The City – San Francisco remains most overpriced region in California. Bay Area home values down 41 percent from May 2006 peak. 10 years to get to the peak 1996 to 2006. 10 years to bottom out 2006 to 2016.

People seem to think that simply having a good tech industry and a trendy scene warrants an entire region with many millions of people bidding on extremely old properties for whatever a bank will lend them.  I don’t say this with enthusiasm or any kind of bravado but the Bay Area has the most overpriced real estate in the entire state of California.  I’m not sure what it is but this region is completely disconnected from reality.  Incomes be damned, people are eager to pay an arm and a leg for a glorified hut.  Yet here is the odd twist to the story; home prices in the Bay Area derived  from the Case Shiller San Francisco MSA data have fallen by 41 percent from the peak in 2006.  Does this sound like a boomtown in The City?

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:

case shiller bay area 2012

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?

bay area fall from peak

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

bay area 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:

sf-income-data

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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