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Bay Area Housing Market Correction?

Bay Area Housing Affordability & Market Corrections

November 17, 2015 Report

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The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It’s important to note that in the past, major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events. (Though it is true that our 1989 earthquake added an extra oomph to the national recession about to begin.) Ongoing speculation on local “bubbles” often neglect to remember this.

Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it’s interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers can’t find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.

San Francisco, as of Q3 2015, with a very low Housing Affordability Index (HAI) reading of 10% is about 2% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.

Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.

Note that Affordability ratios are just one relatively blunt measuring tool, and there are certainly other factors at play affecting our real estate market: local (high-tech boom; surging population, employment and wealth; inadequate housing supply, rental rates, etc.), national (financial markets, unemployment rates, consumer confidence, etc.) and, nowadays, even international economic factors (such as recent events in the Chinese stock markets and the EU). For that matter, major environmental events – earthquakes, and potentially, droughts – can affect the market.

The methodology the California Association of Realtors uses to calculate HAI: Housing Affordability Index Methodology

Our much broader Q2 overview: Bay Area Affordability

Speaking of financial markets, we decided to take a look at how the recent volatility played out in the S&P 500 and the Shanghai stock indices. These indices are constantly fluctuating, but, as of mid-November, the general picture has not altered significantly since we graphed this in early November:


Other reports you might find interesting can be found here:

San Francisco Market Reports

San Francisco Neighborhood Values

30+ Years of San Francisco Real Estate Cycles

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. How any median or average statistic applies to a particular home is unknown without a specific comparative market analysis.


© 2015 Paragon Real Estate Group

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