Why Gen Y Can’t Afford Prime Real Estate Any Longer

in Investing by

I grew up in the Bay Area, and always assumed that sky-high house prices and an astronomical cost of living were the norm. It wasn’t until I went to college in St. Louis that I realized just how crazy the real estate market in San Francisco and Silicon Valley is. It seemed like each time I came home there were condos and office buildings being built en masse. Google, Apple and LinkedIn have all recently moved in, making my hometown, a city that used to be a cherry orchard just a few decades ago, more commercialized than ever.

What makes San Francisco and Silicon Valley such a prime real estate area? Job opportunities, ample housing supply, and the powerful tech sector. This economic triumvirate drives increases in value in both the residential and commercial real estate markets while also providing ample avenues for growth. As a college senior with hopes of moving back to the Bay Area, I’m faced with the harsh reality that I might not be able to afford to live in San Francisco or Silicon Valley. Here are the three reasons why Gen Y won’t be able to afford living in the Bay Area:

Limited Room for Growth

Both San Francisco and Silicon Valley are subject to geographical restraints that significantly limit the amount of construction that can take place. For San Francisco, it’s the fact that it’s a peninsula. For Silicon Valley, it’s the Santa Cruz Mountains and Diablo Range that curb development. These natural barriers prevent both San Francisco and Silicon Valley from expanding their boundaries and continuing to build the infrastructure necessary to support extensive population areas.

It’s easy to understand why Austin, Dallas, and Houston are three of the fastest growing cities in the country. Their city limits are constantly being redrawn to accommodate more expansion. When combined with the booming tech and oil industries, lack of state income tax, and relatively cheap cost of living, it’s easy to see why Texas is able to attract scores of recent graduates and young families.

It doesn’t help that San Francisco is famous (infamous?) for its housing restrictions. Much of the city’s housing policies has focused on growth control as opposed to rapid expansion. Check out this map of maximum allowed building height:

Source: Garry Tan

Yellow indicates a max of four-stories. The overwhelming majority of the city is unable to scale upwards. Districts 3 and 6? That’s the trendy SoMa neighborhood, where a one bedroom apartment will set you back about $3,500 a month.

Buying is A Nightmare…

The California Association of Realtors produces the First-Time Buyer Housing Affordability Index (FTB-HAI) every quarter. The FTB-HAI is a metric that quantifies the percentage of households that are able to purchase an entry-level home in California. It assumes that the buyers are able to place a 10% down payment on the home and is based on the median price of existing single-family homes sold.  Take a look at the FTB-HAI for the Bay Area compared to California, the Los Angeles Metropolitan Area, Inland Empire, and United States:

2014 Q1 - Blue


Based on the FTB-HAI, only 46% of first-time home buyers are able to afford a home in the Bay Area, compared to 58% in the Los Angeles area, 70% in the Inland Empire, and 77% across the country. While seven out of eight Americans are generally able to purchase an entry-level home, and three out of five are able to do so in one of the largest metropolitan areas in the country in Los Angeles, less than half are able to do so in the Bay Area.

Now let’s take a look at the breakdown by county over the same time period:

Q1 '14

The counties that make up San Francisco and the Bay Area? San Francisco, San Mateo, and Santa Clara. You could even throw Marin in as well, as it’s the first county just north of San Francisco. It should come as no surprise that these four counties are the toughest for first-time buyers to find a home, with each experiencing a significant decline over the past year.  Santa Clara county seems to mirror the overall trend of the San Francisco Bay Area as a whole as well – both experienced a decline from 51% in the first quarter of 2013 to 45% a year later.

The primary reason that Santa Clara seems to be more affordable than the other three counties is its distance from San Francisco. The general real estate trend is the further south you go from San Francisco, the cheaper the housing seems to get – for good reason.

HSH conducted a study to determine the salary needed to afford a home in thirty different U.S. cities.

Median Salary

There are a couple of things that instantly jump out at me. First is the median home price in San Francisco. At $679,800, its more than one and half times the median in Los Angeles, nearly double New York City’s median, and almost quadruple Chicago’s. Second is the fact that the median price actually went down from the fourth quarter in 2013. The fact that the median price decreased but is still almost $680,000 is downright scary. Third, of course, is the salary needed to purchase a home, at $137,129. Considering that the salary you need in San Francisco to own a home is more than four times what’s needed in St. Louis, settling down in the city I go to college has never looked more attractive.

Given the median home price, a 20% downpayment would set you back more than $135,000. According to the National Association of Colleges and Employers, the average salary for the Class of 2014 is $45,473. Assuming an average savings rate of 10% per year towards a downpayment, a recent grad would be able to save around $4,500. For those who majored in Computer Science or Engineering (two of the most popular majors in the Bay Area), the average starting salary around $62,000 means they would be able to put away almost $6,200 per year. Twenty years (factoring in raises and inflation) to purchase a home in the Bay Area doesn’t sound too great. At the median salary of $45,473, it would take almost thirty years.

