Credit Crisis: At Least One Great Thing Already Happening for Silicon Valley

The unfolding credit crisis may have severe implications for the region -- or the world -- a bit down the line. But it is already helping chip away at one of the Bay Area's biggest long-term problems: housing (un)affordability.

I'm going to keep with my narrow technology focus here and, fairly or not, make an analysis specifically of the region's viability as a technology and innovation hub, its ability to route investment into businesses that attract top engineers and churn out world-changing products.

Every year when the region's large business leaders meet, housing is at or near the top of their list of concerns. It's hard to hire in a place people cannot afford to live. Especially when potential employees are talented and often mobile, with a lot of options in front of them.

Owning a house in the Bay Area has been expensive for some time. But -- in the space of the last eight years or so -- it has crossed the line from "painful but affordable" to "not realistically affordable" for the technology professionals smart enough not to take one of those wild-'n'-wacky subprime loans with a handful of bogus low payments up front.

I'm going to be concrete here, and use specific numbers... numbers which may leave you gasping or slapping your head if you live elsewhere in the world, but numbers which are real.

In the wake of the dot-com crash, a large portion of the area's "starter house" stock was available for $350,000 to $500,000. These were often 2-bedroom tract homes, not always in the most desirable locations, but not in the worst either. They were no bargain, but they were affordable for the "senior software engineers" with a decent education, a half-dozen years of experience, and the willingness to save for a real down payment all that time instead of going wild with the Visa card. These engineers had seen their earning power top $100,000 (partly due to the dot-com boom), and if they avoided Aqua when the company wasn't paying, they could sock away some serious cash.

A widely held rule of thumb regarding housing affordability suggests that at most one-third -- perhaps a little more -- of gross income can go to housing. More than that, and the probability of the buyer experiencing financial hardship or outright defaulting goes up sharply.

So the senior engineer, with say six or seven years of professional experience, making a little over $100,000 -- exactly the "heart of the batting order" in a growing tech company's talent pool -- could afford a $400,000-$500,000 house, at around 6%, with the traditional 20% down payment. If they had a significant other who was also earning money, they could afford a little more. But not too much more if they didn't want to be dependent on those full dual incomes indefinitely.

Almost all of the folks in my "cohort" (say, within four years or so of my age) whom I know and who bought houses in the Bay Area did so in this way, at this time, and with this sort of cost.

Fast forward three years.

Easy money and bogus mortgages have caused prices to balloon. Those $400k-$500k houses become $700-$800k houses.

Salaries have drifted up a touch as the worst "crash" years pass, but not much beyond the rate of inflation, maybe $5k-$10k per year for these mid-level positions. Certainly not enough to cover the change in housing prices.

And -- just like that -- those engineers, the early-to-mid-career core of any tech company trying to scale, the folks who know enough to use a little process and not re-invent the wheel, while still working hard and willing to take chances to innovate and make something happen, have no access to the stock of starter homes.

Beyond the larger down payment, they discover that making a "real" (i.e., based on traditional mortgage terms) monthly payment on this $750,000 house means making over $150,000. And that's well beyond the typical salary for a senior engineer or even a lead engineer / architect type role.

And there's the story: that bubble cut off the up-and-coming generations of engineers from homeownership. Indefinitely if not permanently. If the Silicon Valley business leaders roundtable thought housing was an issue before, they are in a whole new landscape now.

But this is exactly where the credit crisis is starting to help. It was never practical to build our way out of the housing shortage because not only is buildable land scarce here, but ready credit meant each housing unit gets bid up based on what lenders are in the mood to invest.

Now that the brakes are on, we've already seen the median home price in the Bay Area drop by nearly a third from its high in '06. We need a couple more years of this -- together with lenders that want to see payments under that one-third of income mark, and a solid down payment.

When it all shakes out, perhaps some of my friends who missed that narrow window early in the decade and so, despite working hard, excelling, and making serious incomes, missed a chance to own any kind of house, will get their opportunity.

And, if it's too late for them -- after all, families grow, the kids get bigger, and that worn-down starter house won't look so attractive when we're all middle-aged -- at least the next generation of geeks and whiz kids will have a reason to work in Silicon Valley.

How Bay Area Subprime Mortgages Relate to High-Tech Startups

Earlier this week, Tom Campbell, Dean of Berkeley's Haas School of Business, gave a long interview about "the mortgage crisis" on KCBS' in-depth segment [MP3]. At one point, the conversation turns to the general paucity of housing in the Bay Area (relative to demand, anyway), and the notion that landlords may be beneficiaries as folks suddenly discover that (1) they can't afford $975,000 for that 3-bedroom house and (2) it isn't worth $975,000 anymore either.

