Approximately 68% of homebuyers in San Francisco overbid for homes from May 15, 2016 to June 14, 2016, according to a recent report by OpenHouse.
This statistic is all the more impressive — or garish — considering million-dollar home prices are the new norm in the Bay Area.
The most recent inductee to the seven-figure average for single family residences (SFRs) is Santa Clara County, with an average price of $1 million. San Mateo also broke into the million-dollar range, at a pricing average of $1.2 million which the county last saw in May 2015.
Average or median home prices alone aren’t sensitive enough to accurately depict conditions in individual home price tiers. However, the overwhelming percentage of homebuyers collectively willing to exceed astronomical Bay Area asking prices proves the crisis is still worsening, despite recent decreases in home sales volume. In other words, sufficient crowds are still eagerly drinking the toxic Bay Area Kool Aid.
Even luxury homes sold for an average of 7% higher than the asking price in 2015.
Why are buyers jumping on these ludicrous asking prices?
It all comes down to competition over scarce inventory. Housing supply is severely limited in Bay Area cities, where renting is king and zoning restrictions function as shock collars clamped around developers’ necks. Demand for urban living is far too high for the shallow supply to support; thus, homebuyers feel compelled to get a home the moment it hits the market.
However, in order to even compete as a viable player in the outrageously competitive Bay Area markets, homebuyers need to earn hefty paychecks. Thus, mid-and low-income residents are left on the sidelines. (Keep in mind, mid- and low-income tiers in the Bay Area allow for considerably higher income than other, more temperate markets.)
Unsurprisingly, mid- and low-income residents are saying good riddance in increasing numbers. Already, 34% of Bay Area residents have indicated desire to pack their bags and ditch the crazy competition.
Relocation translates to longer commutes for buyers and more traffic for locals. Eventually, many of these transplanted residents will select more convenient employment in their new location — a big problem for the remaining residents, since most of these employees will be of critical (and underpaid) factions, such as educators, health workers, police, firemen and other government employees. As a result, smaller, less niched businesses will be dragged away from the Bay Area as they try to reattach to a disbursed workforce and escape diminished earnings.
Prices in the Bay Area won’t fall until the Federal Reserve (the Fed) raises the interest rate again near the end of 2016, limiting the amount buyers can borrow (particularly on adjustable rate mortgages (ARMs), the more popular mortgage for the Bay Area). Once buyer purchasing power finally pitches itself over the ledge, prices will fall, likely by 2017 as a result of lack of demand. However, as the Bay Area market will recover more quickly than the rest of California, home prices will buoy up again in 2018.