Can local home prices go any higher?
And does emotion play a role in whether your answer is yes or no?
At a time when local home prices have been declining—whether the recent stabilization of prices state-wide means we've reached a bottom here in Silicon Valley is a matter of conjecture—the question "can local home prices go higher?" may seem irrelevant. After all, shouldn't the question be, "Can local home prices go any lower?"
The problem with "Can home prices go any lower?" is that it has two concealed trap doors for the unwary to fall through. The first is that no one knows the answer. Lots of people think they do, sometimes with the vehemence of the fanatic, but "think" has never been a synonym for "know". And second, to focus on the short term is to live in the short term, and in real estate the outlook for anyone but the would-be flipper should always be the long term. Much like life—note the curious resemblance.
Anyone who wants to will find plenty of sound economic reasons why local home prices must continue to decline—hey, forget the recession and all those risky loans in affordable neighborhoods; those with long memories and grudges to match are still fighting the last war, the boost to prices the tech bubble gave—and why we'll never see those high prices again. Yes, you'll find concrete, oddly compelling reasons why homes in your neighborhood should be selling at—your choice—2001 prices or 1991 prices or 1891 prices in the very near future. But when those solid, irrefutable reasons are delivered, not in the calm cool tones of the all-knowing blog post, but in the shaking voice of the bright decent person who's just discovered that the challenge of buying a home pushes him far outside his comfort zone, I'm one step closer to believing that all arguments about homebuying, pro or con, boil down to one word: emotion.
Emotion: a word under-utilized and roundly abused these days, especially here in Silicon Valley where the spreadsheet has its own cult following. Whether it's because we're sons and daughters of the Age of Science or descendants of the Age of Enlightenment or just infatuated with our intellects and alienated from our emotions, invariably we reach for reason, or what's mis-labeled reason, and leave emotion on the shelf. Sure, emotion can get in the way, but it can also lead the way—and not always over a cliff (and the self-described "rationalists" go over as many cliffs as the "emotionalists") . Emotion is a legitimate driver in the decision whether or not to buy a home and, I'm beginning to think, the only driver. You fall in love with a region, a city, a neighborhood. Or you don't. Sure, once in love you get all analytical so you won't wake up the next morning feeling cheap and used but, having worked through that, you fall in love yet again, this time with a house. Or you don't. Maybe you just fall in love with your spreadsheets. But whatever the emotion you feel about homeownership—love, loathing, fear, pity—it's always honest. Rationalization is never honest.
With this in mind, let's look at some of the popular reasons why local homes prices can't possibly go any higher.
1. "Because."
No, I'm not kidding. After every boom you can bet that a certain percentage of the populace will exclaim, "Whoa, dude! That was some kind of Golden Age we just lived through! We'll never see days like those again!" And here in Silicon Valley you can bet that we'll sell ourselves this end-of-history idea with the same well-modulated tones and quiet conviction so useful in selling software, hardware and visionary ideas. I've pondered this phenomenon since I first met it, up close and personal, during that highly-public self-flagellation and crisis of confidence ("it was all an illusion, and we were all fools") we call the dot-bust, and I have a few theories as to why it happens.
It's either a sign of:
Whatever it is, the funny thing is, the folks who say this are always absolutely right: we never do see that exact same boom again. Instead, we see another boom aka Golden Age and, unless we're Japan or Grand Rapids, we don't have long to wait. And can someone please tell me why Japan's "lost decade", with its own unique drivers, is always held up as the picture of where we're heading, when there are far more examples of highly-developed countries pulling themselves out of recession, painfully, yes, but relatively quickly?
2. "Income can't go any higher."
Why not?
That was too easy. Next reason.
Okay, maybe your income and mine isn't likely to skyrocket, but seriously, does anyone who says this understand why the income of a profession, industry or country rises? Soft-hearted employers? No, income rises when productivity rises. And does anyone really believe that there's a ceiling to productivity? Does anyone really believe that Silicon Valley's best and brightest aren't hell-bent on developing new, more efficient products and processes and on refining old ones?
