Tuesday, February 26, 2008

Cost Of Living in Silicon Valley #2

Housing. Let's start with the biggest thing first, shall we?

Whatever you have read about the high cost of housing here is true. The macro level data from post #1 starts to hint at the issue but doesn't give the whole story by any means. Basically, $1m doesn't go that far in Silicon Valley these days. That's not to say you can't find houses or apartments to buy for less than that figure because you clearly can. However, choice of where in the Valley to live drops once you go below that level and competition to buy the good stuff therefore rises.

Right now the whole US is in a housing recession, even here on the West Coast. However, don't make the mistake that this must therefore impact all of Silicon Valley equally, because it doesn't. Houses under $1m will fare better than those over $1m, and by the time you get to $5m then the impacts of what has happened in the mortgage market will fall away again. However you cut it, though, housing will be the most expensive aspect of living here and likely as not the most frustrating to deal with, at least in the first instance. Buying a house is a competitive sport, and one that entails a lot of paperwork and allied complexity. Be warned - it's also expensive. Expect to pay 3% of the purchase price in fees to buy a place here.

Fortunately, the web has some excellent resources to help you get your head around the various locations, pricing, inventory etc. available. Personally, I tend to stick with one site that has served me very well: MLS listings. Once you have figured out, based on acceptable commute times, school districts etc., a set of areas where you might want to live, MLS will show you pretty much everything available in your price range, allowing you to browse the market in comfort and get a feel for the price/reward ratio of various locations before jumping in and finding a realtor (a.k.a. an estate agent) to work with.

Just by way of comparison, $750,000 gets you just over 1,000 square feet of detached house "as is" (i.e. somewhat ratty condition) in Cupertino, one of those districts where prices have been driven up because it's known as being a good school district. In Campbell, an OK area to live in the South Bay, this gets you a much newer property, in "move in" condition, with almost 50% more floor space. As we say in the UK, "you pays your moneys and takes your choice".

Assuming you want to buy and not rent (where I freely admit I have less experience) what might a mortgage run you? Here's an example that's based on buying a place for $750,000 against which you put down $300,000 cash. That leaves you needing to fund a $450,000 mortgage, running over 30 years (the typical period here), at say a 6.5% interest rate, on which the payments would run you just over $2,800 per month. Again, the web offers a number of different mortgage calculators so you can play with these numbers at will. Of note, though, is that for your principal residence in the USA you can set mortgage interest payments fully against taxes on your annual return. Assuming a marginal tax rate of 35% percent then there's at least a couple of hundred bucks a month you can effectively knock-off that figure.

However, depending on where you come from then prepare for another shock. Property taxes here are a flat percentage of the purchase price you pay for your house or apartment, typically 1% to 1.25% per annum. Pay that $750,000 dollars for your home, therefore, and you can expect to also fork over another $8,000 or so per year in property taxes depending on the county in which you end up living in. (However, property taxes too can be set against annual income when figuring out tax liabilities.)

Other housing-related costs include insurance (figure $2,000 or so per year), utilities ($200 per month minimum) and possibly home-owner association fees if those are applicable in your development or condominium.

As always, "your mileage may vary" but at least this will give you a starting point for figuring out your own outgoings. Likely as not, 50% or more of your take-home pay will get swallowed up by housing and associated costs. Certainly, do take a look at renting in the first instance. Right now, with the market as soft as it seems to be, there's not any rush to jump in and buy if you find yourself here in the next few months or so. Expect to spend anything from $2,500 to $3,500 a month for a modest apartment or house in an OK area. And no, there's no tax relief for rental payments!

Next up, let's take a look at another of the mandatory costs associated with life out here, transportation. In the next post, that is ....

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