Affordability & the Cost of Housing in the SF Bay Area

The California Association of Realtors recently released its Housing Affordability Index (HAI) for the 1st quarter of 2018, which measures the percentage of households that can afford to buy the median priced single family dwelling (house).

In this analysis, affordability is affected by 3 major factors: county median house price, mortgage interest rates, and the distribution of household incomes within the county. (Housing Affordability Index Methodology). The HAI uses house prices exclusively and if condos were included in the calculation, median home prices would decline, affordability would increase and income requirements and PITI costs would be reduced as well. (SF now has more condo sales than house sales, but that is not the case in other Bay Area counties.)

If the HAI Index incorporates changes to the federal tax code (effective 1/1/18) limiting the deductibility of interest expenses and property taxes, it will presumably have a negative effect on affordability percentages in 2018. However, as of Q1 2018, the CAR Index has not yet been able to adjust their calculations for these changes.

By definition, half the homes sold in any given county were at prices below the median sales price, i.e. there were numerous homes that were more affordable than the median prices used in this analysis. However, any way one slices it, the Bay Area has one of the most expensive – if not the most expensive – and least affordable housing markets in the country. That impacts our society and economy in a number of important ways.

Since the real significance of many of these charts is in the longer term trends, we’ve only updated some of the charts below in this report with Q1 2018 data: Q1 median home prices, income required to purchase a median priced house, PITI costs, and county affordability percentages.

Link to our Survey of Bay Area County Markets, Trends & Demographics
Positive & Negative Factors in SF Bay Area Real Estate
Link to our Main Reports Page

Long-term Bay Area Housing Affordability Trends

Affordability Percentage by Bay Area County

Note that extremely low affordability readings converged across Bay Area counties at the top of the bubble in 2006-2007. So far, there has not been a similar convergence in our current market, though affordability is generally dropping as prices increase.

Having dropped approximately 40% from 2007 to mid-2016, extremely low interest rates have subsidized increasing home prices to a large degree in recent years – but they’ve begun to rise significantly in 2018.

San Francisco is still above its all-time affordability low of 8%, last reached in Q3 2007 (even though its median house price has increased more than 50% during that period). Other Bay Area counties (except for Silicon Valley) have appreciably higher affordability percentages, for the time being. Generally speaking, as one moves farther away from the heart of the high-tech boom, San Francisco and Silicon Valley, affordability increases.

Monthly Ownership Cost at Median Sales Price

Minimum Qualifying Income to Buy Median Priced House
Assumes 20% down payment and including principal, interest,
property tax and insurance costs.

Bay Area Median House Prices

San Francisco-Only Median House Price Appreciation
by Quarter since 2012

Before the high-tech boom, Marin, a famously affluent county for long time, had the highest median house price. But the high-tech boom accelerated median home prices in San Francisco and San Mateo faster and higher.

Additional chart: Median condo sales prices by county

San Francisco has a much larger and more expensive condo market than other local counties, and is the only county with a very substantial luxury condo market – one that is growing significantly with recent new-condo project construction.

U.S. Metro Area Housing Affordability
by the National Association of Realtors

This national affordability chart above employs a different methodology than the CA county charts above: The graphed chart values (percentages) have totally different meanings. The two metro areas at the bottom of the rankings make up 7 counties around the Bay Area.

Mortgage Interest Rates since 1981

Short-Term Changes in Mortgage Interest Rates

Interest rates play an enormous role in affordability via ongoing monthly housing costs, and interest rates, after their recent post-election jump are about 35% lower than in 2007. To a large degree this has subsidized the increase in home prices for many home buyers. It is famously difficult to predict interest rate movements, though there is general agreement. Any substantial increase in interest rates would severely negatively impact already low housing affordability rates.

Income, Affluence & Poverty

Santa Clara, San Mateo and Marin Counties have the highest median household (HH) income in the Bay Area. Though the median HH income figures of these 3 counties are almost double the national figure, their median house prices are 4 to 5 times higher, an indication that income dollars can go a lot farther in other parts of the country than they do here. Indeed an income that in other places puts you close to the top of the local register of affluence, living grandly in a 6-bedroom mansion, in the Bay Area might qualify you as perhaps slightly-upper-middle class, living in an attractive but unostentatious, moderate-sized home that costs twice what the mansion did (though, this being the Bay Area, you are probably still driving a very expensive car).

On the other hand, you live in one of the most beautiful, highly educated, culturally rich, economically dynamic, and open-minded metropolitan areas in the world.

Behind median HH incomes, each county also has enclaves of both extreme wealth and poverty within its borders.

