The rise in Bay Area home values is part of the California housing bubble yet is more pronounced in the north.  I’m not sure if we should be proud about being the leading spot of reality-disconnected real estate in the world but that is what we have.  Even with the dramatic decline in Bay Area home prices, some choose to ignore the numbers that prices have corrected.

Take for example this data:

Bay Area median price 

November 2005:                              $625,000

February 2012:                                  $325,000

Bay Area housing has seen a 48% price decline for the entire region and has wiped out $300,000 on a per capita home basis yet some still choose to ignore that a correction has occurred.  Is seven years not enough to bring some people back to reality?  Yet when it comes to Bay Area real estate, this is what we are dealing with.

Many buyers in the Bay Area are currently investors:

DataQuick

Why does the above matter?  Because these investors are looking for cheap properties and they are a big part of the market.  26 percent of all purchases last month came from investors and the chart clearly shows the path of where things are heading.  The typical property they bought cost $230,000.  We are a long way from that $625,000 figure.  All those funky California loans are sure coming back to bite us hard in 2012.

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A bubble has popped in The City

You don’t have to be a charting genius to see that home prices have completely collapsed since the peak in 2006:

From 1996 to 2006 home prices in San Francisco only knew to do one thing and that was to move up.  Yet that has now massively reversed.  It doesn’t help that California has a somewhat inconsistent budget process and incredibly low property tax rates.  This is a separate debate but home prices in the state were encouraged to go up with no regard to income thanks to funny mortgages that belong in some kind of B-rated movie about financial swindles.  The obvious outcome was a bubble and the burst is what we are living in.

If we pull the data out, we find home prices moving lower and now stalling out.  The question is, will we see a second round lower?

Think prices aren’t out of sync?  Take a look at this 833 square foot condo:

The current sales price is $849,000.  When I see things like this it is hard to see any other path than seeing prices move even lower.  I took a look at income data for this zip code and it is $170,000.  No way can $170,000 a year pay for this place.  More to the point, why would anyone pay this much for 833 square feet?

I know some buy into the high price real estate world of California but the statistics show a very different picture and pattern emerging.  Sure San Francisco and the surrounding area are excellent but prices are simply out of line with what people can generate.  To say that incomes don’t matter when it comes to real estate prices is like saying the engine of a car doesn’t matter because the tires are inflated.  Incomes absolutely matter.  Going into massive debt for something you cannot afford typically does not end well.  People over estimate how much households make in the Bay Area:

These figures flat out do not support current prices.  A low interest rate is merely a teaser to do something inane like taking on $20,000 in credit card debt just because you can get 12 months at zero percent.

The City is bound for a second go around in the California correction.  10 years to get to the bubble peak, might take 10 years to reach the bottom (i.e., 2016).  Garbage in, garbage out.

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Let us look at the current data and try to figure out what is going on:

The latest data shows San Francisco still holding at a very high median price.  But San Francisco County only accounts for 6% of all Bay Area home sales.  It should be obvious that price is one of those reasons keeping people from buying in the city.  Yet the reasons don’t seem so obvious when we dig deeper into the data:

The median household income for San Francisco County is $73,000.  So with a current median price of $627,500 we are looking at a household income to home price ratio of over 8.  This is enormous since even looking at historical data a ratio of 3 to 4 seems to be more standard.  Looking at this data tells us that SF County is definitely still in a housing bubble.  As other areas have corrected, this area is still being propped up and it is certainly not because of higher than expected incomes.  In fact, if we look at distress inventory for SF we find that many households are now unable to pay their mortgages:

Distress inventory trumps the actual MLS data viewable to the public.  This is very common throughout many counties in California.  But you would logically think that the most expensive county would have people that are able to pay their mortgages at a higher percentage than other areas.  That is not the case if we are to look at the above.

San Francisco is an interesting case study.  The county is made up of 359,000 households.  But when we look at the housing dynamics we can see why the median income is much lower:

Housing occupied units:                                323,000

Owner-occupied:                             127,000

Renter-occupied:                             195,000                 (60%)

60% of those living in San Francisco County rent.  The obvious reason is that many people don’t have the income to support those current prices.  There is no way a $73,000 income can buy a $625,000 home.  So let us look at the above income chart again.  In order to “afford” a $625,000 a household income will need at least an income of $200,000.  Of those living in San Francisco only 14% make that amount.  Yet 40% occupy their home (i.e., own their place).  So we have a 26% gap of those living in their home that if they were to buy today, would not be able to do so.  We see this when homes were purchased in California:

And for San Francisco, about 40% bought before 2000.  It is interesting to see these numbers because it shows us that many counties in California are still in bubbles.  Given the distress inventory, we would expect more correcting in these areas.  In fact, you’ll notice that the Bay Area is up 20% for the year in price while San Francisco County is down 2%.  This is a long way from making sense but it is heading in the right direction.

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