Middle class struggles amid Silicon Valley rebound

Traffic jams are back in Silicon Valley, start-up funding is at five-year highs but middle-class families living in the prosperous region south of San Francisco face mounting economic challenges, a study released on Thursday finds.

A report by labor advocacy group Working Partnerships USA paints a picture of falling real wages, spiraling home prices, long commutes and rising prices, offset by progress in expanded subsidized housing, improvements in mass transit and lower crime rates.

'Economically, working and middle-class families in Santa Clara County remain worse off today than in 2000,' the report states. 'Incomes have fallen while the cost of living continues to soar.

Santa Clara County, at the heart of Silicon Valley, is home to hi-tech powerhouses Intel Corp., Google Inc. and Hewlett-Packard Co.. Such firms together employ hundreds of thousands of workers, generate billions in wealth and are considered model employers around the world.

'With wages stagnating, the housing market faltering, and higher payments on thousands of adjustable-rate mortgages beginning to come due, Silicon Valley's residents face an increasingly uncertain future,' the report summarizes.

Jobs in the local economy expanded by 37,000 during 2006 to 898,000, the first rise in five years. But there were 156,700 fewer jobs in early 2007 than in 2001, a 15.4 percent drop.

Employment in the region's two biggest industries—manufacturing and business/professional services—is 30 percent below 2000's all-time record levels, the study finds.

'The Valley's workers have been hit first and hardest by trends such as outsourcing, contracting out, contingent and temporary employment, vanishing career ladders, and the movement from stable wages and pensions to forms of compensation dependent on the stock market,' the Working Partnerships study says.

Home sales in Santa Clara County have dropped 26 percent since 2004. But the median sale price for homes grew to $775,000 in 2006 from $521,240 in 2000.

The median real household income fell to $74,293 in 2005 from $83,370 in 2000, a decline of $9,011. Incomes fell most dramatically for Asian-American and Latino-headed households.

The lack of affordable housing means that workers ranging from firefighters to software engineers can face hours-long commutes from lower-cost counties further inland.

"Because of the financing that was possible, so many people bought the bigger house, the million-dollar house with the bowling alley or the tennis court outside," says Guzek, who works for GreenPath Debt Solutions, a nonprofit service based in Farmington Hills, Michigan. "People across all income brackets are having financial hardship."

For those on the frontlines of the growing U.S. mortgage crisis, these are the early signs that the explosion of subprime loans made to mostly poorer borrowers is reaching higher ground. The damage is hitting homes financed through jumbo loans for more than $400,000 and so-called Alt-A loans that are a notch above subprime and a step below prime.

Americans already are facing foreclosure at a record pace, according to the Mortgage Bankers Association. Lenders started foreclosure actions against more than one in every 200 U.S. mortgage borrowers in the last quarter of 2006.

In the last three months, the percentage of foreclosures for U.S. homes valued at more than $750,000 has climbed to 2.5 percent, the highest since early 2005, when RealtyTrac, a online marketplace for foreclosed properties, began tracking data. The overall rate of foreclosures also is on pace to increase by a third this year.

"Everyone's looking at subprime. The rock they aren't looking under are the adjustable rate mortgages and teaser rates and low money-down loans," said Mark Kiesel, a portfolio manager for Pacific Investment Management Co., the world's biggest bond manager. "It's going to affect prime as well."

Kiesel said he sold his Newport Beach, California, home for more than $1 million in May last year after the property appreciated more than 20 percent in two years. He believes delinquencies and defaults will rise, weighing down most of the housing market.

California, with 3,384 foreclosures of higher-scale homes since December, is leading the nation, followed by Florida and New York, according to RealtyTrac. The MBA doesn't track foreclosure data by home value.

"To define the problem as a subprime problem is short-sighted," Rosner said. "It's really seeing the tip of the iceberg as the iceberg."

Compounding the risk is the nature of homebuyers of higher-end homes, says Rosner. About 40 percent of homes bought last year were second homes or investment properties. Speculative buyers may be more at risk, he said.

Standard & Poor's said on a conference call on Thursday that foreclosure rates are likely to surpass levels last seen during the 2001 recession.

"That giant ATM you've been living in has just shut down," said David Wyss, chief economist at S&P in New York. "Consumers are in debt and we've been living beyond our means for some time."

Sheriff McGuire calls the process "one of the most distasteful parts of my position." He places most of the blame on bankers who allowed questionable lending practices.

"This might not have happened if not for these new type of loans," McGuire said, minutes before the auction. The loans also have helped millions of Americans purchase new homes, he concedes.

"The banks took a chance on the future, and the homeowners took a chance so there's enough blame to go around," McGuire said. Still, "the banks and lenders have largely set them up for this downfall."