We need more housing for the upper upper middle class

$1.5 million dollar house in Palo Alto

When people talk about real estate affordability and gentrification often the focus is on housing for the poor. Myself, I don’t think this is the issue. People with means wouldn’t move into poor neighborhoods if there was housing they could afford elsewhere.

Most of the “multi-million dollar” houses in Palo Alto are not mansions. Many are not really worth that much because of the house; it’s just the land. These are modest homes which really are appropriate for middle class buyers. In fact they were often built with middle class buyers in mind.

But in places like Palo Alto they are now for two types of people: long-term residents (who also likely don’t pay much property tax), and those with very high incomes and/or wealth due to selling companies.

From an article published last year:

The average price of the Palo Alto homes that went on the market today is just over $3 million. With a 20 percent down payment and the state’s average 30-year fixed mortgage rate of 3.77 percent, the average monthly payment on those homes would be a little over $14,000, two-thirds of the monthly income for a quarter-million dollar household.

It’s hard to imagine that two married Google engineers in their twenties could afford a house in Palo Alto. It’s beyond their means. But these homes are not luxurious in and of themselves. They’re all that the upper upper middle class have access to nearby.

In Silicon Valley they love to reimagine stuff. But only some people like the demi-god Elon Musk are focusing on concrete things, like cars and rockets. They need to re-imagine housing. There’s no reason the people coding the future should live in post-war ranch homes.

13 thoughts on “We need more housing for the upper upper middle class

  1. Antiplanner ( http://ti.org/antiplanner/ ) has discussed this issue many times, and he concludes that the extreme costs of housing in places like San Francisco, Malibu and Denver is due largely to housing, transportation and environmental regulations that limit construction and land use. They also serve the purpose of racial and ethnic segregation.

  2. We have the same phenomenon in many cities in Canada. A couple of years ago there was an online fad quiz game about the Vancouver real-estate market named “Crack-Shack or Mansion”. The title says it all. There is a similar situation in Toronto, where the average detached house price is about $1M and the median family income about $80k, with lots of foreign investment and speculation throughout the market.

  3. “With a 20 percent down payment and the state’s average 30-year fixed mortgage rate of 3.77 percent, the average monthly payment on those homes would be a little over $14,000”

    My trusty HP12C gives me 11,142.03 as the mortgage payment on that nut. But, they may be including taxes.

    Another problem with those numbers is that it would be very hard to put together a $600,000 downstroke without a substantial inheritance or something rather like that.

    The mortgage payment is at least cushioned by destructibility. For savings, you are full after tax. Paying rent in that market and saving $600,000 before you are 40 is hard to imagine.

  4. “People with means wouldn’t move into poor neighborhoods if there was housing they could afford elsewhere.”

    At least in Europe, there is a subtype of poor neighborhoods that are sometimes “invaded” by a subtype of “people with means” – I am talking about the inner city “traditional” neighborhoods (like Alfama, Mouraria and Graça in Lisbon), and the metropolitan “hipster” upper-middle class (who are strong vocal opponents of gentrification but probably are the main gentrifiers themselves).

    I don’t know if the same phenomenon exists in USA, but attending that the rule in American cities is the poors living in the inner cities an the middle class in the suburbs (the opposite of most Europe), I imagine that probably the phenomenon of upper middle class people buying houses in the center of the city, in neighborhoods traditionally poor but with a good location (close to the jobs, commercial and recreational areas, etc.)

  5. MM, u r describing gentrification in the states. inner city areas that were given over to the poor in the 70s become appealing to single young professionals because of the reasons you give. eventually these people price out the poor, and the more conservative family types can move in. (albeit, small and quite rich families)

    but if there were lots of high-rise condos in the downtown for the professionals they wouldn’t push out the poor in their rundown areas as quickly.

  6. https://ww2.kqed.org/news/2016/04/07/in-search-of-cheaper-housing-silicon-valley-workers-face-long-commutes/

    Hey, just commute every day 100+ miles from the Sacramento suburbs, what’s the big deal?

