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Is the Bay Area in a housing bubble or a housing crisis?


Real estate markets run in cycles, and right now our regional market is soaring. While the national median price for a home is just over $200,000, the median price paid for a home in the nine-county Bay Area last month was just about $600,000.

In San Francisco, the median home price hit $1 million for the first time over the summer, making it the third least affordable housing market in the world behind Hong Kong and Sydney, according to the Demographia International Housing Affordability Survey.

The Bay Area has been here before. The real estate bubble burst after the first dot-com boom in the late '90s, and then it inflated again around 2003. By the recession in 2008, that bubble had also burst.

Now, home prices are higher than ever before in the Bay Area. So it begs the question: are we in a housing bubble or a housing crisis?

Jamie Comer of McGuire Real Estate says that while her business has been thriving with the latest tech boom, the market is starting to get a little choppy. Comer specializes in lofts in the Dogpatch and South of Market neighborhoods where many of her young, well-heeled tech clients are scooping up properties.

“If you'd talked to me eight months ago I'd still say you're seeing at least five to eight offers on every property,” Comer says. “That's not the case as much anymore. Frequently you're seeing two to three offers and of course it depends on the category. A $1.5 million home is very different from a one bedroom condo. The buyer pool is different.”

Still, Comer expects an $899,000 Dogpatch loft she’s currently showing to sell for closer to $1 million.

Broker Dan Dodd of Vanguard Properties viewed the loft for clients in the tech industry who are looking at the top of their price range. They’ve lost out on half a dozen properties so far.

“For this particular set of buyers they're right at the threshold of what they can afford so it means they have to suffer through more disappointment,” Dodd says. “But eventually we'll get something for them.”

It’s a tough market, even if you have a million dollars to spend. And if you don’t, it’s even tougher. That’s the downside to an economy on the upswing -- home prices get so high that home ownership can become unattainable.

Or, you can sell your home for a profit but still not be able to afford to buy something bigger.

This is the case in San Francisco, where real estate values are outpacing incomes, as was the case with the last real estate bubble. However, if you’re wondering when the next bubble will pop, experts say don’t hold your breath.

Jed Kolko is the chief economist at the real estate website Trulia. He uses data to understand housing markets nationwide.

“We should think of a housing bubble as an acute condition,” Kolko says. “[It's] something that can come on quickly. It's very sharp, but won't last forever.”

Kolko says the housing issues in the Bay Area aren’t the kind of acute conditions that characterize a bubble. What we have is a chronic problem, which arises when supply fails to meet demand.

This matters because whatever the current state of the housing market is, people feel like it’s going to last forever. There are some factors that change relatively frequently: interest rates, inventory in certain categories, things like this. But San Francisco’s chronic problem is a lack of housing for middle and lower-income people. It’s not that they can’t afford it, it’s that it doesn’t exist. And real estate investors and speculators are helping drive up the demand.

“They start bidding up the price of housing partly because they expect prices will keep rising. But we know after last decade that home prices don't only go up, they can also go down,” Kolko says.

That doesn’t mean prices are about to level off; Bay Area homes are actually selling for around what they’re worth.

Economists determine whether the price of a house is too high based on things called fundamentals, like income and rents in a particular region.

“In the San Francisco area right now, prices look about 12% overvalued compared to where they should be based on local fundamentals,” Kolko says. “During the height of last decade's housing bubble, though, prices looked almost 50% overvalued.”

And the more prices are overvalued, the closer we are to a housing bubble, and a price crash. Which is what led to the foreclosure crisis in 2008.

“Now that doesn't mean that housing is affordable in San Francisco today, not even close,” Kolko says. “Poor affordability is the chronic condition of the Bay Area's housing market.”

That’s in part because in San Francisco, the rich are getting richer and the poor are getting poorer, according to the Brookings Institution. It reported that from 2007 to 2012, San Francisco’s income gap widened more than any other U.S. city.

Households at the 95th percentile earned about $350,000 a year, while households at the 20th percentile earned just over $21,000. That huge disparity makes it pretty hard to determine what the average San Franciscan should be able to afford.

“There's no perfect way to know what home prices should be at any one point in time,” Kolko says. “Measuring fundamentals is as much art as it is science.”

And one reason that bubbles form is it’s very hard to know whether you’re in a housing bubble until it pops. If the Bay Area is not in a bubble, Kolko says it had better start building.

“San Francisco builds much less housing than almost any other metro in the country, particularly compared with metros that also have strong demand,” he says. “To make a serious dent in our affordability crisis we would have to build a lot more housing than we build today and than what we've built over the past decades.”

Even then, Kolko says, it will take a long time for supply to meet demand.