Sep262016

Are high home prices in Silicon Valley stifling start ups?

Many new companies form in Silicon Valley because they gain access to capital and a large well-trained workforce. But high housing costs forces wages up to attract talent, raising the start-up costs, and reducing the number of start-ups funded.

stifleMany entrepreneurs with great ideas for new businesses flock to Silicon Valley, the largest incubator of start-ups in the country. Many wealthy investors and funds with the specialized expertise to identify and nurture start-ups live and work in Silicon Valley, so entrepreneurs looking to start new ventures go where the money is.

Once these start-ups secure funding, they must execute their business plans. Just as the entrepreneurs flock to Silicon Valley, the influx of venture capital draws workers with the unique skills necessary to make start-ups successful. This creates a critical mass of money and talent necessary to propel new businesses forward.

While the venture capital money appears to flow freely from those on the outside, these investors aren’t foolish, and they want to invest as little as possible into new companies that may fail to produce anything of value. The less money investors must fund to incubate a start-up, the more likely they are to fund the deal.

One of the largest costs of most start-ups is labor. And labor in Silicon Valley is expensive — expensive because it must be in order to pay the ridiculous cost of housing in the Bay Area. Of course, this becomes a self-fueling cycle as each new, highly-paid employee bids up the price of the scarce housing stock for everyone else. Due to the shortage of housing, rising salaries initiate an arms race, which in turn fuels an arms race in housing with the real winners being owners of existing housing stock.

As this self-fueling cycle moves forward, each time a venture capital fund reviews another start-up budget, the salaries go up and up and up. The start-up costs rise to the point that many viable start-ups don’t get funded because the business can’t incubate in the hostile housing environment.

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Bay Area wages soaring — but still can’t keep up with housing prices

By GEORGE AVALOS: September 25, 2016

The Bay Area’s wages are getting higher, far outpacing most of the country, but more residents are finding their paychecks can’t keep up with the region’s skyrocketing cost of living.

The typical Silicon Valley income — well over $100,000 annually — is now double the national average, according to a Bay Area News Group analysis of ten years of federal data. But while pay here is soaring, the cost of housing is rising even faster.

If ten workers compete for five houses, house prices and rents will rise as fast as the wages of the five highest paid workers in the group. No matter how fast wages go up, housing costs will rise faster due to this persistent shortage of supply.

“We have a two-income family — we both make good money — but it seems like every month, the expenses keep rising,” said Nicole Tembrevilla, a recruiter for an East Bay tech company. Together, Tembrevilla and her husband, who own a home in San Ramon, make in the low $200,000 range.

“It’s hard to save money,” said Tembrevilla, who lives in San Ramon with her husband and two children, one in high school and the other in middle school. “It’s home improvements, the car, car insurance, tuition — it’s overwhelming. And we’re trying to save up for college.”

It’s hard to feel sorry for a family making over $200,000 per year. Listening to them whine about the high cost of living sounds like a bad joke, but in Silicon Valley, it’s a real problem.

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Residents say the biggest obstacle to making ends meet is simple: The Bay Area’s mammoth home prices and soaring rents.

“I’m getting good pay raises, but you really have to make around $150,000 a year to be able to afford a house around here,” said Joseph Martin, of Mountain View, a systems administrator with a San Jose tech company. Martin says he makes in the high five-figure range. “The real question is, ‘How do you afford to find a place to live here?’”

Since California nimbys oppose all new housing developments, but politicians all embrace new commercial and office developments because they create new jobs and increase local tax revenues. Since our policies create jobs but no matching housing, the shortage of housing gets worse, and costs escalate out of control.

For those making below the average wage, owning a home is out of reach. They’re just trying to survive.

“We are just barely making ends meet,” said Zeyen, as she shopped at a San Jose thrift store. “The expenses here are a real eye-opener.” …

“It takes everything we have to pay the bills,” Zeyen said. “We moved here to make a better future for ourselves. It’s hard to say if it’s worth it.”

(See: California housing policies devastate the lower middle class)un_review_of_united_states_reveals_severe_shortage_in_affordable_housing_geneve_november_2010

“The war for talent is driving all of this,” said Russell Hancock, president of Joint Venture Silicon Valley. “… The tech boom and wage growth have created a class of the uber-rich in the Bay Area.” …

Silicon Valley’s concentration of tech workers, with their top-flight paychecks, increases the chances that people will bid up housing values. …

The pattern of sharply rising wages in Silicon Valley is likely to persist, experts say.

“Demand for hiring is going to continue,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. “And that will keep the upward pressure on wages in Silicon Valley.”

I wrote that chronic shortages of housing supply inflates California house prices. When there are more jobs than houses or rentals, people are forced to bid up house prices and rents in order to obtain housing. This forces people to substitute down in quality and move further away from job centers, and it prices out the lowest bracket of wage earners, forcing them to live with multiple families in the same house or put upwards of 50% of their income toward housing, lowering everyone’s standard of living. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market.

This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income. The tipping point comes when businesses no longer want to play along. When businesses relocate — and take jobs with them — then California’s high house prices weaken the entire economy.

Is Silicon Valley in danger of losing it’s advantage as a tech incubator? If something isn’t done to alleviate the shortage of available housing, it will reach the tipping point where investors, businesses, and employers find it’s in their best interest to move elsewhere. It’s only a matter of time.

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