The pat answer is of course that demand exceeds supply. The real question is why the supply lags the demand so badly.
Some recent statistics from the California Board of Realtors and others:
Median price of homes sold in Santa Clara County (Silicon Valley), May 2001: $532,500
Median price of homes sold in Sacramento, May 2001: $174,080
Median price of homes sold in the state of California, May 2001: $257,060
Median price of homes sold nationwide in Q4 2000: $139,600
I know a couple of “conventional wisdom” arguments, but they don’t really hold up under examination:
The state tax code in California is set up such that it is a financial loss for cities to approve housing developments as opposed to retail or commercial development. Houses drain more from the city in terms of services used (schools, water, sewer, police, fire) than they return in taxes.
Objection: Then why aren’t houses more expensive everywhere else in the state, too?
There is a shortage of buildable land.
Objection: Piffle, for the most part. Berkeley was “built-out” long ago, and houses run up the sides of steep hills. In other areas, development plans do not allow building on the hills. Now, you can’t tell me that local environmentalists are so powerful that they can get cities to ban growth, not even in California. There’s some other reason why cities are so receptive to development bans, but I don’t know what it is. It can’t be argument #1, because again, that would hold throughout California, which it certainly does not.
Uh, so far as I understand it, real estate in California is more expensive than it is in the rest of the US. Indeed, your numbers show that. So argument #1 may be partially valid; one reason that Silicon Valley real estate is so expensive is that it’s in California.
Other factors are 1) it takes a long time to build new units–say 12 to 18 months, and 2) new housing is a long-term investment. You don’t want to build a house and then find out ten years later no one wants it. These two factors mean it’s prudent to “underbuild” during periods of explosive growth, unless you’re absolutely certain the bubble is not going to burst for a good long while.
From the city government’s point of view, explosive growth is a PITA: you need to radically increase city services, which probably means raising taxes. It always costs more to get things done faster, after all. At some point it becomes politically easier for the government to say, “newbies are just not welcome here.” And development restrictions, which lead to high real estate prices, are an easy and politically acceptable way to do that. It certainly looks better than putting up a barbed-wire fence.
Last but not least, certain places are always just going to be more expensive than others. This is due to either geography or what economists call network externalities. NYC is the center of the financial world, so everyone who wants to be part of financial world wants to live in NYC. This behavior creates a self-reinforcing feedback loop, and creates a (semi) permanent differential in economic rent between NYC and, say, Albany.
What about Denver? Although Boulder and Fort Collins have growth restrictions (the “Blue Line” and Larimer County’s “Urban Services Area,” respectively), the rest of the Denver metro area has no such restrictions.
There’s plenty of developable land north, east and south of Denver – not BLM owned or part of a greenbelt.
Development regulations in the Denver area are very strict, but the review process in most municipalities is short – about 15 weeks from the first conceptual review to final subdivision approval by City Council, if there are no snags along the way. A house takes about three to four months to build, from permit issuance to the final certificate of occupancy.
Maybe it’s market forces resulting from a generally affluent population – the upper middle class in any other part of the country are the average middle class in Denver. Let’s take Joe and Jane Colorado. Odds are both work in tech or for telecom companies, and each pulls in about $50K a year – probably more. With $100K or $120K in the kitty every year, they should have no problem making payments on a $400,000 house. Unfortunately, it leaves teachers, government workers and the middle class not employed in the tech sector out in the cold. For someone who is single, and a non-tech professional, Denver is borderline unaffordable. (Only in Denver is a planner or elementary school teacher, someone pulling in $35K a year, considered “working class.”)
Because the cost of living is so high, other services become more expensive – construction and skilled trades. There’s a shortage of skilled labor, partly because the high cost of living doesn’t compensate for the additional work resulting from the boom.
It’s becuase it’s a seller’s market. People who are looking for homes in Silicon Valley are usually a little more well off ( huge generalization here) and the real estate market knows this. Because of it, they say “people can afford, thus we charge it”. I know it seems unfair to those of us who can’t afford it, but there it is. Have you seen what the cost of a cruddy appartment in San Fransisco cost? Sheesh!!! Forget my childhood dream of living there!
Your assumption that there’s lots of buildable land in the Silicon Valley is just wrong. The area is bordered by mountains on both sides and the Bay. Look at the size of the typical house lot. Even before the real estate prices soared, the houses were built on lots that would be considered laughably small in most other areas of the country. The mountains also limit access. There aren’t a lot of roads through the mountains, and what roads are there are twisty and windy. So building out in the boonies and commuting is not an attractive option.
Other things that affect the house prices.
It’s an earthquake prone area. So I’d guess there’d be not much in the way of multi-story buildings. I don’t think the geology of the region really supports building on hillsides – it’s prone to mudslides.
The climate is great, there’s lots to do, and it’s near one of the country’s great cities. So like most really nice places, it’s going to attract people until the crowding makes living there no more attractive than anywhere else.
Finally, there’re lots of well-paying jobs there. So there are people who can actually afford the outrageous prices.
I used to think it was the lack of buildable land that accounted for the prices, but then I noticed that the foothills near San Jose, at least as you approach it from the East Bay, are partly built on and partly not, depending on whether the local government says you’re allowed to or not. Plus, Berkeley (as I mentioned in the OP), East Oakland, and San Francisco are built on hills that have got to be as steep as the ones around San Jose. I agree that it would be more expensive to build there, but not prohibitively so, and certainly not to a degree which would explain the difference in cost between San Jose and, say, Fresno.