Why Even Software Engineers in Silicon Valley Cannot Afford a Home in the Bay Area

Published: July 12, 2020
Anthony
By Anthony
7 min read
Why Even Software Engineers in Silicon Valley Cannot Afford a Home in the Bay Area

When I first started my career, I had a starting salary of 100k, a 10% targeted bonus, and a 8k worth of stocks a year. When people hear about this offer, they're usually shocked to hear I'm still living at home. They usually tell me "you make over 100k why don't you buy a home already?" I always tell them rent prices are outrageous and homes prices are insane.

Breakdown of Income

Let's first breakdown the monthly income. I generally ignore the bonus because that is paid out once at the end of the year and is heavily taxed on. So this means our monthly income is dependent on salary and stocks. One thing to note is that not all companies pay out stocks on a monthly basis. At my previous company, they paid out stocks on a yearly basis meaning all my expenses are dependent on my salary. Some stocks are also worthless if you're working at a startup that has not become public yet. So let's take a look at the worst case scenario where we can only depend on salary. Inputting a salary of $100k into this calculator shows we take home around $2,600 every two weeks after tax. The after tax is the important part because that's the money that is used towards groceries, car, and savings. So, let's assume every month we make $5200 and talk about our monthly expenses as well.

Breakdown of Expenses

Let's take a look at some common expenses and see the average costing for each category.

Food

We all have to eat. There's no getting around it. This number can change depending on your eating habits and if you cook or eat out, but Numbeo.com’s report finds that the recommended monthly food spending per person in San Francisco is $423.75. Let's round this down to $400.

Car

Unfortunately, the transportation infrastructure in Silicon Valley is bad compared to cities like Tokyo or Shanghai. We don't have bullet trains or underground subways. Everyone here drives so everyone needs a car. Let's see how much a loan on a Volkswagen Jetta costs. According to this site, with a down payment of $5000 on a $17.7k car, you'll be paying $264 a month.

Car loan

Let's also take car insurance into account. This will vary based on your age, gender, and car. Running the numbers on Zebra.com against a male in their mid twenties for the Jetta generates an estimated $134 a month. Gas is pretty expensive in the Bay Area as well.

Car insurance

I usually spend $60 a month on gas. So every month you'll be paying around $467 ($264 + $143 + 60) on the car. Let's use $470 for the costing breakdown.

Loans

Many students have to take out a student loan in order to afford their education. In fact, 70% of 2018 graduates had an average of $29,800 in borrowing. Generally, it's better to pay off the loan as fast as possible, let's say you pay off the loan in 5 years at a 6% interest rate. This would mean you would owe around $570~ a month.

Rent

Rent is by far the most expensive cost Let's look at some apartments near Google. The average price for a 1 bedroom apartment starts at $2500 a month. What if I wanted to live farther from work? The rent prices in Campbell (which is about 18 miles away from Mountain View) is a bit cheaper averaging at $2000 a month. Let's average this around $2250 to have something in between.

Personal Care

We all need to get haircuts from time to time. Some people also like to get their nails done or do their eyelashes. Let's also throw in gym membership costs in this category. I generally spend around $20 on my haircuts. A typical gym membership here costs around $30. Let's assume we'll need to spend at least $50 on personal care a month.

Entertainment

I like to categorize anything fun related including going out on weekends or that Netflix subscription in this category. Let's assume every weekend you spend $50 and you have both Netflix and Spotify subscription. That comes out to be $220~ a month.

After crunching these numbers together, we come up with a total of $3960 ($220 + $50 + $2250 + $570 + $470 + $400 = $3960). This means we save $1240 ($5200 - $3960) a month after expenses for the first 5 years if we have a loan to pay.

expense chart

After the loan is paid off, we'll take in $1810 a month.

Now that we have a good idea how much we take home a month, let's look at some homes in the Bay Area.

Homes Prices in Bay Area

A typical home in the Bay Area starts at one million dollars. That's right. STARTS at one million. Even condos and townhomes are over $500k. Most people don't buy a home in full. Rather, they take out a loan over 30 years. These loans typically require a down payment of 20%.

So let's see how long it'll take to save up for a down payment on a $600k condo. Let's also assume we live in a perfect world where the home prices are fixed since a lot can change from now and 20 years later. I will need to save $120k (20% * 600k) for the down payment. For the first 5 years, we'll save up $74,400 ($1240 * 5 * 12) meaning we only need $45,600 left. Since we don't need to pay off our students loans, this will take approximately 25 months ($45,600 / $1810). Ok only 7 years to save up for our every own condo! (This is assuming we are cruising at our job and we never get a raise)

Mortgage prices

Once we purchase our condo, we'll need to start paying more expenses. Looking at this $600k condo, we'll be paying $2,996 a month on the property. Unfortunately, this is still out of our budget since we only save $1810 a month.

Ok what if we 5% raise every year? By the end of year 7, our salary will be at $140k we'll take in about $7000 a month. Assuming we get a raise every year and home prices aren't inflating, we'll be able to buy a home in 7 years.

YearSalary
0$100,000
1$105,000
2$110,250
3$115,762
4$121,550
5$127,628
6$134,009
7$140,710
Zillow Prices

However, that's not reality. According to Dr. House Bubble, home prices have been steadily rising. Looking at that same condo from above, the home was sold for $365k in 2014, but is now being listed at $600k in 2020.

Home prices

Conclusion

I believe the home prices is one of the reasons why many people have been moving out of the Silicon Valley. Homes just feel out of reach for those bringing in over 100k a year. I also think a shift towards remote work could fix some of these issues. As demand for housing decreases, the prices will ideally stabilize as well. Check out my article on remote work to learn more about the pros and cons of WFH. What do you guys think? Are you a home owner in the Bay Area? How did you afford your first home? Let's chat in the comments section below.

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