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Income, Affluence, Poverty & the Cost of Housing: Housing Affordability in the San Francisco Bay Area

The California Association of Realtors just released its Housing Affordability Index (HAI) for the 2nd quarter of 2016, 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: median house price, mortgage interest rates, and household income. (Housing Affordability Index Methodology). The HAI uses house prices exclusively and if condos were included in the calculation, median home prices would decline (in SF, from $1,375,000 to $1,200,000 in Q2), affordability would increase and income requirements and PITI costs would be reduced as well.

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.

Affordability Percentage by Bay Area County

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Long-term Bay Area Housing Affordability Trends

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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. Most counties now have higher, and sometimes much higher, home prices than in 2007 (see chart later in report), but their affordability percentages are higher now too, instead of lower. The reason behind that apparent contradiction is the approximate 44% decline in interest rates, 2007 to 2016, as well as some increase in median household incomes.Extremely low interest rates have subsidized increasing home prices to a large degree in recent years.

San Francisco is still 5 percentage points above its all-time affordability low of 8%, last reached in Q3 2007 (even though its median house price has increased about 50% during that period). Other Bay Area counties (except for San Mateo) 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

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Minimum Qualifying Income to Buy Median Priced House

Assumes 20% downpayment and including principal, interest,
property tax and insurance costs.

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Bay Area Median House Prices

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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.

Income, Affluence & Poverty

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Marin has the highest median household (HH) income in the Bay Area, a tad above Santa Clara and San Mateo. 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.

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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

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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.

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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.

Mortgage Interest Rates since 1981

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Interest rates play an enormous role in affordability via ongoing monthly housing costs, and interest rates are close to historic lows, over 40% 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, that rates cannot go much lower. Any substantial increase in interest rates would severely negatively impact already low housing affordability 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.

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Monthly Rental Housing Costs

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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

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Additional Chart: Affordable Housing Construction Trends in San Francisco

There is probably no bigger political 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 groups to developers. It is an extremely complicated and difficult-to-resolve issue, especially exacerbated by 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 affordablemeans in a city with a median home price 5 times the national median. One corollary of increasing affordable housing contribution requirements for developers and extremely high building costs is that developers are concentrating on buildingvery expensive market-rate units – luxury and ultra-luxury condos and apartments – to make up the difference.

Other reports you might find interesting:

Bay Area Home Price Maps

Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

San Francisco Housing Inventory and New Construction Pipeline

Survey of SF Bay Area Real Estate Markets, August 2016

10 Factors behind the San Francisco Real Estate Market

30+ Years of San Francisco Bay Area Real Estate Cycles

San Francisco Market Overview Analytics

San Francisco Neighborhood Affordability

Our sincere gratitude to Leslie Appleton-Young, VP & Chief Economist, and Azad Amir-Ghassemi, research analyst, of the California Association of Realtors, for their gracious assistance in supplying underlying data for the CAR Housing Affordability Index calculations.

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.

© 2016 Paragon Real Estate Group

Bay Area Real Estate & Demographics

While waiting for the autumn market to begin, we thought we would step back and look at the Bay Area from a variety of angles. If you are tired of reading about real estate, there are some interesting demographic analyses at the bottom of this report.

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Ups & Downs in Bay Area Real Estate Markets
All Bay Area markets saw large surges in home values from 2000 to 2007; all went through significant or even terrible declines after the 2008 financial markets crash, typically hitting bottom in 2011; and all have made dramatic recoveries since. But there are big differences in how these events played out in distinct markets, with 4 main factors behind price changes over the past 16 years:

  • BUBBLE: Generally speaking, the lower price ranges and the less affluent areas saw much bigger, crazier bubbles than other segments, inflated in the years prior to 2007 by predatory lending, subprime loans and the utter abandonment of underwriting standards.
  • CRASH: In 2008-2011 distressed-property sales devastated the lower price segments, which suffered the biggest declines in home prices. When the recovery started in 2012, they began from unnaturally low points, which had little to do with fair market values. Other market segments were affected but to much lesser degrees.
  • PROXIMITY to the high-tech boom: SF and Silicon Valley have been the white-hot hearts of economic expansion. Oakland and the rest of Alameda County were the closest, significantly-more-affordable housing options. Then, as one moves further away, the electrifying effect on home prices gradually lessened.
  • AFFORDABILITY: The more affluent areas led the recovery in 2012-2014, but then the highest pressure of demand started shifting to less expensive, comparatively more outlying neighborhoods, cities and counties. Buyers desperately searched for affordable housing options, or simply wanted more home for the dollar. Now, some of the most expensive markets are beginning to cool, while less expensive ones remain very competitive.

