For the past several years, real estate prices in San Francisco have risen dramatically. This was a welcome change amid the national recovery from the housing crisis of 2008 (and its aftereffects), but prices in the city are rising far faster than the national average.
Is there a chance that this could represent a localized real estate bubble in San Francisco? And if so, how could this affect current citizens and prospective investors?
Let’s take a look at the rising price trends over the past decade or so. Back in 2007, right before the financial crisis, the median home sales price in San Francisco was about $900,000, with a median condo price of just under $800,000. Compare that to the national median home price, which was just over $200,000. That’s a gap of roughly $700,000.
During the crisis, home prices in the Bay Area fell to $700,000, while condo prices fell to just over $600,000. The national median price didn’t fall much, resting just below $200,00 for a few years.
Then, from 2012, the prices in San Francisco began to explode, growing consistently and significantly, year over year.
For 2017, the median home sales price was a whopping $1,420,000, with a median condo price of $1,150,000. Compare that to the national median home sale price, which was $248,000 in 2017. That’s a gap of $1,172,000, meaning the gap is more than 50 percent bigger than it was pre-economic crisis.
Why is this the case?
- The job market: Tech companies pop up in San Francisco constantly, especially when the economy is booming. It’s frequently hailed as one of the greatest cities for jobs in the United States, and jobs always lead to increased home prices.
- The stock market: The overall market has been performing exceptionally well over the past decade, with few pullbacks to worry investors. This has given people more money to play around with and has helped support an overall booming economy.
- Increased spending: Consumers are also spending more money on luxury items and experiences, including exotic game reserves and luxury cars. It makes sense that more people would be willing to invest in high-price housing.
A slight weakening
There are some troubling signs, however. For starters, pending home sales in California (overall) fell for a few months in a row at the end of last year, furthering the trend of dropping pending home sales over the past few years.
Real estate agents began noticing a trend of fewer floor calls, listing appointments and client presentations. The drop hasn’t affected real estate prices much so far but could be a sign of reversing momentum in the near future.
The problem is compounded by the fact that the Bay Area has been hemorrhaging jobs in the past few months, with September of 2017 resulting in the worst month for employment since February 2010.
With more than 4,700 jobs lost due to direct job cuts and hiring freezes, some experts suspect the outrageous housing costs are part of the problem; workers simply don’t have affordable places to stay.
So what do these trends mean for the future? Is San Francisco in a housing bubble, or is there still room to grow? There are three distinct possibilities:
- The bubble bursts: One possibility is that we’re in a bubble currently, and the job and pending sales figures are a sign that it’s about to burst. If that happens, prices will plummet, and the local economy will struggle to get back on its feet.
- We’re not in a bubble, but housing prices correct: It’s likely that home prices are a bit inflated, but that’s not a guarantee that a bubble has formed. We may be in store for a small correction, with a gradual and steady dip in home prices until they normalize.
- Job and pending sale trends are temporary, and the market stabilizes in growth: Finally, job drops and low pending sales could be temporary. If those trends reverse, the market could stabilize, and keep pushing for higher growth. Of the three options, this is the least likely.
It’s entirely possible that a micro-bubble has developed around San Francisco, and a collapse would be bad news for current residents and property owners alike. Still, there’s a possibility that there’s still room for prices to rise higher — we won’t know until we have more data on jobs, prices and sales later this year.