    I’ve known two people who bought houses in Palo Alto: one (50 years ago) was a public school administrator, the other (5 years ago) was a venture capitalist.

    Talking to someone else who grew up as a faculty brat on the Stanford campus in the 1950s: she said Palo Alto was seen by Stanford snobs as kind of a “townie” place back then.

    CA wasn’t more expensive than the US until 1975.

    http://www.doctorhousingbubble.com/what-should-a-california-home-cost-price-and-income-ratios-various-market-ratios-to-determine-real-estate-valuation/

  7. Living in an area with low housing costs due to decades of population decline, the continued desirability of those undistinguished ranch houses in California has always been kind of amusing to me. I say this because locally those houses tend to be close to the low desirability point – not old enough to have the “character” that people who like old houses look for (hardwood floors, stained glass windows, intact unpainted woodwork, etc) but they also don’t appeal to someone who wants a modern home. It doesn’t help that they tend to be smaller than the homes built not only after them, but also the homes built earlier – though admittedly part of this may be because the older small homes were disproportionately demolished due to urban renewal. Regardless, these kinds of homes only tend to keep value in areas where there’s some other reason for property values to be inflated – mainly school districts. Otherwise, they just contribute to the general decline of many first ring suburbs as the “doughnut of poverty” moves outward.

    Regardless, in tony Northeastern suburbs, the way it works typically is the three bedroom, one bath houses from the 1950s are demolished after purchase, and a McMansion is put in their place. I would have to think that unless they are for some odd reason in historic districts, the same dynamic would happen in California.

  8. It’s hard to imagine that two married Google engineers in their twenties could afford a house in Palo Alto. It’s beyond their means.

    Having grown up in megacities with skyrocket high housing prices, I am not sympathetic to this line of reasoning. It strikes me too much as having the cake and eating it too. There is always bound to be a tension between desirability/employment prospects of a location and affordability. There is a spectrum to this tension, but it’s there one way or another.

    It’s not a God-given right that two Google engineers should be able to afford a house in Palo Alto any more than two junior investment bankers should be able to own a brownstone in Manhattan.

  9. I’m getting ready to move into a rental house in Mountain View in a few months. I can’t get over how expensive these places are.

    I’m from the Canadian Midwest, where my parents large, fancy bungalow in a rich suburb was recently valued at about $370,000CAD. Beautiful interior, recently renovated. ~3500 sqft usable space. Landscaped back yard garden with patio, gazebo and fire pit. 4 Bed, 3 bath.

    The house I’m going to move into is a 3 bed, 2 bath, maybe 1500 sqft. Decent sized yard but the house itself is pretty trashy. The electrical is badly not to code, threatening to burn the house down, and currently being fixed. The ‘kitchen’ is really just a little part of the living room with tiles and slowly collapsing cupboards on one side. An earthquake a few years back broke a hole in the floor (under the carpet, so you can’t see it) in the hallway. Furnace is from the 50s, noisy as hell, and needs to be replaced. No insulation whatsoever; heating and cooling is a fortune.

    And this house is evaluated at like $1.5M.

    It’s absurd to me that things cost so much here. Build some more goddamn housing

  10. @bob sykes

    I’ll speak a bit to the Denver real estate market which I know well.

    Yes, land use regulation is an issue (e.g. authorizing granny flats and “alley houses” in otherwise single family housing neighborhoods as Boulder, Colorado has done, could open up a large supply of diffuse, affordable housing with well screened tenants, as could reductions in parking requirements near transit for new construction, and authorizing tiny houses on lots currently too small to build a legal dwelling upon) – although in the City and County of Denver it hasn’t been that restrictive – Denver proper has had more than 50% of new residential building permits over the last decade despite being effective landlocked, mostly built out, and having only 20% or less of the metro area’s population.

    But, one of the main reasons that metro Denver has surprisingly little sprawling suburban style development for its size (even suburbs are high density by national standards) is scarce supplies of water that can be used for municipal purposes. Dense housing means smaller lots which means less lawn watering which means cheaper tap fees.