Interested in helping your children or grandchildren with their first downpayment? Check out how to gift a downpayment.

…And Renting is Worse

About 35% of San Franciscan residents are homeowners. and approximately 45% live in rent-controlled apartments. Between the two, eighty percent of San Francisco’s (already-limited) housing supply is taken up. Over the last twenty years approximately 1,500 units are built per year. The amount of full-time residents that have moved to San Francisco since 2010? Try 32,000+, or 8,000+ a year. Applying the fundamentals of supply and demand, it’s no surprise that San Francisco’s median rent looks something like this:

Source: CurbedSF

During this time, studio apartments in San Francisco have seen the most price appreciation, gaining 17%. One-bedroom and two-bedroom pads both experienced 3% growth. San Jose and Oakland both experienced increases as well, and present viable alternatives. However, if you were to commute to San Francisco or to Silicon Valley (such as to Sunnyvale, Mountain View, or Palo Alto) you’d have to factor in the cost of transportation and the value of the time you spend commuting.

Based on price alone, San Jose looks like a terrific option. It’s close enough to Silicon Valley and has convenient routes to San Francisco to attract plenty of price-conscious young workers. Unfortunately, too many people have this idea. SpareFoot ranks San Jose as America’s Top Apartment Boom Town. Approximately 38% of San Jose residents spend more than 35% of their income on rent. Housing is deemed affordable if it costs less than 30% of an individual’s income. So not only would you be spending outside the recommended threshold, but you also wouldn’t be building home equity.

Is Living In The Bay Area Worth It?

Considering these drawbacks, why do people continue to flock to San Francisco and the Bay Area? There’s no doubt that the bevy of jobs, fantastic weather, and laid-back culture play a part. But why is it worth it? Why is it worth spending well over the 30% recommended threshold on housing? Why is it worth assembling packets of information containing credit scores, employment history, and a list of references just to get an apartment that you know that you don’t really want? Why is it worth buying a house way out of your price range knowing that you’ll still have to spend multiple hours commuting each day?

Because in no other area of the country is the American Dream more alive.

Raj Chetty, Nathaniel Hendren, Patrick Kline and Emmanuel Saez, economists from Harvard and UC – Berkeley, conducted a study that dissected federal income tax records for 40 million children and their parents between 1996 and 2012. What they found was that San Jose and San Francisco are the two metropolitan areas that provide people the best chance to go from the bottom quintile to the top quintile.

Upward Mobility

Throw that in with the job opportunities, great weather, and laid-back culture, and it makes sense why San Francisco and the Bay Area are so popular. Many people save money by simply co-habitating with rooms ranging from $900 – $1,600 a month on average.

San Diego, New York City, Boston, Washington, D.C., and Seattle also appear in the top ten of both the median salary and upward mobility lists. Seattle, New York, and Boston have a significant tech presence, while San Diego and Washington constitute two of the country’s leading defense hubs.

Dallas, Houston, and Austin are recognized as some of the fastest growing cities in the country due to their ability to attract smart college grads to the financial services, tech, and oil industries. In Dallas ($47,708) and Houston ($49,036) the salary needed to purchase a home is almost one-third of that needed in San Francisco. The common thread across these three cities? No state income tax.

Interested in selling instead of buying? Learn how to choose the right realtor to sell your home. Middle-age and considering buying your first home? We wrote a lengthy piece about the topic. Are you thinking about your mortgage the right way? See what we have to say about your mortgage and bond exposure

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Arun Sundaresan

Arun Sundaresan

Arun Sundaresan is a Portfolio Management Intern at Personal Capital. Arun has previously worked at Citigroup in London, and spent time at Personal Capital last summer. He is currently studying Finance at Washington University in St. Louis.


  1. Financial Samurai

    Arun, I’ve found out a lot of people in SF have A LOT of parental help when buying a house. Over the past 10 years, I found out that seven of my neighbors home’s were all bought by their parents.

    So in that sense, Gen Y doesn’t need to afford a home. They just need to be nice to their parents and take care of them when they are old!


    • Laura


      That’s assuming that their parents are rich AND want to give that wealth to their kids. 😉

      On another note – 30% of income going toward housing seems extremely risky to me. In our household 20% of our take-home goes toward our mortgage (take-home is after taxes, health insurance, HSA and 401k deductions, so probably we are much less than 20% depending on how you calculate). Even with that I’m not spending much on clothes, we don’t take fancy vacations, and we aren’t saving nearly as much as we need to for our kid’s college funds. There are also those pesky home ownership costs to worry about.

