I’ve spent the last 8 years living in Silicon Valley. It’s a sprawling urban area with beautiful year-round weather consisting of about 10 cities that feel like one big suburb. It sits in a bowl surrounded by mountains and dotted with palm trees. Add in a bunch of tech companies, clogged highways, and houses starting at $1MM, and you’ll have a general idea of the place if you’ve never had the pleasure of visiting.
Before moving here, if you asked me to picture a million dollar house, I would have pictured an estate containing a large mansion surrounded by manicured grounds with a pool. But you’re not getting that with $1MM budget around here. Not even close. You can forget about the grounds, the pool, or the large house. In fact, that’s barely enough to get you a regular house on a small piece of land. In prime locations near Google or Facebook campuses, expect a 2 bed 1 bath with maybe 1000 square feet. If you want a big house or one with a pool, expect to pay a lot more.
If you’re willing to pay a small fortune for a modest house, that means you’re going to need a down payment of $200k just to get a jumbo mortgage of $800k. Do you know what the monthly PITI payment is on an $800k mortgage? It’s almost $5000 per month! And yet there are no shortage of buyers. Most people are buying with the idea that even though it’s expensive now, they’ll still benefit from rapid appreciation in the future. But considering that the average Apple or Google engineer who is paid the tidy sum of $188,000 can’t afford to buy one, how much room can there really be for growth? Even if you can afford it, do you really want to tie your fortune to an illiquid asset in prime earthquake country? Judging by the sales figures, the answer for most people making high wages is still yes.
Of course if you just work a regular job like me, you can’t afford to drop a million dollars on a small house even if you think it would be a good investment. Luckily, there are other options that will allow you to part with hundreds of thousands of dollars of your hard earned money. There are plenty of $700k two bedroom condos! This is likely a worse idea than dropping 40% more on a same-sized house, considering that you now get to deal with the busybodies of the HOA and have the privilege of paying an extra $500-$1000 per month in fees on top of your gigantic mortgage payment for what amounts to a glorified apartment. At least you’ll have a pool.
Or maybe you’re willing to sacrifice two hours of your day morning and night commuting from over the mountains. In that case, you can definitely find a regular-sized house that could hold a regular-sized family for less than $1MM. You’ll be miserable and spend so much time commuting that you’ll never see the other people that live in your house, but at least you’ll own property. Personally, I’d rather gouge out my eyes with a sharp stick than commute for two hours each way, but a lot of people make that choice.
Complaining about housing costs is really the great unifier here (not without merit, obviously). It even surpasses complaining about Trump! Get a group of Silicon Valley residents in a room, and while only 90% will despise the president, you’ll get 100% consensus on the ridiculousness of housing prices. I’m a bit surprised that a chapter of The Rent Is Too Damn High party has not opened up a satellite branch here yet.
It’s not all bad though. While real estate prices cause most things to be more expensive than the rest of the country, wages are higher too. The professional jobs pay well because they know it’s expensive to live here and need to attract good workers. Unemployment is very low, so it’s relatively easy to switch jobs and get yourself a raise when the time is right. And for someone on the FIRE path who is looking to save a lot money, one of the top priorities should be to make a lot of it. After all, you can’t save what you don’t earn.
Whatever you do, don’t buy into this overpriced real estate market without a plan to stay for the long term. Even considering appreciation, it will take multiple decades to come out ahead compared to renting a reasonable place, assuming you have the discipline to invest the difference. So unless this is your forever home, the goal should be to minimize housing costs. While some people resort to extreme measures like living in a box truck, that’s probably not necessary. Going with a more mainstream approach like living with roommates or renting a small studio or one bedroom apartment will get you most of the way there. Plus you’ll have indoor plumbing.
Any search of Craigslist will show you dozens of 1 bedroom apartments for rent for $2000/mo or less. As with most things in life, if you’re willing to put in the effort there are even better deals to be had. I stalked new For Rent posts multiple times a day for almost 10 weeks to find the place that Katie and I rent for $1500/mo. It’s old, but it’s in a good location. Right across the street are $4000/mo luxury apartments. The condos a couple of blocks away would cost about the same amount. That’s a gargantuan gap between owning and renting. That’s an extra $30k/yr that we get to save and invest. By forgoing the $1MM house, we’re saving an extra $45k/yr. That’s some serious cash!
In order to save that extra money, all we’re really giving up is a bit of living space. Our lives are not that much different from our neighbors that are forking over the big bucks. We can take advantage of the same neighborhood amenities. We can walk to the same downtown. We have access to the same transportation. We experience the same glorious weather. But we don’t have a pool.