    For example, Douglas County, Colorado (an exurb between Denver and Colorado Springs) topped the national lists of fastest growing counties in the country for many years, but now it costs ca. $100K per new house as a water tap fee before buying land or building anything or paying development fees (the finance stuff like the construction of new schools) in addition, to build a new housing unit. Yet, you don’t have to pay these if you do infill development in the City and County of Denver where there are trivial tap fees and no significant development fees either (since the urban infrastructure and water rights are already in place). The fees are high because groundwater aquifers and surface water rights are being depleted. Tap fees driven by scarce water supplies are effectively an invisible “soft” growth boundary that is present in many other Colorado cities (e.g. Grand Junction, Colorado where the water board has far more practical control over urban growth than the planning commission) as well.

    Also, Denver’s growth has been facilitated by school choice options (mostly programs within public schools and charter schools as opposed to vouchers to private schools) that make neighborhoods with inferior schools less toxic to would be upper middle class real estate buyers, since they can buy a nice house in a neighborhood with poor neighbors and not condemn their children to underperforming schools. This has also dramatically increased enrollment in the Denver Public Schools which crashed before school choice during desegregation busing. People are opting into the public schools again instead of going to private schools or moving to the suburbs.

  11. The fees are high because groundwater aquifers and surface water rights are being depleted.

    I worked in Colorado Springs some years back (I’d have happily settled down in Monument), and I was really surprised by the massive growth of Castle Rock when I visited last time. During the whole visit, I kept thinking that the area couldn’t sustain that kind of development and density due to water limitation.

    school choice options

    Colorado in general has excellent school choice flexibility. Aside from what you already mentioned, home schoolers can selectively take advantage of classes/programs at public schools in many “school choice” localities. This always struck me as eminently sensible and fair (given that home schooling families pay property taxes too). There just didn’t seem to be as much acrimony between home schoolers and public schools in CO.

  12. Karl

    As a resident of the area I can say there is controversy in neighborhoods in San Francisco and outside once the “monster” houses with high lot coverage start getting built and legislation is passed making the process at best difficult with lots of discretionary approvals.

    But really a lot of people in the more modest homes on small lots are like me. We can afford the home but not to completely rebuild it.

  13. Also, Denver’s growth has been facilitated by school choice options (mostly programs within public schools and charter schools as opposed to vouchers to private schools) that make neighborhoods with inferior schools less toxic to would be upper middle class real estate buyers, since they can buy a nice house in a neighborhood with poor neighbors and not condemn their children to under-performing schools.

    Someone who posts on Razib’s page should really know better than to repeat claptrap like this.

    While it is true that a lot of housing value in the U.S. is mediated by “good schools” this is largely a crock of shit. “Good schools” are primarily good because they happen to have selected for students who are predisposed to succeed. Essentially because the entry requirements (high tuition or housing costs) mean that parents who end up enrolling their students are either wealthy, put high value on education (meaning high IQ) or both. There have been repeated studies adjusting for selection bias in education, finding there is little evidence once you take inputs out of the picture that the outputs of schools (whether highly-regarded public suburban, public urban neighborhood, urban magnet, private, charter, or homeschool) differ in any fundamental way. Well, that’s not quite true – certain models like cyber-charter seem to be demonstrably worse than the average. But AFAIK there is no system which works better in a systematic fashion than a regular old U.S. public neighborhood school.

    If those yuppie parents in Denver sent their kids to the “bad” neighborhood school in appreciable numbers, they would miraculously improve. We know this because it’s happened in urban neighborhood schools around the country, from San Francisco to Chicago to New York City. Basically a critical mass of middle-class parents commits to jointly enrolling their kids in a formerly entirely low-income school. Then a few years later, the test score start improving, which causes slightly more nervous parents to consider it as an option. As time goes on gentrification naturally erodes the low-income student body, but because there is a replacement student body, the school district doesn’t have to consider altering the feeder pattern or closing the school. If the dynamic continues for long enough, you end up with a “good” school in the city – with essentially the same teachers, administration, and funding levels.

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