Very generally speaking, in the Bay Area counties, renters typically have a median household income about half that of homeowners. In San Francisco, where the majority of residents are in tenant households, that significantly reduces the overall median HH income figure. The picture of housing affordability for renters in the city is ameliorated or complicated by its strong rent control laws (which, however, don’t impact extremely high market rents for someone newly renting an apartment) .

Additional chart: Homeownership Rates by County

Additional chart: Population Demographics – Children & Residents Living Alone

San Francisco has the lowest percentage of residents under 18 of any major city in the U.S. (It is famously said that there are more dogs in the city than there are children.) It also has an extremely high percentage of residents who live in single-person households – 39% – which is a further factor depressing median household income below markets with similar housing costs.

The Bay Area has approximately 2.8 million households. Of those, approximately 124,000 households have incomes of $500,000 and above, which would generally be considered to place them in the top 1% in the country by annual income. At 7.5%, Marin has the highest percentage of top 1% households, followed by San Mateo at 6.2%. With approximately 38,000 top 1% households, Santa Clara, the Bay Area’s most populous county, has by far the largest number of these very affluent households, while San Francisco has about 22,000.

It should be noted that besides high incomes per se, another factor in the Bay Area housing boom of recent years has been the stupendous generation of trillions of dollars in brand new wealth from soaring high-tech stock market values, stock options and IPOs. Thousands of sudden new millionaires, as well as many more who didn’t quite hit that level, supercharged real estate markets (especially those in the heart of the high-tech boom) as these newly affluent residents looked to buy their first homes, perhaps with all cash, or upgrade from existing ones. That is something not seen in most other areas of the country, certainly not to the degree experienced locally, and is a dynamic outside typical affordability calculations. This increase in new wealth has slowed or even declined in the past 12 months as the high-tech boom has cooled (temporarily or not, as time will tell). Still, there are dozens of local private companies, usually start-ups, some of them very large – such as Uber, Airbnb and Palantir – which are considered to be in the possible-IPO pipeline. If the IPO climate improves and successful IPOs follow, a new surge of newly affluent home buyers may follow.

Additional chart: Bay Area Populations by County

A look at two very different income segments in the Bay Area, those households making less than $35,000 and those making more than $200,000. The $35,000 threshold is not an ironclad definition of poverty, especially since housing costs (by area, and whether market rate, subsidized or rent-controlled), household sizes and personal circumstances vary widely, though it is clearly difficult for most area families trying to live on that income. At over 25%, San Francisco has the highest percentage of households with incomes under $35,000 and, at 22%, Marin has the highest percentage making $200,000 and above.

Amid all the staggering affluence in the Bay Area, and huge amounts of new wealth generated by our recent high-tech boom, very significant percentages of the population still live in poverty, especially if our extremely high housing costs are factored into the calculation. (The above chart calculates poverty rates by different criteria, the higher one factoring in local costs of living.) The economic boom has helped them if it resulted in new, better paying jobs, unfortunately not as common a phenomenon as one would wish for the least affluent. It hurt them, sometimes harshly, if their housing costs escalated with the increase in market rates.

Longer-Term Trends in Prices and Rents
The same economic and demographic forces have been putting
pressure on both home prices and apartment rents.
 

Bay Area Median House Prices since 1990

If one looks at charts graphing affordability percentages, home prices, market rents, hiring/employment trends and to some degree even stock market trends, one sees how often major economic indicators move up or down in parallel.

Monthly Rental Housing Costs

The recent economic boom has added approximately 600,000 new jobs in the Bay Area over the past 6 years, with about 100,000 in San Francisco alone – with a corresponding surge in county populations. Most new arrivals look to rent before considering the possibility of buying. The affordability challenges for renters (unless ameliorated by rent control or subsidized rates) has probably been even greater than that for buyers, since renters don’t benefit from any significant tax benefits, from the extremely low, long-term interest rates, or by home-price appreciation trends increasing the value of their homes (and their net worth). In fact, housing-price appreciation usually only increases rents without any corresponding financial advantage to the tenant. Rents in the city have been plateauing in recent quarters and may even be beginning to decline as the hiring frenzy has slowed and an influx of new apartment buildings have come onto the market – but they are still the highest in the country.

Bay Area Rent Report

Affordable Housing Stock & Construction in San Francisco

Additional Chart: Affordable Housing Construction Trends in San Francisco

There may be no bigger political and social issue in San Francisco right now than the supply (or lack) of affordable housing: Battles are being fought, continuously and furiously, in the Board of Supervisors, at the ballot box and the Planning Department by a wide variety of highly-committed interests, from tenants’ rights and neighborhood groups to anti-growth factions and developers (to name a few). It is an extremely complicated and difficult-to-resolve issue, especially exacerbated by nimby-ism and the high cost of construction in the city. SPUR, a local non-profit dedicated to Bay Area civic planning policy, estimated in 2014 that the cost to build an 800 square foot, below-market-rate unit in a 100-unit project in San Francisco was $469,800 – and we have seen higher estimates as well.

