San Francisco Real Estate

San Francisco is the real estate market that couldn't fall. It has now fallen 45% from its peak in 2006. Here's a graphic that compares the three California cities in the Case Shiller Index to the housing market in SF if it had followed the increases in the Consumer Price Index. The reasoning here is that housing prices should roughly follow the growth in other prices, given no new technological changes in the cost of producing houses, as well as no unusual changes in demand.

Of course, weakened lending standards did lead to an unusual surge in demand, because millions of people who would not have qualified for mortgages under the old standards suddenly did, and they bought houses, bidding up prices.

The graph shows that despite spectacular carnage in the SF real estate market, prices still have not converged to the CPI. To consider another measure, prices have not reached the level of historical affordability either.

The median income in SF was $68,023 in 2007, while the median home (or condo) price was a staggering $830,700. The median home price to median income ratio was therefore 12.8, as compared to a historical ratio of about 4.5 to 5, (according to the Metro Affordability Study) which is already much greater than the national historical ratio of between 2.5 to 3. (This ratio gives rise to the old banker's rule that you never give someone a mortgage that is more than about 3 times their income.)

(Check out the Calculated Risk blog for some good analysis.)

Imagine what SF real estate would look like if median home prices here fell to their historical relationship. That would mean that the median home price would be $280k to $350k. That would be good news for people who don't want to leverage themselves into mortgage oblivion, creating an odd state of poverty by overconsuming housing.

The 2008 Cost of Living index for SF was 180.3, compared to a nationwide average of 100. This means it's about 80% more expensive to live in SF as compared to a place that tracked the national average (like Mongomery, AL, which has an index value of 97.3).

It seems logical to me that in the boom years, cities do extremely well. Wages and incomes rise, along with real estate and asset prices. But in the bust years, the situation changes. I have an anecdotal sense that SF is losing young people. I hear about them moving to places like Portland, or less dramatically, moving across the bridge to Oakland.

Will SF go through an abrupt reversal, seeing declines in the cost of living that are far sharper than declines elsewhere? We'll see.