Housing Update 1/31/2018:
|San Francisco Housing|
Everything in that earlier post is still relevant, but I thought I'd update some of the housing data and add more historical context.
- We are in the middle of a housing boom. As booms go, it is not particularly unusual - bigger than the last one, but not as big as two earlier booms in the 1980's and 1990's. Housing prices go up with employment. They are still going up after almost 5 years of increases (they started increasing in 2013). This followed 6 years of price declines (2007-2012).
- Land is so expensive, only luxury housing can be built.
- A lot of apartments and condos are in the pipeline nationwide and in the SF Bay area. This should result in a halt to price increases.
- SF Bay area housing costs over the last 32 years have gone through 4 boom-bust cycles. During booms they went up as much as 100%. During busts they have gone down 10% to 27%. Currently they are up 75% from their 2013 lows.
- Growth in high wage jobs causes housing inflation.
The rise of housing costs was starting to subside in the SF Bay Area last year as companies expanded elsewhere. This seems to have been a temporary lull. Hiring is still increasing faster than housing can be built in the SF Bay Area. The geographical area occupied by tech employers is expanding in an ever-widening circle raising housing costs in increasingly remote areas.
|Housing prices rose in last 18 months|
15% in lowest 3rd of housing
10% in middle 3rd
6% in highest third
The affordability peaks occur during economic downturns and the low affordability points occur during economic booms (bubbles).
In other words,
Either: lots of high paying jobs and high housing costs
Or: jobs are hard to get and pay little, but housing is cheap(er).
Either way - it's cheaper further out.
Possibly the least surprising economic correlations - ever.
Because of the increasing concentration of high paying jobs, land is becoming so expensive that it is the overwhelming part of housing costs. The high price of land makes it impossible to build anything but luxury housing in or near Silicon Valley or most of the SF Bay Area.
As a result, housing prices are reaching new highs in the mid and high priced homes and the lowest 3rd of homes by price are close to their 2007 bubble highs as seen in the following chart. (click to enlarge)
Might as well build the large house and while you're at it, add granite counters, and marble bathrooms for another $40K - it's just icing on the cake. Those luxury touches make the large $1.85M house a $1.89M house. Who cares about the third significant figure? So all new housing becomes luxury housing.
|What the heck - why not? |
The land costs so much might as well go whole hog.
The following chart shows that as you get further out from the center of economic activity, the lower the rents. Sprawl happens because people can't afford to live close in.
The closer you are to the center of economic activity, the more expensive the land. So Lower Manhattan is more expensive per acre than its far suburbs. Lower Manhattan, Silicon Valley and San Francisco are centers of economic activity. They will never be cheap. Chart is from: http://MarronInstitute.NYU.edu/content/working-papers/the-spatial-distribution-of-land-prices-and-densities
We have seen these bubbles before as seen in the following chart covering the last 33 years back to 1984:
|FANG refers to "Facebook Apple Netflix Google"|
For SF, include AirBnB, Uber, SalesForce.com, and some others
All growing very fast all at once.
A House Price Rises and Falls
Using the above chart we can see that buyers of a house in 1985 caught the beginning of a boom and felt "rich" 5 years later in 1990. On the other hand, those buying in 1990 probably felt like chumps 5 years later in the slump of 1995 when their house equity went negative. Then, 9 years later, in 1998, with the house back up 15% from where they bought it, they might have felt philosophical that "after all, a house is a home" not an investment. By 2001, 11 years later, they were likely to feel like financial geniuses, and on, and on...
In fact, for all the talk about "housing crisis" this current rise is a relatively mild percentage increase in housing compared to previous booms - see the following chart. The percentage run up in prices in the previous two economic cycles in 1985-1995 and 1996-2001 (Dot-Com bubble) was significantly greater - 100% vs current 75%. The latest run up in prices is sort of average right now, though in dollar terms they are new highs. Less than the earlier two bubbles but greater than the US sub-prime housing bubble that burst in 2007.
|Last 5 years = increased housing costs|
After 6 years of decreasing housing costs
SF Housing Prices went down from 2007 to 2012
No one is going to build new housing if existing housing is losing value. If prices are going down, then supply exceeds demand. The market is saying "don't build!" In that time period there were a lot of foreclosures, and mortgage defaults.
|Blue line = Mortgages 90+ days past due|
Red line = Foreclosures started
Worst since at least 1980
Builders won't build for people that aren't here yet. As long as new jobs are being added, construction will always be playing "catch up". There will always be a "shortage" as long as jobs keep forming faster than housing can keep up.
As the companies expand, the increase in housing prices near work spreads out in an ever widening circle - like a drop of ink on tissue paper - meaning people who aren't getting the higher tech salaries have to commute from further and further away.
People keep asking me for a solution to this "problem". It's a problem only if you want two things that are incompatible, in which case, the problem is you.
If you want continued growth in high income jobs, then housing will keep rising in cost.
If you want housing costs to stay constant, then you can't have continued growth in high paying jobs.
One or the other, make up your mind.
|You get to choose (or, maybe not)|
|Salary Needed to Buy a House in 50 US Cities.|
San Jose (red) at far right, San Francisco (purple) next to it.
National average in middle (maroon)
Chart from Nov. 2017 data at
|"O beautiful for spacious skies,|
For amber waves of grain,"
1893 Poem by Katherine Lee Bates
Multi-family housing inventory is about to get it's biggest increase since 1975 (43 years ago).
Housing price swings are a regular feature of the US economy as seen in the following chart from census data from 1963 through mid-2011 (click on graph to enlarge):
So how is this boom different? Mainly in the builders' PR. By terming this, not particularly exceptional boom, a "housing crisis" and getting everyone to accept that term, they create a panic-driven urge to over-ride all reasonable zoning limits. And ignore the problems of getting people to and from work.
|So you build lots of housing everywhere.|
How do you get people in and out?
Well, many people are honest and trusting and aren't prepared to deal with profit-driven attempts to panic them. A little cynicism is in order. When you wake up and realize you've been manipulated it feels really awful.