PALO ALTO, Calif.
During the Internet boom of the late 1990s, a lot of hip young dot-commers in San Francisco began a long daily trek known as a "reverse commute": They resided in the city and traveled 40 to 50 miles southward to their jobs in Silicon Valley.
At first, they did it because they didn't want to live in the Valley, which, despite being one of the economic capitals of the world, consists mostly of sterile business parks and plain housing subdivisions. After a while, however, some of the dot-commers began commuting for a different reason: The average cost of a house in San Francisco was $475,000, about $50,000 to $75,000 less than the home prices farther south.
The transformation of one of the world's great cities into a bedroom suburb is just one screwy side effect of skyrocketing home values in Silicon Valley, and just one of the cautionary tales for the D.C. region.
Clearly, housing costs in the Washington area have not yet reached Silicon Valley's absurd level. But with home prices rising by double-digit percentages the past two years -- and the median over $250,000 -- the D.C. region is beginning to feel the effects of an imbalanced market. For Washingtonians, the California experience provides some important lessons. Even if housing prices there don't continue to climb this fast, things will not "return to normal." In all likelihood the current rise is not a "bubble." And the high prices won't be checked by the flight of struggling home buyers to cheaper areas, because these coastal metropolitan regions are where the jobs are. Unless some dramatic steps are taken, the D.C. area, too, might wind up with some serious side effects to rising home prices. Consider this a wake-up call.
Here in the Valley, there are van pools for sheriff's deputies who must travel 60 to 70 miles to work. School districts are building subsidized apartments and condominiums to house teachers who otherwise would have to travel similar distances. There is rampant overcrowding of rental units. Then there's the ripple effect -- where Silicon Valley workers bid up homes in distant suburbs, driving workers in those communities even farther out and displacing yet another group of folks.
So how did this happen? Less than 40 years ago, most of this area, then called the Santa Clara Valley, was primarily orchards. A few old cities were growing quickly, including San Jose (now larger than San Francisco) and Palo Alto, the college town adjacent to Stanford University. In nearby San Mateo County -- located along San Francisco Bay between San Francisco and Palo Alto -- tract-home development in the 1950s and '60s had already created some of the first suburban-sprawl horror stories, as hillsides were leveled to make way for two- and three-bedroom cracker boxes.
The computer revolution transformed the Santa Clara Valley into Silicon Valley. Meanwhile, a variety of factors -- including strict growth-management laws, a desirable location and a regional land shortage -- was propelling the Bay Area into becoming one of the most expensive housing markets in the nation.
When the Internet boom hit, the wealth that flowed into the region drove housing prices out of sight, especially in Silicon Valley itself. According to the California Association of Realtors, the median home price in Santa Clara County -- the heart of the Valley -- rose from $364,000 in 1998 to $521,000 in 2000.
Older working folks who had bought tract homes in the area long ago suddenly had the chance to be near-millionaires -- and could cash in instantly because their houses would sell as soon as they were placed on the market. In an odd reversal of traditional suburban growth, rich people moved into the close-in suburbs, while regular working-class people moved far away. The inner suburbs became so hot that even an ordinary house in Palo Alto soon cost well over $1 million -- often to serve as a teardown.
Younger working folks were faced with bad choices: either house-sharing or commuting long distances. There were many reasons for this, not the least of which was the opposition to additional housing construction posed by longtime homeowners in the older communities around Silicon Valley itself. The result was an invasion of Silicon Valley workers into practically every community within a 90-minute commute.
Take, for example, Salinas -- a working-class town in Monterey County, 60 miles south of San Jose, that is best-known as the setting for Steinbeck's "East of Eden." As an agricultural center and the Monterey County seat, it had a large population of farm-working families and public employees. Once the Silicon Valley commuters hit town, Salinas became a city that was simultaneously desperately poor and amazingly expensive.
With home prices hitting $300,000, blue-collar families (including farm workers) began to double and triple up. Meanwhile, the county employees -- many of whom had grown up in Salinas -- headed south on U.S. 101 looking for single-family homes they could afford. Some pushed as far south as King City, a poor farming town of 11,000. Soon enough, home prices in King City were hitting $150,000 and $200,000, far beyond the reach of people making minimum wage in the lettuce and broccoli fields of the Salinas Valley.
King City is 120 miles from Silicon Valley.
The first word of warning for Washington, then, is that as the area solidifies its position as the strongest economy in the Mid-Atlantic region, high housing prices and peculiar commuting patterns will ripple even more powerfully toward Baltimore, toward Wilmington, toward West Virginia, toward Richmond. Baltimore already has an advertising campaign urging Washington workers to house hunt in Charm City, while tract housing is advancing on Fredericksburg's Civil War battlefields.
The second warning is that even though "what comes up must come down," home prices never return to the original level. They simply settle down at a much higher range. You would think that once the Internet bubble burst, home prices would have returned to earth and everything would have been fine again, but that's not what happened. The median home price in Silicon Valley is approaching $600,000, and the median for the greater Bay Area now tops $500,000. The Nasdaq might be worth only a quarter of its peak value, but Silicon Valley homes are as expensive as ever. Once a market has been turned upside down by hot home prices, there's not a whole lot to do but adjust.
And the third warning is that while prices in Iowa or Idaho look good in comparison, not very many people will move there. From Silicon Valley, some older white homeowners and some younger Latino workers have gone elsewhere in the West looking for cheaper places to live. But the economic and cultural advantages of a metropolitan powerhouse are so great that most people will stay no matter what, ensuring that prices remain high.
And more people will come. Washington has lots of high-paying jobs, its status as the capital of the free world will always be a draw, the cultural institutions are well established, recreation opportunities are plentiful and the climate is moderate by East Coast standards.
It would be shortsighted for the Washington area to think it can avoid Silicon Valley's real estate nightmare without taking some action. As we've learned in the Valley, there is no automatic brake on housing prices -- but Washington has the opportunity to plan ahead. Right now, some of the cities and counties that could best accommodate the volume of new housing that will be needed are doing their best to keep it out. Look at Loudoun County, the very jurisdiction closest to rapid high-tech job creation. Not unlike some communities in Silicon Valley, Loudoun has seized on the solution of passing zoning laws so extreme that only the bosses will be able to afford to live there.
Instead, Loudoun should be cooperating with neighboring Fairfax County on workforce housing. In this high-cost-land market, this means small lots, perhaps even attached units. And it should be working with the other jurisdictions to provide a balance of transportation choices so Washington's already brutal traffic doesn't get worse.
Changing attitudes in those ways would help. And to a certain extent, Washingtonians will probably have to adapt in the same screwy ways that Californians have. We find roommates, we ask parents or relatives to help us come up with big down payments, we go to 40-year mortgages. In the end, both our regions wind up less like Middle America and more like Manhattan -- a really expensive place you have to really want to live in in order to stay. Let's hope the Washington region makes it easier for folks to do so than California has.