A fifth factor just beginning to impact some markets now (such as the SF condo market) is the significant increase in new home construction, most of which is on the more, or much more, expensive end.

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The chart above illustrates median sales price changes, from 2007, the approximate peak of the bubble, to 2011, the approximate bottom after the crash, to the present, after 4-plus years of recovery. The table below summarizes the percentage changes charted above.

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OAKLAND had a very large subprime bubble, a huge crash, and then a sensational recovery highly pressurized by being just across the bridge from SF (and much more affordable). The Oakland median house price is up a staggering 178% since 2011, partly because it crashed so low. However, because its subprime bubble was so big, it is only 10% above its inflated 2007 price. Alameda County as a whole has experienced much the same market. Other comparatively lower-priced Bay Area markets, such as northern Contra Costa, Solano, Napa and Sonoma, more distant from the high-tech boom, saw similar dynamics, but are still below their 2007 peaks despite substantial recoveries.

Price-change percentages up and down are not created equal: If a price drops 60%, it then has to go up 150% to get back to where it started.

SAN FRANCISCO, more expensive and affluent, had a much smaller bubble and much smaller crash with far fewer distressed property sales (and those mostly concentrated in its least expensive districts). The high-tech boom then supercharged its recovery: Its median house price is up 93% from the bottom hit in 2011 (much less than Oakland), but is 51% higher than its 2007 peak, the biggest increase over the 10 years of any of the markets measured. Silicon Valley has similar statistics, and other high-price markets like Marin and the Lamorinda/Diablo Valley area of Contra Costa County, saw comparable, if somewhat less dramatic, dynamics.

These county market descriptions are gross generalizations, as each county has both very affluent and less affluent communities, with their own unique dynamics.

Additional chart: Bay Area home price trends since 1990
Additional chart: Bay Area dollar per square foot values
Additional chart: Average Bay Area house sizes


Trends in Home Values since 1988

per the S&P Case-Shiller Home Price Index

Instead of looking at different locations in the Bay Area, Case-Shiller analyzes its entire market by low, mid and high-pricetiers, each tier equaling one third of sales. For any Bay Area home, whatever its price in January 2000, Case-Shiller assigns it a value of 100. All other values on the chart below refer to percentages above or below the January 2000 price, i.e. 150 equals 50% price appreciation since that date. Case-Shiller does not use median sales price data, but instead uses its own custom algorithm to reach its conclusions.

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Two things stand out: As mentioned before, different price segments had bubbles, crashes and recoveries of vastly different magnitudes. Secondly, all the price tiers are now roughly the same percentage above their January 2000 prices, each showing about 130% appreciation over the past 16 years.

Note how much higher the peak of the bubble in 2006-2007 was for the low-price tier of homes (light blue line): Prices jumped an incredible 170% from 2000 vs. 119% for the mid-price tier and 84% for the high-price tier. Then came a correspondingly gigantic crash.

Our full report: 30+ Years of San Francisco real estate cycles


San Francisco Home Prices by Neighborhood, Property Type and Bedroom Count
Below is one of 7 tables in our updated breakdown of SF home prices. The full report:
SF Home Values Analysis by Neighborhood
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Selected Bay Area Market Dynamics

A selection of relatively self-explanatory snapshots measuring Bay Area real estate markets. San Francisco dominates the news, but it is a relatively small real estate
market by number of sales.

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Virtually no place else in the country has seen competitive overbidding comparable to the inner core of the Bay Area. (Though some of it is caused by strategic underpricing.)

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Additional chart: Average days on market by county
Additional chart: Median condo sales prices by county
Additional chart: Comparative Bay Area rents
Additional chart: Housing affordability in the Bay Area

 

Selected Demographic Snapshots

A few angles on how the Bay Area is different from other places, and how Bay Area counties differ from one another.

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All Bay Area counties have been growing in population. San Francisco in particular is very densely populated and getting denser.

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In the spirit of the times, a look at Bay Area political party demographics.

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Along with Washington DC and Seattle, the Bay Area ranks among the best educated metro areas in the country.

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The single biggest factor behind strong rent control laws:

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Our most recent region-specific market reports are here:

San Francisco Real Estate Market Reports
Marin County: Market Conditions, Trends & Values
Lamorinda & Diablo Valley: Market Conditions, Trends & Values
Sonoma County Market Report

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 the Bay Area, each with its own unique dynamics. Median prices can be and often are affected by other factors besides changes in fair market value, and longer term trends are much more meaningful than short-term. It is impossible to know how median prices apply to any particular home without a specific comparative market analysis.

© 2016 Paragon Real Estate Group