I mentioned half a year ago that I am homeless. It is with much interest that I read last week's SF Chronicle piece on the Relentless Rise of Bay Area Home Prices. Here are my favorite passages from that article.
- If you look at the things that really drive the real estate market, you have interest rates which are still at 35-year lows. I think the biggest thing that's driving price today is lack of inventory. There are more buyers than there are houses to buy.
- [In October the median price of a home in the Bay Area] went up from $544,000 in September to what looks like will be $553,000. This is for resale houses... what we're seeing is basically buying activity where people are putting roofs over their heads. You can't use the bubble criteria there... The market does what it does. What did Ed Leamer of UCLA (director of its Anderson Forecast) say a couple of years ago? He said, "What are they smoking up there in the Bay Area?" He just couldn't make sense of the numbers here.
- What's happening in the Bay Area is this: We have a deficit of home ownership, so people took advantage of the low interest rates and easy credit to become homeowners. We have the lowest home ownership rate in the state. I believe it's 58 percent. Nationwide, it was 69 percent. So we have a deficit. Let me give you the demographics and the job situation, which I think eventually will cause us a problem. We've lost 135,000 jobs the last three years in San Francisco. We've lost 175,000 in San Jose. In Oakland, we lost only 30,000, and we've actually gained 6,000 in the East Bay. So the job situation would have said that this would be a very bad housing environment. Every time we've had a recession like this, with a run-up in prices, which we did have in the late 1990s, you would get a housing recession. But what offset that was the extraordinarily low interest rates.
- Other factors have offset the terrible economy. There have been extraordinarily low interest rates, easy credit and trade-up buyers having built up more money. I'm worried about the Bay Area and California as a whole. The California Association of Realtors affordability numbers are 14 percent for San Francisco. Oakland is about the same. San Jose looks like it might be a hair better. The problem with that is that's with very low interest rates. I'm thinking that if interest rates go up, it's out of control.
- It wouldn't shock me to see a price decline of 15 percent on average over a three- or five-year period... From 1990 to 1994, the Bay Area probably lost about 10 to 11 percent of its value.
- In the Bay Area, it's low. About 7 percent are buying homes they don't live in.
- We've got this churn rate, how fast (houses) turn over. Basically, the Bay Area is about the same as the rest of the state. California has always had a higher turnover rate than the rest of the country. We just do more of everything here. We get divorced more often; we move more often; we get fired and get new jobs more often. Everything happens faster in California, and that's reflected in the length-of-ownership statistics. One other thing about the market -- and this is one of those obscure little factors that's going to play a big part -- we have to remember that for every mortgage dollar being loaned out there right now, there are two waiting in the wings to be loaned.
- The vast majority [of people leaving the Bay Ara] are homeowners. It makes a lot of sense. Their house is now worth $1 million or $1.5 million. They can sell it, trade down, get the capital gains tax-free and pay no income tax in Nevada. California has a crisis. The Bay Area's problem isn't housing as much as how do we create jobs? The housing factor could hurt because companies have to pay a lot more for their employees to live here.
- [First-time homeowners] don't need a big down payment today -- very low down payments, creative financing. You can basically be qualified at a 2 percent rate on a deferred-interest mortgage. Easy credit has most helped them. Wealthy buyers don't care about that. What percentage of buyers are first-time buyers? I want to say something like 30 percent, and it's eroding. It's not that there aren't many of them. It's that the other side is so able to take advantage of this trade-up market.
- Until two years ago, it got very affordable because prices hadn't moved up much, and interest rates had come down. So interest rates and easy credit were two main reasons along with the wealth effect -- people reallocating their money to housing rather than stocks. For first-time buyers, it's always been tough. People are stretching. It used to be that you couldn't spend more than one-third of your income to buy a house. Now the criteria are stretched. It's 42 or 43 percent.
- In January, February and March, it was crazy. There just weren't enough properties on the market. It seemed every property had 8, 10, 12, 14, 44 offers. Right now, that's moderating. That's a positive thing. Houses with multiple offers are going for less over asking price. There are exceptions, particularly on the Peninsula, where you have a scarcity of listings, like Burlingame, like Menlo Park. It's unbelievable that at entry level -- $700,000 in Burlingame -- you may have 20 offers because there are so many people want to get in there.
- Annual median price of single-family detached houses in the nine-county Bay Area:
2004 $527,000 (through October)
I love listening to real estate people talk about the Bay Area housing market...