San Francisco’s housing market has been the shining star in the California housing recovery. It has been a long, bumpy recovery across the majority of California since 2009, but the Bay Area bounced back faster and more robustly than the rest. But is this meteoric success sustainable? Has the Bay Area’s housing market expanded into dangerous bubble territory?

Unlike other California regions, San Francisco home prices in the mid- and high tier are higher in 2017 than before the Great Recession, and low-tier prices are on their way to catching up.

But mid- and high-tier home prices have leveled off and started to decline in recent months, casting doubt on the longevity of the rapid price rise. Further, home sales volume has stalled in San Francisco, displaying little movement in recent months.

If there is a bubble in the Bay Area’s housing market, do these signs indicate it will soon pop?

CoreLogic recently evaluated San Francisco’s housing market with this question in mind.

To answer whether San Francisco is experiencing a bubble — or if today’s price rise is commensurate with the area’s successful economic growth — CoreLogic compares San Francisco’s:

  • home price index; with
  • per capita disposable income.

This comparison tells us San Francisco’s housing market is currently valued appropriately.

In other words, recent income increases have mostly kept up with median home price increases. According to CoreLogic’s measurement, the last time the market was overvalued was at the frenzied apex at the end of the Millennium Boom.

Readers: we hate to burst your bubble, but this simplification is not the full story.

Related article:

San Francisco housing indicators

Different price tiers, different issues, different conclusion

The questionable thing about CoreLogic’s measurement is that it uses a median price figure. It’s like building a mathematical model premised on a fictitious foundation. When you examine the real details and look at how home values vary based on their price level, we get a different story — and a very different conclusion.

Low-tier home prices — homes which sell in today’s market for less than $621,500, according to the Case-Shiller home price index — continue to increase at a rapid pace, with prices 10% above a year earlier in San Francisco as of October 2016.

In contrast, mid- and high-tier home prices have seen a leveling and decline in the past few months. [See the chart above]

Thus, when you average price movement across San Francisco’s price tiers, as CoreLogic has done, you see a moderate increase broadly consistent with average income increases. But when you zoom in on just the low tier, a price bubble becomes more apparent.

Further, individuals with mid- to low incomes have seen slower income increases than the population as a whole.

The further illustrate the fact that reductionist median pricing is inapplicable to the Bay Area, San Francisco has the highest level of income inequality in California. Thus, there is a great degree of variance between the prices of high-tier and low-tier homes, which is glossed over when the values are averaged.

In San Francisco, the top 5% of earners make over 14 times as much as the bottom 20% of earners, according to the Brookings Institution. The bottom 20% of income earners make $26,400 annually as of 2014, far below what is needed to qualify to rent even a modest apartment in San Francisco’s pricey housing market. This is $1,400 less than what was earned by the bottom 20% before the 2008 recession. In contrast, the wealthiest 5% of San Franciscans earned $52,100 more in 2014 — for a total of $353,500 — than before the recession.

As individuals with lower incomes see slower income increases (and in some case decreases) over the years, competition for low-tier housing has become tighter — perhaps even overvalued.

The solution is more low-tier housing to satisfy more of San Francisco’s population in need of housing. The good news? Residential construction has picked up in San Francisco in the past year, particularly in the more accessible multi-family sector. On average, building permits were approved for nearly 400 new multi-family units each month in the second half of 2016. This is about 100 more units approved per month than a year earlier, a 30% increase.

Still, expect to see competition remain tight in San Francisco’s low-tier housing market during 2017. This landscape isn’t going to change until rising construction has a chance to meet some of the continually rising demand. On the other hand, mid- and high-tier segments of the housing market will continue to experience a slowdown in sales volume and pricing as we progress through 2017.