      If you are spending 36k per year on a mortgage on a 137k income in SF, you are probably only taking home 100k. That leaves just 5k a month for expenses. $1200 for food, $2500 for 2 kids in daycare, $300 in utilities, $150 for cell phone, $400 for auto/life insurance, $400 for gas, $200 for clothes (and for most people living a 100k lifestyle that’s how much they spend on one pair of shoes). Anyway, it basically goes NOWHERE. And all my quick budget estimates are low. Even single without kids on this salary you are still not going to get ahead.

      Whenever I think about this too hard it really scares me. Most people simply can’t afford to sustain, let alone save at this point. Try asking our generation in 30 years to help with a down payment for our kid’s house – not going to happen.

    • Nick

      Personal experience says you’re right. The wife and I moved back to the bay area when our daughter was born, and had to give up on the idea of living in the city. We were going through more scrutiny to rent in SF then we did for our first mortgage (which was *after* the recession hit, and lenders had already tightened up on their practices). We’re buying my grandparents’ old house now for basically at-cost (it wouldn’t be an option for us otherwise). It wasn’t where we wanted to live, but even still we’re probably among the lucky ones.

      With a household income in the low six figures, it feels like we have *just* enough to cover the basics (daycare, food, transit passes, student loans, mortgage, etc.), and even for the bay area we seem to be on the upper end of the income scale (for now, we’ll see how this tech bubble plays out). Which just hits me with the thought… how the f**k is everyone else getting by? This is ridiculous. I’d cut our income by 75% if it meant the cost of living for everyone would go down. It just isn’t fair.

      I just find it disappointing that parental help is almost required for a gen y-er to buy a home, especially considering said parents probably didn’t have to. What does that say about the children of generation Y? It sure feels like this boat is taking on water and with 80% of this generation already drowning, the next generation doesn’t have a snowflake in hell’s chance of making it. Definitely not a good trend, to put it mildly.

  2. Cullen

    Maybe you should have titled this post differently… it’s as though you are treating “Prime Real Estate” as being a synonym for “Bay-area Real Estate”.

  3. Anonymous

    Stopped reading after the second paragraph – Arun, please explain why “ample housing supply” would increase real estate prices. In fact the single greatest factor increasing prices in the area is restrictive zoning regulations that artificially decrease the supply of houses, condos, and apartments and ensure the the housing supply is far from ample. I wouldn’t count on this internship turning into a real journalism job if you can’t keep basic economic principles straight.

  4. Mark

    Median house prices are misleading. I live in Minneapolis and $188K will buy you nothing but a rundown home in a so-so neighborhood.

  5. Jason

    Interesting post. It would be a good to list the cost of the home including property tax as well. I’m not sure what it’s like in areas like San Francisco, but in Long Island, NY property taxes for a $400,000 center-middle class home can be $12-14k easily. This $1k+ per month in perpetuity for just property tax.

  6. Justin

    Looks like the real American dream is alive and remains in Texas. Everyone else can live in a fairytale.

  7. Troy benson

    Hi there, I am an advertising professional in the RE industry based in NYC. I am also a developer myself. I have a few comments regarding the data relating to NYC, specially the medium price. You have to consider the boarders of NYC do include queens, Brooklyn and Staten Island. The outer limits of these areas starkly drive averages down for NYC as a whole. If one is intending to live in manhattan you probably wouldn’t be able to afford a property for less than 700k if you are lucky. Most home buyers will wait until they can afford approx 900k before making the move to buy. It is also fair to note that size of units are a factor, so I would be interested in further analysis of the per/ft comparable across major us cities. Some of my friends who do own (very few) live in apartments that are 500-600 sq/ft and they make over 200k per year.

  8. collarek

    Any chance you can post the full “upward mobility in the 50 biggest metro areas” chart? Thanks!

  9. Alan

    San Francisco is half as dense as Brooklyn. Silicon Valley is far less dense than that.

    All y’all have to do is get the existing homeowners to stop saying ‘f you, got mine’ and to start saying ‘yes, you can build an apartment/office building near this rapid-transit/commuter rail station’.

    Good luck with that.

  10. Stephen Crouch

    The last graphic showing likeliness to move from bottom 5th to top 5th quintile could not speak more clearly about the barriers of race. It also shows that those cities have not had much growth. Are the two related? I would guess so.

  11. Arvind

    There is also the effect that foreign buyers have on property prices, not only in popular metro areas like NYC but other parts of the country as well. RE prices should reflect the underlying economics of the population that lives in the area. Foreign buyers distort prices. In many cases they are not even living in the property but rather use it to park their money in the US. This behavior needs to be curbed severely through taxes or otherwise.


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