3. "We're living in a fool's paradise of cheaply manufactured goods. Just wait until everyone in China is middle-class."
I'm no economics expert, but then, neither are the people who say things like this and, for that matter, even the economics experts don't seem all that expert. But I'm reasonably sure that it'll be a while before 1.3 billion more people join the ranks of the middle class. As a Chinese factory worker quoted in Daniel Altman's Connected: 24 Hours In The Global Economy says, "...after thirty years' economic reform, when China becomes an important global player, everyone's life is changed and confused...however, can all achieve their dreams? Few, probably very few for [sic] the peasants can do this, while many will pay [a] heavy cost for these great changes I believe". And if every Chinese peasant-turned-migrant-factory-worker does turn middle class and have a Buick parked in his driveway, I'm also reasonably sure that there'll be another politically stable but under-developed country that'll be open to the idea of becoming the next China.
4. "Inflation will go away."
No, no one's saying this, but that's certainly one of the implications of "home prices can't get any higher". Hey, maybe that's why Obama brought Paul Voelker back? To lick inflation once and for all? Now where did I put my old Whip Inflation Now button?
5. "They'll find more land around here, in places where people really want to live, to build homes that people really want to live in."
No, no one's saying this either, at least in so many words, but again, that's the implication. And while I could be wrong, I don't think that a hundred thousand new homes in Antioch is going to cause a mass exodus from what some people around here call the RBA (Real Bay Area). Or that two hundred new condos in Palo Alto will satiate everyone's longing for a single-family home on a 6000-sq.ft. lot. Or that some day every local homebuyer will throw up his or her hands and exclaim, "My God! This home was built in 1952! I'd rather buy a nice new Pulte home in Dubuque!"
6. "No one will move here anymore. In fact, population will actually go down."
Yes, some people do say this. Silicon Valley, they say, will choke on its own success and excess. Congestion and a sky-high cost of living will drive everyone away, or at least act as a relief valve modulating upward pressure on home prices. Well, who knows? All I can say is that this thinking would amuse someone coming here from one of the world's major cities because, take it from me, we still look pretty darn suburban to them. To them, we still have plenty of room to grow and, in fact, some growing up to do. I do know that more people live here than did when I came here forty-two years ago, and we've managed to squeeze them all in. Maybe we can squeeze in a few more without looking like Tokyo.
So there you have it, six good solid reasons why local home prices can't go any higher, not next year, not in five years, not ever. They're based so solidly on sound economic thinking that I really can't refute them. Or maybe they're based solidly on conventional wisdom, or at least the conventional wisdom of people who habitually think it's all downhill from here. The good times are over, or soon will be, because they were just an illusion, a fluke instead of the natural progression of 150 years of steadily rising living standards. The standard of living of the "haves" (and in the era of the brain-power economy, Silicon Valley's technological elite is the "haves") can't keep going up up up! because...well, because the earth is flat, and if you sail too far, you fall off. Everyone knows that. It just makes sense.
We're told that Americans are optimists, the optimism of the no-fear migrant and immigrant, especially here in no-limits Silicon Valley, and that this optimism is the secret of our success, but "it's all downhill from here" doesn't sound like the outlook of the optimist. No, it sounds more like the pessimism we're told is endemic to an old, decaying culture, whether it's Pittsburgh or the Old Country we, or our ancestors, left behind. I've always wondered how the optimist and pessimist can each survey the same scene and one see nothing but promise, the other nothing but gloom. I don't wonder that each instinctively seeks economic thinking to support their outlook, although I have occasionally wondered why each inevitably finds support from leading experts—which always makes me wonder about leading experts.
And why has our well-known native pluck and optimism gotten such a cornball Chamber-of-Commerce rep? Too much Horatio Alger? Too much George Babbitt? Not enough George Babbitt? Too much ennui? Too much pointless rebellion?
Whatever the culprit, my guess is that the outlooks of the optimist and pessimist are each the product, not of conventional wisdom, even less of reason, but of emotion—hope or fear. Mull that over, the next time you hear the earth is flat.