Manisha,  in Cupertino, CA

Why is Los Altos Hills so expensive?

Asked by Manisha, Cupertino, CA Thu May 10, 2007

Does it have only high-end properties here?

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The minimum lot size in the hills is 1 acre. There also isn't any commercial or multi-residential units within the town limits. Kids go to either the Palo Alto or Los Altos school districts -- which are very good. Large lots, large homes, great schools...leads to a very good lifestyle
1 vote Thank Flag Link Wed May 16, 2007
Los Altos Hills is very desirable compared to most areas in California for all of the reasons mentioned here.

However, like all housing in the US in the last 20 years, Los Altos Hills experienced a "Bubble" where purchase prices broke free of "real" demand. Prices became based on speculation instead of actual desirability.

The easy way to see this is price-to-rent ratio (look this up on Google).

Rent reflects what a house is really "worth" from a pure demand perspective. People pay high rents for desirable areas and lower rents for less desirable areas.

In Los Altos Hills you can expect to pay anywhere from $4,000 to $10,000 per month in rent (based on a quick browsing of Craig's List).

That's a lot of money for rent, and this reflects actual demand: this is what people are willing to pay to live in this town.

But here's the catch: based on the asking prices of homes here, these rents are actually incredibly LOW.

I just looked at Craig's list and found a home at 26173 Rancho Manuella. It is listed there for $7,500 per month. The price of this home when it was listed was $5 million! (Google the address).

Think about that: imagine renting a $5 million item for ONLY $90,000 per year. That would be like renting a $250,000 Ferrari for $400 per month! Where can I sign up for that? :-)

What's the catch? The catch is that while RENTS in Los Altos Hills reflect the actual market, PRICES here reflect SPECULATION.

The famous "US Housing Bubble of 2007" has burst. Anybody who believes that we're going to return to the Bubble years is either deluded or has been living on Mars for the last three years. Prices are falling everywhere and the will be flat for the next decade at least.

Why? Just like the Bubble made "prices go up because prices are going up", the deflating of the Bubble will make prices go down for the same reason.

So you can say that rents in Los Altos Hills are insanely LOW, but they reflect actual market demand. You can't move that side of the equal sign :-). So if that side of the equal sign is not going to move, it means the OTHER SIDE has to. That means purchase prices.

In short, based on price-to-rent ratio, houses in Los Altos Hills are between 2x and 3x OVERPRICED right now.

If you take the house on Manuella, the correct price-to-rent ratio would price that house at $1.5 million, not $5 million! Even if you assume that owning might be "better in a lot of ways" it still isn't going to be THREE TIMES better. 20% better if you are lucky (a lot of people don't like paying property taxes and paying for upkeep, remember).

Using a combination of Trulia and Craig's List you can find a dozen more examples of this.

Los Altos Hills prices are sitting on a cliff which can fall in at any moment. The only reason prices here haven't fallen YET is because people here can wait a lot longer to sell (in some cases, virtually forever).

There are two things that will finally drive prices in Los Altos Hills to fall:

1. Owner education. In other words, the Smart money will leave sooner than the dumb money. The more owners are educated about the realities of the market, the more they will pull out. This means we'll see houses here actually priced to SELL rather than sit on MLS for six months only to move to Craig's List for rent after that. When owners understand that there is no light at the end of this tunnel, they will actually move. The smart money will leave first (and enjoy the best sales prices, albeit down from peak).

2. Foreclosures. Los Altos Hills is an expensive area reserved for rich people. During the Bubble times, however, a lot of mere "well to do" people moved in. These were working professionals that could make high payments. Bubble financing allowed somebody making $300,000 per year to leverage into a $3 million home. Option ARM payments could be as low as $4000/million and banks would allow you to allocate virtually all of your income to your payments. And there was virtually no down payment requirement. And if you paid a little extra, they wouldn't ask any questions (no-doc loans).