This fascinating graphic above, based on SF Controller’s Office estimates from late 2013, breaks down SF housing supply by rental and ownership units, and further divides rental by those under rent control. All the units labeled supportive, deed restricted and public housing could be considered affordable housing to one degree or another, i.e. by their fundamental nature their residents are not paying and will never pay market-rate housing costs. (Units under rent control will typically go to market rate upon vacancy and re-rental, though rent increases will then be limited going forward.) Adjusted for recent construction, there are roughly 34,500 of these units out of the city total of about 382,500, or a little over 9% of housing stock. Section 8 subsidized housing would add another 9,000 units.

There are currently many thousands of affordable housing units, of all kinds, somewhere in the long-term SF Planning Department pipeline of new construction, though many of them are in giant projects like Treasure Island and Candlestick Park/Hunter’s Point, which may be decades in the building. But it is generally agreed that new supply will never come close to meeting the massive demand for affordable housing, further complicated by the question of what exactly affordable means in a city with a median home price 5 times the national median, typically well beyond the means of people such as teachers and members of the police force. One corollary of increasing affordable housing contribution requirements for developers and extremely high building costs is that developers are concentrating on building very expensive market-rate units – luxury and ultra-luxury condos and apartments – to make up the difference.

Other reports you might find interesting:

Survey of SF Bay Area Real Estate Markets

10 Factors behind the San Francisco Real Estate Market

30+ Years of San Francisco Bay Area Real Estate Cycles

San Francisco Neighborhood Affordability

All our analyses can be found here: Paragon Market Reports

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers should be considered general estimates and approximations.

© 2018 Paragon Real Estate Group
 

SF Residential Newsletter: Hottest SF Neighborhood Markets

Before discussing neighborhood values, appreciation rates and market cycles, here are 3 overview charts on the entire city market.

Citywide Home Values & Trends

On a 3-month-rolling basis, median home sales prices in San Francisco yet again hit new highs in April 2018: The median house sales price jumped $55,000 over the March price to hit $1,665,000, and the median condo sales price jumped $50,000 in April to $1,225,000 (3-month rolling sales through 4/30/18, reported by May 2). Those reflect year-over-year increases of 23% and 8% respectively. Average dollar per square foot values also reached new peak values.

Highest Median House Price Appreciation Rates by Neighborhood:
Compound Annual Appreciation Percentages, 2011 – 2017

The neighborhoods and districts circled on the map below have seen compound annual appreciation rates of 12% or more over the past 6 years. As a point of comparison, the national rate over that period was about 7%, and the CPI inflation rate about 1.5%. As illustrated in the table below the map, the highest rate in San Francisco over the period was above 18%.

If the return on cash investment was calculated for purchasing with a 20% down payment (instead of paying all cash), and adjusting for closing costs (estimated at 2% on buy-side, 7% on sell side), the compound annual rate of return on the cash investment soars: A 10% annual rate of home price appreciation would then translate into an annual compound return on cash investment of just under 40%. The use of financing in home ownership is one of the reasons why it can often be such a good investment to develop household wealth over time.

Total 6-year appreciation rates can be calculated by dividing the 2017
median house sales price by the 2011 price.

Though median home price appreciation rates throughout the city have been incredibly high by any reasonable measure, some neighborhoods have outpaced the norm. The main reason is affordability: Less expensive homes have appreciated considerably faster than more expensive homes. Also, some of the most affordable districts were hammered by foreclosure sales after the 2008 crash, which brought their sales prices down to unnatural lows by 2011 – setting the stage for dramatic recoveries. Bayview, with the most affordable houses in SF and also worst hit by the 2008-2011 distressed property crisis, has had the highest compound annual appreciation rate since that time, a staggering 18.3%, or a 6-year total rate of 174%. Other affordable neighborhoods running across the southern border of the city – such as Excelsior, Visitacion Valley, Sunnyside, Ingleside and Oceanview – also saw extremely high annual rates of 12% to 14% for similar reasons.

The dynamic in the Inner Mission was somewhat different: Its 14.7% compound annual rate of appreciation – a total of 128% over the 6 years – was because it turned into the hottest, hippest district in the city, especially among younger high-tech workers. The gentrification which had been slowly occurring for 30 years suddenly went into overdrive to catapult prices higher.

