SF real estate is expensive

It can be pretty hard to place a value on a home. Choosing where and how to live is a complicated decision that forces us to prioritize across a broad array of financial, personal, and values considerations. Facing this very question myself, I did some investigation into the drivers of home prices over the last 35 years.

What I found was pretty interesting…

The financial decision to purchase a home can be broken up into the bet on the land, and the bet on the building (or space). In modern metropolitan areas like NYC and SF, the value of the land can be 75–90% of the actual value of any particular home. Meaning, whether you want to or not, when you are buying a home, you are buying into the local market for land.

Further, if you accept that prices are tied, even loosely, to household income, then these land prices can be viewed as pricing in the higher future incomes that people expect to capture by moving to the area. The price for a seat at the table, as it were.

Seeing how these markets play out across time can be pretty instructive.

Turns out that even once you take the impact of higher incomes into account, real estate in San Francisco (and California generally) looks pretty expensive. Even though households in Silicon Valley make almost 2x the national average, they are buying houses that are 9x their income. Meaning even if you put 50% of your income into buying your home, it would take you almost 20yrs to pay for the median home in SF making the median income.

Here’s that headline chart again, this time in context…