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The fundamentals do not support the SF market. The price of a house is over 10x the median household income there
SF is a weird market. I don't know if prices there are supportable or not, but I will note a few things that indicate why they might be:
First, like NYC you have a lot of "permanent renters" who will never buy a house in the area. So you can't really compare everyone in SF with everyone in another area of the country where homeownership is much more common. If you look at incomes of people who are buying vs. house prices I believe it will be a lot more in line with traditional multiples for high income, high cost areas. It is not like 10 years ago when people were buying houses that were 10x their income with no doc teaser rate loans.
Second, there is the Silicon Valley effect. Among the people I know in the bay area, a fair number of first time homebuyers bought with the proceeds from a big one time windfall due to stock options or an IPO. This is a minority of the people in the tech industry, but there are still a lot of people - potentially enough to influence the market.
Third, there is a not insignificant number of foreign buyers, many paying cash.
Finally, rents are insanely high. Buying is not that much more expensive than renting in SF. One of the big indicators for the areas that suffered the most in the last crash was that buying got a lot more expensive than renting in those areas.
SF is a weird market. I don't know if prices there are supportable or not, but I will note a few things that indicate why they might be:
First, like NYC you have a lot of "permanent renters" who will never buy a house in the area. So you can't really compare everyone in SF with everyone in another area of the country where homeownership is much more common. If you look at incomes of people who are buying vs. house prices I believe it will be a lot more in line with traditional multiples for high income, high cost areas. It is not like 10 years ago when people were buying houses that were 10x their income with no doc teaser rate loans.
Second, there is the Silicon Valley effect. Among the people I know in the bay area, a fair number of first time homebuyers bought with the proceeds from a big one time windfall due to stock options or an IPO. This is a minority of the people in the tech industry, but there are still a lot of people - potentially enough to influence the market.
Third, there is a not insignificant number of foreign buyers, many paying cash.
Finally, rents are insanely high. Buying is not that much more expensive than renting in SF. One of the big indicators for the areas that suffered the most in the last crash was that buying got a lot more expensive than renting in those areas.
The dangerous, bubble-like problems of the SF market is it drags up places like Hayward ca and east Palo Alto that are actually quite crappy but get dragged up by the prices in other cities
Where the "many areas" where prices are up to 15 times income?
BTW, with interest rates in the low 3%s, buyers in many areas can afford a house 4-5x their income and still keep their house payment below the "traditional" 28% of income guideline. The "traditional income ratios" of 2.5x to 3x income were based on an era when interest rates were 9% or higher.
The ratio of (fixed) monthly payment to income is what determines affordability, not the ratio of house price to income.
At a 9% fixed interest rate the payment on a 30 yr $100k mortgage would be $805/mo. At a 3.25% fixed interest rate, you can get a $185k mortgage for the same $805/mo. So at 3.25% you can afford almost 2x what you could when rates were 9%.
Income ratios are the best metric to determine the long term affordability of housing. In real terms Seattle is about 25% OVER long term affordability when compared to incomes (yes even with all our income growth)
So unless YOU believe we have entered a whole new world where Seattle can demand higher income ratios than NEWYORK we are coming back down.
Of course I could be wrong, I am not an economist.
I go a bit further. In a pensionless society where people are expected to self-fund retirement and carry the risk of insolvency themselves, basing "affordability" on the purported normalcy behind financing 3x of your gross income to secure simpleton housing is just ludicrous. Sure, if I was my boomer parents and had 75% pensions waiting for me I could then live on 100% of my income, raise a family comfortably and leverage my monthly income into 3x gross housing costs. But in a Country where everybody is going to a social security check? Hell no.
As long as people support the idea of paying 40% of their net income into housing costs as some floor of "safe and dignified" living in metropolitan America, we'll continue sinking deeper into that retirement insolvency. Housing isn't helping anyone retire, except maybe Californians who like locusts, cash out and raise cost of living in the South for everybody after having not paid taxes into those state's pension or education systems for decades. You can't eat your house, sans reverse mortgage that is. Otherwise your supposed nest egg makes no sense when you have to rip your family and social life apart, remove the roof over your head and move away to the proverbial cheaper socioeconomic desert in order to realize the income stream to eat in retirement. Not an enviable proposition. For the rest, even worse, SS retirement aka poverty when indexed for the fact these people made above median income the day before their hands gave out.
SF is a weird market. I don't know if prices there are supportable or not, but I will note a few things that indicate why they might be:
SF is the extreme but all the high COL regions are seeing pretty much the same thing. They have booming economies. The transportation infrastructure is lousy everywhere but NYC where rail and the extensive subway system allow people to commute without driving. It puts an enormous premium on being able to live close to where you work in a town with a viable school system.
As I posted on another thread, housing starts are not even where they were in the early 90s, much less 2005.
Circa 2005 housing prices were driven by speculation. Now they are driven by good ol' fashioned supply & demand. We are not building much new housing these days, not like we used to.
Housing prices are up because people are finally getting jobs again & have cash in their pockets, and banks have finally unloaded most of their excess foreclosed inventory. During the recession, no bank wanted anyone to know how much property they owned from foreclosure & couldn't sell. From discussing it locally with a banker in my area... A LOT.
So no. The next downturn will be caused by something else.
As I posted on another thread, housing starts are not even where they were in the early 90s, much less 2005.
Circa 2005 housing prices were driven by speculation. Now they are driven by good ol' fashioned supply & demand. We are not building much new housing these days, not like we used to.
Housing prices are up because people are finally getting jobs again & have cash in their pockets, and banks have finally unloaded most of their excess foreclosed inventory. During the recession, no bank wanted anyone to know how much property they owned from foreclosure & couldn't sell. From discussing it locally with a banker in my area... A LOT.
So no. The next downturn will be caused by something else.
The median net worth for millennials is something like 10k. How do they buy houses with 10k?
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