In my previous installment of “On California,” I argued that a sharp drop in the Inland Empire’s job growth last year occurred as its home price appreciation far outpaced that of Orange County since 2009.
Even though the median price of a home in the Inland Empire is still lower than Orange County’s, the margin of difference has narrowed. As a result, the Inland Empire’s magnetic pull of more affordable housing has weakened.
A similar pattern is emerging in Silicon Valley, but not because its affordability has narrowed. Rather, it’s because Silicon Valley’s home prices are among the highest in the nation.
It might be suggested that the higher incomes earned in Silicon Valley justify its seven-digit home prices. But the average median home price for the four Silicon Valley counties (Figure 1) is nine times greater than the average annual pay of all workers ($114,767) earned in those counties. That compares to a home price-to-wage ratio of 4.9 in the U.S. Even for workers in the highly remunerative information technology sector ($175,000) the home price-to-pay ratio of 5.9 is still higher than the U.S. ratio.
High housing prices relative to other tech hubs across the nation have consequences. Information technology jobs in Silicon Valley dropped from an average growth rate of 6% in 2014 to 4% last year. An important component of information technology is information services. For that sector in Silicon Valley, the decline was even more dramatic, plummeting from 10% average growth in 2014 to 2% last year (Figure 2).
It’s possible, of course, that the weakening of Silicon Valley’s tech sector had little to do with its out-of-sight housing prices. Perhaps this weakening was caused by overall market forces unique to the information technology sector. But no such drop occurred in the U.S. as a whole. In fact, a number of established and newly emerged tech hubs across the nation experienced higher tech-related job growth, with several experiencing growth in excess of 6% by year-end 2016.
Because Silicon Valley’s growth in information technology jobs dropped from the 6% rate registered in 2014 to 4% last year, about 12,000 fewer high-tech jobs were created. Interestingly, just as Silicon Valley’s tech sector created 12,000 fewer jobs last year, the four tech hubs that increased their rates of job growth, as shown in Figure 3, created 10,000 more jobs. A factor working in favor of these four tech hubs is a lower cost of housing. In three of the hubs, the median home price ranges between $200,000 and $300,000, less than a third of Silicon Valley’s home price. Figure 4 shows the inverse relationship between job growth and home prices. Though the sample size is small, the correlation coefficient that measures this relationship is significant at the 0.05 (95%) level of confidence.
In a comprehensive Urban Land Institute survey of views on housing, the following observation was made about housing affordability in the Bay Area: Affordability is a major concern in the Greater Bay Area, little surprise in one of the country’s most expensive housing markets. Only 40% of Greater Bay Area residents are “very confident” that they will be able to afford to own or rent the kind of home they want in the next five years, compared with 54% of national respondents and 56% of those in similar metro areas.
The sudden weakening of Silicon Valley’s job-making machine is not just a regional phenomenon. It’s one with significant statewide consequences. As noted above, the sharp slowdown in Silicon Valley’s tech sector resulted in 12,000 fewer information technology jobs being created. At an average wage of $175,000 per worker in information technology, that represents a loss of $2.1 billion in total wages. Conservatively assuming a multiplier of 2.0, that suggests that aggregate income was $4.2 billion lower and California state tax revenue was reduced by about a half-billion dollars.
Silicon Valley certainly isn’t dead. Its higher education infrastructure and concentration of tech companies gives it the kind of critical mass that attracts venture capital and business startups. Clusters of companies producing similar products and services serve as a critical mass. This clustering serves as a magnet for tech center support services, including business, legal, marketing, management, financial and other services. They provide a well-established service infrastructure that gives Silicon Valley a comparative advantage over other tech hubs.
That comparative advantage, however, as documented in this report, is being undermined by Silicon Valley’s other claim to fame—the highest housing prices in the nation. What can be done about that challenge? More on that in the next installment of “On California.”
