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In Silicon Valley $37K/Year May Mean Public Housing
flanksteak
sent us this U.S. News and World Report
story
about head-shakingly high Silicon Valley housing prices.
A local homeless shelter administrator is
quoted as saying, "We're serving firemen, cops, and
teachers. We even have the human-resource departments of
some of our biggest companies calling us, asking,'Can you
get this employee into your shelter?'"
The sale price of a house is an almost purely fictional value.
No more or less so than any other price. The price of housing, like the price of pork bellies or any other commodity, is just exactly the equilibrium value between supply and demand. Things cost what they cost because that's how much people will pay in order to maximize the profit of the buyer and the seller. There is no more "real" quanitity underlying price. If you want to put it that way, all prices are "almost purely fictional."
So, of course they want to sell it for as much as possible.
Uhm, real estate is not exactly unique in this respect. Where I come from, people who sell things generally do so because they want to make money. When I buy a sandwitch from the deli, they want to sell it for as much as possible. As it turns out, "as much as possible" turns out to be about $4.50, because if they charged any more, the losses from people who don't buy sandwitches will outweigh the gains from the increased price. Ditto real estate. The only difference is that people want a house a LOT more than they want roast beef on sourdough, and that difference in desire maps directly onto an increase in price.
There hasn't been enough of a tangible change in that property to justify it's suddenly increased value.
Yes there has. Silicon Valley has suddenly become a black hole of employment for anyone under 30 with a university education. It's nearly impossible to work in Silicon Valley if you live in New York. Therefore lots of people want to buy houses in S.V. More people want it, therefore it is more valuable. That's all there is to it. If a real estate prices a house at more than it's worth, the agent will get offers that are below the asking price. If the agent won't sell for less than the asking price, the buyers will go buy a house fron another, more reasonable agent, who will soon be much richer than the first one.
You keep referring to "the concrete value" of a thing, as though there really were such a thing, outside of how much people will pay for it. There isn't. Take gold. What is the concrete value of a gold bar? Can a chemist measure it's "concrete value" with the right tools? What are it's units of measure (in metric, of course)? The price of gold has been falling for years. Is there some undocumented physical process going on by which the "concrete value" is seeping out of the world's gold? Of course not. There's no such thing as "concrete value." There's just "value." It's units of measure are Dollars (or Yen or Pounds or Euros or whatever), and the only way to measure value is to try and sell it and see what people will pay.
You're right, liquidating MS would not produce $500 billion in assets if liquidated right now. But so what? The people who are paying for Microsoft stock think it's worth $500 billion, and so it is. Part of their calculation of that value is that Microsoft is extremely unlikely to totally liquidate itself in the near (or even long-term) future. It may be broken up by the courts, but that arguably will not result in the destruction of that much value.
"Never let your sense of morals prevent you from doing what is right" -Salvor Hardin
Welcome to the dark side of the free market.
It's not like everyone out here is gouging. In fact, it's all too easy to find stories of people putting their house up for sale and receiving offers above the asking price. Interest rates are low, money is plentiful (for the moment), and housing is in very short supply, so prices are high for those units that are available.
Apart from building more houses and easing the space crunch, it's difficult to see how this problem could be addressed. I can assure you rent control will not go over well here. It's also difficult to make the ethical case that some outside agency (government, whatever) should be able to tell people what they can/can't accept for their property.
However, one of the Bay Area's hallmarks is its commitment to open space preservation and well-planned, environmentally sensitive growth. So it's not really possible to plop a couple thousand housing units on a vacant sector of land. One needs only to look at the Los Angeles Metroplex for an example of what happens with unplanned development.
This problem will eventually solve itself as more housing units are built and companies establish remote offices or encourage telecommuting (the advent of the Internet makes this even easier than before). Howver, I think a rather more serious problem needing worrying about is what is going to happen to the banks holding mortgages on these properties when the bubble finally bursts. I'm concerned that property values may fall to as little as half their present level, and banks will be left with X dollars loaned out against collateral worth X/2. About the best we can hope for is that the fall won't be precipitous.
The first speedbump in this roaring market will happen around 1 January, 2000, if for nothing other then purely psychological reasons. If nothing else, it's going to be an interesting ride.
Schwab
Editor, A1-AAA AmeriCaptions
Hey -
Silicon Valley isn't the only place that has high prices on real-estate:
Boston is climbing that ladder too. Right now, the average price per square foot of office space in Boston is higher than Manhattan's. That's saying something. The average 1 bedroom rental is around $800/mo. A lot of this is due to the abolishment of rent control, and the "gentrification" of various neighborhoods.
The prices of homes in the Boston area (all the way out to Rt 128, which encircles the greater Boston area) seem to be at a minimum $300,000. While this in no way compares to the situation in Silicon Valley (a single floor ranch that an older couple sold, went for 2.1 Million), it is indicative of a series of related problems...
1> The sale price of a house is an almost purely fictional value. Think about it - I mean, I know "land appreciates in value" - but does the house as well? Almost anything else you buy depreciates over time. Granted, land is in finite supply - thus it's value will increase as the demand for it increases - but the house on that land should really depreciate, unless it is substancially improved.
2> This increase in price stems from a vested interest on the part of two parties - the owner, and the real-estate agent responsible for selling the property. Keep in mind that the agent gets a percentage cut of the sale price! So, of course they want to sell it for as much as possible.
3> Like the stock market, the real estate market is so over inflated it's incredible. Essentially they are creating money out of nothing. There hasn't been enough of a tangible change in that property to justify it's suddenly increased value. However, when the property changes hands again, the goal is of course to sell it for even more! Thus further inflating it's price without regard to it's actual concrete value.
4> We are, in the age of "information" and as such, we are often concerned more with increasing the value of things rather than the actual worth of things. By value, I mean percieved dollar worth of something. By worth, I mean the tangible concrete value of something.
Look at Microsoft - they are worth over $500 billion - the next closest company is GE, and they are only $300 billion or so. If you liquidated MS - would their assets in any way come close to $500 billion? I know that value is based on their possible future earnings (ignore any possibility of an OS revolution here for a moment) - but do you really think that 5 years from now they'd be worth 500 billion in assets?
Sorry for the rant - but this is something I feel pretty strongly about. The housing situation in some parts of the country is merely a symptom of how far out of whack we've become. Just because someone will pay it doesn't mean you should take it.
- Woodie