You can imagine how this is going to end. Why pay $12,000 per month for an underwater home when you are paying interest only (or less) with absolutely no hope of ever getting above water in your lifetime? Better to rent the same (or bigger) home for half of that and start saving for your future.
3 votes Thank Flag Link Tue Oct 6, 2009
Paul wrote:
> [...]
> Keep in mind that the best locations are never available for rent.
>

Typical Realtor myth: the only "rentals" to be found in the world are 1br apartments in skid row.

Maybe people believed this kind of stuff before they invented the Internet, but now it takes about 30 seconds on Craigslist to clear this up. Take a look at this crappy old place that the unfortunate renter would be forced to put up with since obviously only crappy places to live are for rent:

http://sfbay.craigslist.org/pen/apa/1581443267.html

Yes, you can rent the above-linked home which recently sold for $8m two years ago for $12.5k/month (note: the property tax alone on this place would be $6.6k). So yeah, what a rip-off: pay effectively $6k/month to make use of a $8m asset. Only an idiot would put that $8m in the bank and make about five times that rent in interest.

Impossible you say? It is. The real idiots here are the ones that paid $8m for that house. Based on price-to-rent ratio, the future value of that home will be more like $2.5m.

And to the other poster's point, prices here have fallen somewhat, but have they fallen enough?

Home values in many communities in US have fallen (corrected) to proper price-to-rent ratios. Los Altos has not. Not even close. Based on price-to-rent ratios that coincide with historical precedent as well as simple math, Los Altos home prices still tend to be anywhere from 20% to 50% too high.

The "rule of thumb" for price-to-rent ratio is: $5k/month per $1 million in purchase price. In other words, if you see a house for $1 million, can you rent it for $5k? No? Then don't buy. If the rent on the place is $3500, it's worth about $700k. If the purchase price is more than that, then don't buy.

Wait until the inevitable correction unless you want to be one of the millions of Americans whose life-savings down payment was flushed down the toilet and who are now in the process of mailing the keys to their house to the bank.

The fact that prices in Los Altos haven't corrected yet should scare the hell out of anyone thinking of buying here (unless the money means absolutely nothing to you and/or you can live with the fact that the same amount of money today will buy you 50% more house sometime in the future).



OP
1 vote Thank Flag Link Sun Feb 7, 2010
It's the best place to live in Silicon Valley. Most houses are 1+ acre which means a lot of privacy and big houses. Many people in the area work in Mountain View or Sunnyvale and are sitting on millions in options. They have to live somewhere in the area and Los Altos Hills is a great choice where you don't have to get on a freeway to commute. If you want a view and that feeling of being nature, but still close to town, Los Altos Hills is the only choice. (Woodside and Portola Valley are too close to the San Andreas fault).
1 vote Thank Flag Link Tue Nov 6, 2007
large lots -> more dirt = more expensive
Although the price/s.f. is more reasonable than e.g. a $6000sf lot with house purchase in the midtown part of Palo Alto.
1 vote Thank Flag Link Sat May 12, 2007
Does anyone care that this question was posted in May. 2007?

Maybe prices aren't so expensive in Los Altos anymore :)
0 votes Thank Flag Link Sat Feb 6, 2010
In my 40+ years of living and working with home owners in Los Altos and Los Altos Hills I have observed that most people own homes in these locations because they like the area, have the money and have reasons for being here that are found in Silicon Valley’s creative and rewarding business environment.

Why would someone with an income that only 15% of the people in this country have put up with commuting or living in a place they do not find enjoyable? Keep in mind that the best locations are never available for rent. The only way to live where you want in these locations is to own and that is what drives the market price not a rental comp. comparison argument.
0 votes Thank Flag Link Sat Feb 6, 2010
Tim,

Sweet diggs on Mora. Good luck with the sale.
0 votes Thank Flag Link Mon Jan 21, 2008
All of the answers given are great reasons, but I would add one to the list. Los Altos Hills is a great commute location for Silicon Valley execs, so there will be solid demand as long as the valley is going strong. Hills always have better views, too, which is why they get a premium in any marketplace.
0 votes Thank Flag Link Thu Oct 4, 2007
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