The San Francisco Bay Area seems to be immune to home price erosion. Many folks felt that this was explained by the large amount of wealth (except that New York and Beverly Hills are even wealthier and prices have dropped there) and by demand (actual number of residents has dropped dramatically since the housing boom).
Certainly on the fringes of the Bay Area, we see doom and gloom. Stockton is the foreclosure capital of the US, they say. Sonoma County, Sacramento, Contra Costa county - all are facing problems. But the strip that runs from San Francisco to San Jose has remained strong.
In its recent report on home sales and prices, Dataquick revealed (
http://www.dqnews.com/RRBay0108.shtm) that for San Francisco, San Mateo and Santa Clara, median prices were flat year-over-year. No change. Which is different from neighboring Alameda county (-8%), Contra Costa county (-11%), Marin (-5%) and so on.
There are arguments about the median price calculation. The chief one states that the subprime mess has meant no low-end homes are selling (or being bought, depending on how you look at it) and there aren't any options around to pay for the high end homes. Without the low- and high-end homes, the median prices won't come down because they reflect the middle slice of home sales. There is truth to that point, but lets not get too distracted. Even the mid-tier homes should be coming down.
So why are home prices so resilient? Indeed, that resiliency is so strange in the face of the limited affordability.
Historically, Bay Area residents pay ~3.5X median salary. At the last boom in 1990, this peaked at 5X and bottomed at 2.5X. For those who don't know, SF Bay Area median home prices today are ~10X median salary.
I can see at least two factors that enable affordability
1. Dual incomes
2. Stock options and even some profits from previous home flipping (aka trading up)
Double the income, and now home prices are 'only' 5X home income. Still high.
What if we add $200K in downpayment from options or profits from previous home selling. Now the home is 'only' 7.5x median salary or ~4x the salary of a double income home.
I'm sure this is the reality for a lot of folks, but the records show that the bulk of homebuyres in the last few years did not have downpayments. So home prices really are closer to 10x individual salaries or 5x double income earners.
Which means that a retreat to historical norms would drop home prices a cool 50%.
So, again, why haven't they?
In fact, look at another choice statistic tied to demand called, well, demand. According to the US Census (
http://quickfacts.census.gov/qfd/states/06/06085.html), Santa Clara County hasn't had much population growth since 2000. Only 50,000 new residents or 3%. Those are probably mostly kids, considering that 25% of the population are under 18, reflecting the density of young professionals. It's not a retirement destination, in other words: this is where you come to get jobs and raise a family.
My point is that there is not a strong demand for housing based on population growth. Neither is there strong demand based on jobs growth. Santa Clara County employment has been flat for 4 years and staying around 1994 levels:
2007: 833.3
2006: 817.1
2004: 819.0
2002: 852.7
2000: 1,057.3
1998: 961.3
1996: 899.0
1995: 857.1
1994: 809.7
1992: 798.1
Source:
http://www.viewfromsiliconvalley.com/id391.html(The guy's a little nutty but really good at his record keeping)
Demand for housing is flat at best, and weaker than a few years ago (based on jobs growth). But housing prices remain flat. In fact, considering that mortgages were more expensive last year than they have been in a few years, even a flat price reflects a relative increase in willingness to commit a chunk of income to owning a home here.
Except that sales are very, very low. In fact, sales volume is down 40% compared to December 2006. Home sales were even lower than the last drop off in 1990. The cause of the drop is partly tied to a drop in lending availability. I really think the majority comes from the end of speculation and also to a more esoteric event: something I call Borrowing from The Future. The concept of borrowing from the future is that there is a natural demand for housing tied to population and job growth. The past few years created such a mad rush to buy, that folks who would have waited longer, instead, ended up buying sooner. So here we are, in the future, and that natural demand is gone. Normally, that bulge in demand would reappear in a few years, except these folks are stuck: they can't sell or trade up because they have no equity due to flattening prices.
So here we are: job growth is flat, population growth is flat, access to mortgages has gone down and taken with it speculation mania. Foreclosure rates are surging, adding much more supply to the market, so inventory is certainly rising. So, the question to ask again: why aren't prices dropping?
The answer: they are. Look at this chart that peels back annual home prices by zip code
http://www.dqnews.com/ZIPSFC2007.shtm. Let's go to San Francisco. Lets focus on the areas that are holding steady (94102 is the Tenderloin and the 11% drop in median price is to be expected).
Of the 23 areas, 14 had price rises. The ones with the biggest rise: Noe Valley, Presiod/Richmond, Marina. Other areas that grew were around the Mission, reflecting ongoing gentrification. Core wealth areas like St Francis or Pacific Heights were flat.
This is a different picture from a year or so ago when every area showed growth. Now we do see prices coming down. And it always starts at the margins. First it is the areas outside of San Francisco. Then it is a few select areas in San Francisco. Then it is everywhere. Because if someone can save $200K by living 1 mile away, they will do it, especially if the kids will be going to private schools anyway.
Prices are starting to come down. As we roll into the Spring, the traditional period of home buying, I predict a continued sluggishness of selling coupled with a panic of frenzied sellers dumping inventory. A lot of folks held back from selling last year because they believed that things would improve this year. Not likely. Already a local site is showing inventory ~25% higher than last 2 years:
http://www.socketsite.com/archives/2008/02/socketsites_san_francisco_listed_housing_inventory_upda_8.html#commentsIt's going to be a mad rush for the doors. Because reality is back: folks earning even $120K can not afford a $5K monthly mortgage. Nevermind the tax breaks: add in insurance, heating, taxes, and upkeep and there is no disposable income left. It doesn't matter if the mortgage is 5% or 6% - no disposable income is no disposable income. More people will be heading to the exits because they bought intending to sell at a profit - now they are hoping to sell without a loss.
This is the year of anger and fear. Next year is the year of real panic.