Bernal Heights – with a 13.3% compound annual rate and 111% 6-year total – is right next to the Mission on one side and to Noe Valley on another. It was perfectly situated to take advantage of the classic overflow effect for people who wanted a similar neighborhood ambiance to Noe or Eureka Valley, but could no longer afford their much higher prices. Outer Richmond was also a standout: It has the lowest house prices in the northern third of the city. And the Sunset & Parkside district is filled with mid-price 2 and 3 bedroom houses, has a variety of attractive neighborhood commercial districts, ocean or parks on 3 sides, and easy access to highways south to the peninsula. All these factors have made it into a much sought-after location to purchase a home in recent years. The market there is insanely hot now.

The most expensive neighborhoods in the city have lower, but still very high rates of appreciation. And in dollar terms, their appreciation returns are by far the highest in the city.

CONDOS: Calculating appreciation rates for SF neighborhood condo prices is an iffier process, because so many large, new condo projects have come on market, significantly impacting inventory and sales prices, and making it much more difficult to perform apples to apples comparisons. Therefore, our calculations, above and below, are performed for the entire city instead of for separate districts. It is certainly true that, due to supply and demand issues, condos have typically appreciated at somewhat lesser rates than houses, which have become the scarce commodity in SF. There has been some variation in condo appreciation rates depending on location, supply and price segment.


Up, Down, Up: A Longer-Term Look
at SF Home Value Changes since 2000

Bubble, Crash & Recovery
by District & Price Segment

Home value appreciation in the charts below is broken down by 4 distinct time periods: 1) 2000 to peak of bubble (2006-2008, depending on price segment); 2) peak of bubble to bottom of market (typically 2011); 3) the 1st 4 years of the recovery, 2012 to 2015; and 4) 2015 to present.

House appreciation is broken down into 4 broad price segments as exemplified by the markets in 4 city regions: The least expensive segment is represented by house sales in the broad swathe of southern neighborhoods running from Bayview through Portola, Excelsior, Crocker Amazon and Outer Mission (Realtor district 10). The mid-price segment is illustrated by sales in the Sunset & Parkside district (Realtor district 2). The central Noe, Eureka & Cole Valleys district (district 5) is used to represent the expensive segment; and the very expensive house segment is illustrated by the northern, old-prestige neighborhoods running from Sea Cliff, Lake Street & Jordan Park through Pacific & Presidio Heights, Cow Hollow and Marina to Russian, Nob & Telegraph Hills (which are the very affluent parts of 3 different Realtor districts).

These areas were used because of their quantity of sales and the relative homogeneity of values within them. For condos, appreciation rates were calculated on the entire SF condo market. The calculations below were made by averaging both median sales price and average dollar per square foot appreciation rates. Present values are based on sales occurring in Q4 2017 and Q1 2018.

2000 to Peak of Bubble,
Crash to Bottom of Market

Less expensive homes saw by far the biggest bubbles (2000 to 2006-2008) and crashes (2008-2011), mostly due to the predatory lending/ subprime financing crisis. This was a phenomenon across Bay Area markets. (Note that different price segments peaked in different years from 2006 to mid-2008.)

Bottom of Market to 2015,
2015 to Present

The first 4 years of the recovery which began in 2012 saw high home-price appreciation rates across the city. In 2015, the market shifted – there was considerable financial market volatility in late 2015 and the first half of 2016, a precipitous drop in IPO activity, and the high-tech boom cooled temporarily – and appreciation rates diverged, with less expensive homes significantly outpacing more expensive neighborhoods. One factor was that buyers were desperately searching for homes they could still afford.

Overall Dollar & Percentage Appreciation
2000 to Present

By total percentage appreciation since 2000, Sunset/Parkside ranks first. By actual dollar appreciation, the most expensive home prices increased the most, typically by well into seven figures.

San Francisco Condo Appreciation
2000 to Present, All Districts

Generally speaking, the SF condo market has not seen appreciation rates as high as for houses. Mostly, this has to do with increasing supply due to the boom in new condo construction, but it was also affected by factors in 2015-2016 already described above.

Percentage of Sales over List Price
by Property Type

This chart illustrates the difference in demand by property type.
Houses have been the hottest segment in recent years.

San Francisco New-Housing Trends

New construction, projects authorized, and affordable housing figures
based on SF Planning Department data recently released for 2017

Additional reading for those interested: Paragon Main Reports Page

Please let us know if you have questions or we can be of assistance in any other way. Information on neighborhoods not included in this report is readily available.

It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term. Late-reported MLS activity may change certain statistics such as median sales prices, to some small degree.

© 2018 Paragon Real Estate Group