Ed Merryman just bought a house in Silicon Valley--a feat that many now compare to an ascent of Mount Everest.
It is, as Merryman put it, "just an average regular ordinary house." The home sold in less than a week. Merryman and his wife Amy Vanclef made one of 27 competing offers. Most of the offers were for at least $75,000 over the asking price, and in theirs, the couple included a love letter to the house, a photograph of their kids and a fresh, made-from-scratch chocolate cake.
Merryman is a happy man. But he admits he feels stunned, having paid $550,000 for his new home--$90,000 more than the asking price. His wife is a pastry chef. He is the assistant director for mailing services at Santa Clara University. He confesses that the thirtyish couple, who make about $100,000 combined, will be spending most of their income on their new home--"with a little left over," he laughs nervously, "for things like food."
But Merryman also says he does not know how other, less lucky middle-income families like his are going to make it in a place such as Silicon Valley, which has the most expensive and hard-to-find real estate in the nation. "I guess that a lot of people like us," he said, "will probably have to leave."
The housing shortage and soaring prices in the popular coastal cities of California, from San Francisco to San Diego, are leading some officials here to openly suggest that the state's phenomenal economic growth could be stymied by the real estate crunch.
The whole meaning of "affordable" housing is being turned on its head in California. Where once the term was a euphemism for public or government-subsidized housing for lower-income people, the question now is whether folks earning middle-income salaries can afford to buy a home in the communities where they work.
In a report accompanying his budget proposal this month, Gov. Gray Davis (D) warned that "home building remains the single cloud on California's otherwise bright economic horizon," adding that "the low level of new construction activity may now be a constraining factor on the economic growth in many of California's densely populated coastal counties."
And no place is the market as tight as San Francisco and Silicon Valley, where the cost of homes is tough for the well-to-do and brutal for the middle class, which soon may be left with no options other than leaving or commuting daily for hours.
The market is so expensive and so tight around the San Francisco Bay area that "affordable housing" has become a recurrent issue in recent elections here. Tom Ammiano, who took San Francisco Mayor Willie Brown to a surprise runoff election in November, described his platform as "housing, housing and housing."
Many San Franciscans probably were not shocked to learn of a recent calculation by the National Association of Home Builders that concluded only 12 percent of the city's families--those earning an income of $72,400 a year or more--can afford a home there, where the median home price is now $407,000.
The most expensive real estate market in the nation is here. In the San Francisco Bay Metropolitan Statistical Area, which encompasses nine counties, the median home price is $372,700. (The median home price--the level at which half the homes cost more, and half cost less--is $136,000 nationally, and $179,900 in the Washington area, according to the National Association of Realtors.)
Within this area, the most expensive county is at the heart of Silicon Valley, Santa Clara County, where the median price has reached $420,000. And in certain desired neighborhoods, those with average-sized homes on average-sized lots, there is nothing to buy for less than $500,000.
In Cupertino, a community with a population of 47,000, there are 27 houses for sale, with a median asking price of $664,000.
Last year, the Washington area housing market--particularly the District and the close-in suburbs--heated up to a point not seen in a decade as would-be buyers bid up prices on increasingly scarce houses.
But the Washington market is tame compared with coastal California's. Davis, pressured to help soften the pain, promised this month that he would work with San Francisco Mayor Brown and San Jose Mayor Ron Gonzalez to try to come up with ways to help teachers, police, fire fighters and other civil servants buy homes in the communities where they work.
The governor is proposing to give teachers, for one, low-interest loans and subsidized down payments. State Treasurer Philip Angelides also is proposing to offer teachers tax credits equal to 15 percent of their annual mortgages if they work at schools with the lowest test scores.
"We're finding that housing prices are the big, big thing," said Paul Fassinger, research director for the Association of Bay Area Governments. "It's all some people talk about."
The high cost of housing is translating into higher inflation rates for California. In the San Francisco Bay area and Los Angeles, the consumer price index increased 3.0 percent last year, compared with 2.2 percent for the nation. In San Francisco, home prices overall jumped 6.7 percent. But in certain neighborhoods in Silicon Valley, home prices are going up 20 to 30 percent a year. The same is true for desired sections of Los Angeles and San Diego.
In California, housing construction has not returned to the pre-recession peaks of the early 1990s. To meet needs, housing starts must increase by 100,000 or more. Whereas five years ago, people were moving out of California--particularly moderate-income Anglos--they are now returning in droves.
"We're not keeping up," said Michael Dardia, an economist with the Public Policy Institute of California. Why not? There are several reasons.
During the recession, many developers headed for booming cities such as Phoenix, Boise, Las Vegas and Salt Lake City, and they have not returned. Also, along much of coastal California, residents insist on slowing sprawl and protecting green spaces.
In Silicon Valley, what some say is overdevelopment has created intense congestion, with freeways slowed to a crawl throughout the day. Many people without high salaries or big down payments are headed for faraway inland communities such as Livermore and Tracy, about 100 miles away.
While Davis and other politicians promise to try to offer middle-class buyers some help, many economists and real estate brokers say good luck.
In Silicon Valley, the recently wealthy can have almost every single material thing they want--except a place to live.
"They can afford almost . . . anything," Ardith West, a successful broker with Coldwell Banker, said of those who are making a killing in the high-tech and dot-com world. "The problem is there aren't any homes to buy. And so the prices are going into outer space."
Here the market rules, and it can be beautiful or cruel, depending on whether one owns or is looking to buy. "In some ways, housing in Silicon Valley has become like the new blue-chip stocks," said Fassinger of the Bay Area government association. "And so the problem is as demand increases, and prices continue to rise, homeowners hang on to their properties, so you have a phenomenon that feeds on itself."
Consider that there are about 3,000 real estate agents working in the center of Silicon Valley, where there is a population of about 2 million. At present, there are 613 single-family homes for sale. A decade ago, there might have been 12,000 homes for sale.
Last week, real estate broker West drove around to look at a few houses in Cupertino available for preview by agents. At each place, she and her peers, most of them driving silver Mercedes-Benzes, would pull up to the addresses and check out the properties.
Nil Keskin, an agent, took her shoes off and walked through a decent 3 BR, 3 BA, asking price $612,000, and said, "I have to explain to people, yes, I can maybe get you a house, but it'll cost you half a million, and I have begun to feel ashamed."
The agents exchanged news of the hottest deals of the week. The condo in Sunnyvale with 18 offers. The "nothing special about it" ranch home in Los Altos with the asking price of $999,000 that just sold for $2 million.
Betty Lin, who was showing this house, said, "I'm not even taking any more buyers anymore." There aren't enough houses to show.
Ardith West said that many buyers will make more than 10 offers before they buy a home, and the offers have gotten downright desperate. Buyers must not only have pre-approval letters from their lenders, but everything is selling "as is." There are no appraisals. No contingencies. If the roof leaks and plumbing is old, that is the buyer's responsibility.
A nearby home in West San Jose, on a quiet street in the highly regarded Cupertino School District, was recently sold by Lin. The asking price? $508,000. The selling price? Over $650,000. Lin got 37 formal offers. And the house itself? An ordinary ranchette. A small dirt backyard. An old kitchen and baths. Window units for air conditioning. In many neighborhoods in the United States, this place would be on the market for months and sell for $400,000 less.
"This is a situation that no one really likes," West said.