Silicon Valley's housing nightmare is breeding absurd assumptions and unrealistic solutions
The geographical heart of the tech boom, Silicon Valley up through San Francisco, has a major problem: it has too many people making lots of money, and not enough places for them to live.
A 2013 Wealthfront post on how much a couple needs to afford a wealthy lifestyle in Silicon Valley has gotten renewed attention in the last couple of days on social media.
You may not be moved by the plight of the couple making $250,000, but policymakers should be. If the country's wealthiest laborers can barely afford to live where they work in this part of California, what is to be said for everyone else in the area? Where are the service workers, bus drivers, hotel operators, and support staff supposed to live?
Wealthfront's analysis finds that a couple making $250,000 a year, with a 3-bedroom house in Silicon Valley and plans to send their (two) children to private college will end up several hundred thousand dollars short on retirement savings if they rely on investing alone.
Wealthfront says that the couple needs a good cushion of equity from a successful startup in order to make up the difference.
Here are Wealthfront's assumptions:
To do our analysis we had to make a number of assumptions about a young, professional Silicon Valley couple[1]. We started with 30 year olds. We assumed they earn a generous $250,000 per year and spend $60,000 per year on items not related to supporting children. The couple's income and spending grow at an inflation rate of 3% per year. Their income stops at age 65, when they retire, but they begin drawing social security at 70.
They buy a house when they turn 30 for $1 million financed with a $200,000 down payment and an $800,000 mortgage. The mortgage has a 3.75% fixed interest rate for 30 years. For context, a 3.75% interest rate is historically low.
Federal and state taxes represent 45% of income, and savings are invested at 6% a year.
The couple has two children, one when both are 30 and the other when they're 32. Each child costs about $22,000 a year to support. (This number includes housing costs for the United States. In Silicon Valley, we think $22,000 is the cost without housing). The couple needs to save $1,100 per month for 18 years to afford to send each child to private college. Alternatively, they could save $6,500 per child per year for 18 years to afford to send their kids to a public university. (Unfortunately, families that currently earn $250,000 per year do not qualify for financial aid at most universities.)
Absurdities in the assumptions aside ($2400 a year for a gardner creates about 50% of the $270,000 hole Wealthfront says the couple will have after 50 years), the big problem here is housing. Wealthfront assumes that the couple needs $1 million for a house. That's absurd. But it's pretty much a reality if you want to live within a reasonable commute and - this is an important and - in a good public school district.
The individual solution from the perspective of a financial advisor might be to strike it rich with an equity stake in a successful startup, but that's not solving the larger societal problem. Housing prices in the San Francisco area are high because there aren't enough houses for everyone who wants to live there.
And that's a policy problem that affects everyone from the $250,000 couple down to the Google bus driver giving them a ride to work.