and smart aka socially desirable and families who are here for the schools. While those who rent for schools may not have the same amount of money as those who own, often they're of a very similar social caste as their home-owning neighbors. They just got here later. Most of the people who own in Palo Alto would not be able to afford their own homes at current market prices.

As a renter, I was actually more educated and more affluent than many of my neighbors.

Personally, I think it's a shame that Palo Alto is losing much of its former economic diversity. It used to be that it was a city that had rich areas (Crescent Park) and working-class areas (Sterling Gardens started as military tract housing). I think it made the city more interesting and vibrant and, frankly, it meant the kids weren't living in such a bubble. (Which I actually think adds to the extreme stress at the schools.)

"Global warming is neither here nor there in this discussion unless you're concerned with chunks of Palo Alto ending up under water when the Arctic melts."

OhlonePar,

You keep stepping in it. That kind of hysterical remark is what drives the green agenda in Palo Alto. It ends up costing us a bunch of money, unnecessarily. However, as I said, if enough rich decendants can afford to buy into it, then it actually boosts property values in PA.

Old -

I agree with the form of your analysis, but disagree with the numbers or boundary conditions, which matter when it comes to a single individual during a single lifetime.

A $1m single family house in Palo Alto (assuming that you can buy a single family house ready to rent with no additional investment for 1m in Palo Alto) rents for (I guess) $1500 - 1800. It is quite small and undesirable. The property tax alone is 1000/month. Insurance and maintenance will be another $100 - 200/month; if in a flood zone, and it either is now or will be, there's another $30 - 50/month or more.

Can you borrow $500,000 for $300 - $800/month?

If you are thinking of a condo, you may well get more rent, but there is an HOA fee which will eat into cashflow.

Am I missing something?

Numbers matter:

A 1MM property in Palo Alto rents for about 3500 - 4000 per month. There are lots of examples in Midtown and South Palo Alto.

"A 1MM property in Palo Alto rents for about 3500 - 4000 per month. There are lots of examples in Midtown and South Palo Alto."

that's why it's expensive either way, you pay premium rent, you pay premium prices, no deals around here.

"A 1MM property in Palo Alto rents for about 3500 - 4000 per month. There are lots of examples in Midtown and South Palo Alto."

Really? Of 176 2+br places listed for rental in Palo Alto, only ~30 are over $3,500 and most of those are 4br places that will cost a lot more than the 1MM. Web Link

"Really? Of 176 2+br places listed for rental in Palo Alto, only ~30 are over $3,500 and most of those are 4br places that will cost a lot more than the 1MM. "

Yes, and most of those are apartments or condos, not single family homes.

Really? Check again.

Sure, I did. All listings under $2K are for condos or apartments. Only 3 tiny 2br houses were under $2.5K. Even between $2.5K and $3K it looks like half are apartments/condos/townhomes. So out of 177 listings, only about 60 are for single family houses with most houses over $3K.

Kent,

My point was that you're off-topic with the generic liberal-bashing. I wasn't saying we'd end up under water, but that would be the one thing that would make global-warming relevant to the conversation at hand.

Back to the topic at hand.

I had one of those house rentals--and, no, they're not anywhere nearly as low $1,500-$1,800 a month. That kind of rent for a house hasn't been available for years. It was fairly rare 15 years ago. Expensive either way is right--you pay to live here. All that remains is how you want to do it.

By the way, leverage, since I'm not sure from where you're posting--listings can be misleading. East Palo Alto rentals can show up under Palo Alto on some searches--different city, different county, but parts of EPA and PA share zip codes.

Craigslist search for 3 bedroom house (not apt since that is what the original poster was comparing), there are 22 listings (not very many)

6 - under $3K
8 - 3-4K a month
8 - 4-9K

The original poster made the excellent observation that the purchaser of the 1.3 million dollar home would have been much better off renting and investing the money that would have been saved. It would seem that this particular individual grossly overpaid for that house. If anyone in Palo Alto can find someone else willing to take on a mortgage payment more than twice as expensive as rent, I say take the money and run.

The buyer who purchased the $1.3M house is betting on economic and real estate market recovery. House prices in Palo Alto came down 20% from the peak, so he is betting that they will come back. Same logic with stock buyers. People do not look at underlying value, they look at trends, at historic highs, etc. If shares of company X cost $100 in the past and now they are $80, people who buy them at $80 think they are buying low so that they can sell high some time in the future. The original poster could have posed a question this way - who in their right mind invest in US market or US dollar these days...

Some people are just too damn practical. People aren't necessarily buying PA homes for investment purposes. We bought a $1.4 million dollar house in 2005 because we wanted PAUSD and to own a home in the community of Palo Alto, my hometown, not rent with the fear of being kicked out. If the house depreciates, we do not give a hoot. We want to own our house and raise our children here.

Some of you ought to consider moving to that mobile home park next to Jamba Juice/Blockbuster Vids on El Camino Real. Your kids can attend PAUSD, you can own a home and save lots and lots of money. That would be the practical thing to do.

I've seen several "new price" signs tacked onto realtors' for sale signs around town lately. That tells me that Palo Alto housing market is feeling some pain.