But aren't these b-school types the ones who are always telling us to "think outside the box"? The best Tom can come up with is a kind of housing trust or co-op, that lets you own, say, 25% of an expensive house, while you still get to live in it (an investor group owns the rest).

That's a really cute way of pumping up housing prices and speculation even further, by letting investors who would never do the real-estate transaction themselves pool their investments and then spread them across a bunch of properties (doesn't this sound a little like the mortgage problem we just saw?), while leaning on loan guarantees to cover their downside.

The cost of housing and difficult commutes are a big brake on the tech industry; they consistently rank at or near the top of Silicon Valley business leaders' concerns about the growth of their companies and the success of the region.

In the positions I've held over the last 4 years or so, I've been responsible for hiring engineers. Not just punch-the-clock engineers, but wicked smart, willing-to-build-it-from-scratch-but-wise-enough-not-to startup-minded engineers. But it is brutally hard. Even with robust salaries, it is difficult to get applicants in the door, let alone hired. And, no, it's not due to a shortage of U.S. geeks. Housing costs and impractical commutes seem to be the primary limit on the realistic pool of applicants.

Over time, if we don't do something about it, we'll only have the old-guard geeks (who bought homes a long time ago or live in rent-controlled places in SF or Berkeley) and immediate college grads (who are up for an adventure and happy to have roommates).

The problem is, when your only tool is sprawl, and you run out of farmland to sprawl on, you either throw in the towel (Silicon Valley) or you sprawl farther away (American Canyon, Fairfield, Tracy, even Monterey). When your only tool for traffic congestion is building more lanes, that's what you try to do, even though latent demand means that more freeway creates more traffic in the long run, not less.

If I'm so clever, what am I suggesting? We need to use a different tool, namely smart growth.

Among other things, we need significantly higher density, infill development, and more mixed-use development (residential, commercial, and light-industrial uses in the same or nearby buildings). This isn't a speculative proposal: where it has happened locally, it has been popular. Look at Santana Row, San Mateo, downtown San Rafael, even South of Market/Mission Bay SF (although arguably the planning there didn't go nearly far enough, leaving too few housing units to make any dent in affordability).

Luckily, the Bay Area does not share America's poorly grounded prejudice against living in towns. So communities like the ones I propose, on the peninsula and in the East Bay (Hayward, anyone?) would likely be embraced. And infill opportunities abound: Every time you see a big-box store in the Bay Area, whether you love them or hate them, imagine a few stories of residences on top and additional businesses lining the enormous "blank" sides of the store at street level.

Will this generate so much housing that no one will be tempted to take on debt at crazy terms they can't afford? Of course not. But if it can help keep that housing-cost-to-salary ratio from growing quite so fast for the folks we want (and need!) to work with, while bringing the ancillary benefits of denser communities, it seems like a no-brainer.

Show Up for Class, Learn the Questions on the Final (or Interview)

Even though I went to the University of Chicago, unofficially known as the place "where fun comes to die," some profs had a sense of humor. Physics professors would sometimes "joke" about the sort of problems that would likely appear on the final, and the joke was that those problems (or nearly identical ones) would appear on the final. If, even with the hint, you still didn't prepare how to solve the problem, then the joke was on you.

In that spirit, I'll share my two favorite (at the moment) interview questions for senior- and lead-level tech job candidates. First:

What's interesting about RSS?

I'm not looking for what RSS stands for, how it works, what library you'd use to parse it, or who invented it, although those might make excellent lead-in questions. Or fallback ones if you have no idea how to answer the real question.

The real question is about the significance of RSS ... to the industry, to building applications, etc. You don't have to like it. Tell me why it's no good. Tell me how you'd do it differently, and what the tradeoffs are. Tell me about the alternate formats and why they exist. Or tell me why it's saved the Internet. Either way, show some real thought process. I know it sounds obnoxious to read -- heck, it sounds obnoxious to write. But hundreds of absolutely stumped interviewees with overblown resumes have taught me it's necessary.

Second:

"I always thought that Smalltalk would beat Java, I just didn’t know that it would be called ‘Ruby’ when it did." — Kent Beck.
What is Kent saying here?

Notwithstanding this page, which claims to have verified the quote, it could be apocryphal. Doesn't matter (though it's not bad if you know who Kent Beck is or at least recognize the name).

I want to know what you think the quote means. At the industry level, what's the significance of Smalltalk? Ruby? Why are they being compared? Why are they distinguished from Java? At the nuts-and-bolts level, what might it hint at in terms of improving Ruby performance?

Anyway, it's not the answer, it's the thought process that matters.