San Francisco Housing Bubble 2.0

Two interesting articles were released this week on a recent Fitch report citing a housing bubble in the “San Francisco” Bay Area.

It’s important to note that Fitch isn’t referring to “San Francisco proper”, or “The City”, rather the entire “MSA”, which covers 5 counties – Alameda, Contra Costa, Marin, San Mateo, and San Fran — and 4.5 million people. When covering large geographic and highly populated regions like an MSA, housing data and forecasts become less volatile.  So, while Fitch’s analysis remains wildly Pollyannaish and optimistic to me, it’s conclusions are rather aggressive for a ratings agency serving the sell-side and looking at an entire MSA, which is the only reason I took note. If the Fitch report was just covering “SF proper”, an epic bubble in both rents and prices would be clear.


1) The first article cites Fitch’s call that the SF MSA is “16% over-valued based on the areas underlying economic fundamentals”. But that’s the “best case” scenario. That’s because those “economic fundamentals” are made up of Fitch’s static data and rosy forecasts and models of macro-economic growth. In light on the past several months of stock, bond, high-yield, tech, and foreign demand market turmoil, the underlying data they used to derive their forecasts are outdated and optimistic.

Put it this way…I doubt that Fitch has any possibility of a recession – or even a tech-sector specific pullback — built into their macro-economic and house price models, which is increasingly likely, especially in the tech-heavy, stock/bond market supported, and “unorthodox” capital dependent Bay Area.

Bottom line: If house prices were to drop 16% over the next year, for example, then Fitch’s economic outlook and models will have to be revised lower, perhaps several times, meaning at that stage, prices could still be 16% over valued based on their “fundamentals”.


2) In the second article, analyst’s compare this market with the 2000 tech boom/bust, VC volume and rents, which is interesting and worth a read. But then, they basically say the region is “isolated” because of tech and during the 2000 tech bust San Fran housing only fell 10%.

Bottom line, by comparing today to 2000 (and not 2003-2007) the Pollyanna’s are able to say the Bay Area is “isolated” and downplay the chances of a severe correction like we saw in 2008-10.


3) This is how I see it, living here and all, and witnessing every day the exact same bubble conditions as in 2006, but worse:

Firstly, when the ratings agencies see or announce a possible bubble it’s already in the process of popping.

Secondly, Fitch’s analysis of housing being “16% overvalued” is based on its own present day and forward-looking macro-economic and housing forecasts. But, when tech sector pukes, the economy rolls, incomes and rents drop, credit becomes more expensive, and foreign housing demand “continues” to drop, Fitch’s rosy economic forecast will fail and the “16% overvalued” will instantly become 25% or 30%.

Lastly, as we learned last time around, house prices can fall quickly below their fundamental valuations meaning the 25% to 30% can easily become 40%, or 50%.

Bottom line: Fitch’s “16% over-valued” analysis is the absolute best case scenario based on a growing economy. If the economy does continue to grow at Fitch’s underlying forecast (which it doesn’t share), perhaps the 16% can be “worked off” over a long period of time. In the absence of solid economic growth and inflation, both of which I view as unlikely, or in a recession for example, the “16%” becomes the “first stop” in the next severe housing reset.


Red text is my emphasis.


Is San Francisco in a housing bubble?

Fitch Ratings suggests Bay Area home prices are at ‘unsupportable’ level

February 8, 2016

Ben Lane


San Francisco often ranks among the “hottest” housing markets due to its rapidly rising housing prices. In the last month alone, San Francisco appeared on three separate lists of the “hottest” or “strongest” housing markets for 2016.

But how hot is too hot?

According to a new report from Fitch Ratings, San Francisco is reaching that point, with the dreaded “b” word being thrown around now in regards to San Francisco housing.

Fitch’s report suggests that Bay Area home prices are “overheating” and have reached a “level unsupportable by area income,” and asks if there is a “Bay Area bubble.”

According to Fitch’s report, San Francisco home prices hit an all-time high in third quarter of 2015 and are now 62% above their post-recession low in early 2012.

In the report, Fitch Managing Director Grant Bailey said that San Francisco home prices are up more than 10% in the past year alone, making the San Francisco housing market now approximately 16% overvalued when compared to the area’s underlying supporting economic fundamentals.

“The last time the Bay Area experienced this kind of home price growth was during the dot-com era from 1997-2000,” Bailey said in the report.

According to Fitch’s report, the surge in San Francisco home prices over the last three years has exceeded the growth rate observed during the 2003–2006 housing boom.

“In both the dot-com era and recent years, home price momentum was initiated by undervalued prices and strong income growth,” Fitch’s report stated. “Area home prices fell roughly 5% nominally and 10% in real terms when the dot-com bubble burst.”

The graph below, courtesy of Fitch’s report, shows the rapid rise of home prices in San Francisco compared to the rest of the U.S.


According to Fitch’s report, strong income growth in the San Francisco area has driven the home price increases as the area’s total income is up 44% since the prior peak and 18% since the post-recession low.

But Fitch’s report suggests that home price growth “appears to have exceeded” income growth.

The graph below, also courtesy of Fitch’s report, shows San Francisco’s “sustainable” level of home prices compared to the actual level of home prices over the last 30 years.

(HANSON NOTE ON CHART BELOW:   The blue line in the chart below represents what Fitch considers to be a “sustainable home price” and is made up of Fitch’s own rosy and static forecasts and modeling of macro-economic growth.  This growth, however, is likely wildly optimistic, especially in light on the past several months of stock, bond, high-yield, tech, and foreign demand market turmoil.  Put it this way…I doubt that Fitch has any possibility of a recession built into their macro-economic and house price models, which is increasingly likely, especially in the tech-heavy, stock/bond market supported, and “unorthodox” capital dependent Bay Area.  Bottom line:  It’s important to remember that if house prices were to drop 16% over the next year (red and blue lines converge), for example, then Fitch’s economic outlook and models will have to be revised lower, perhaps several times, meaning at that stage, prices could still be 16% over valued based on their “fundamentals”.  Mark Hanson)


While the gap between the “sustainable” home price level and the real home price level was much wider in 2006 than it is now, the current gap is widening.

Fitch isn’t the only one that noticed how much the cost of San Francisco housing has risen lately.

Late last year, one San Francisco credit union announced that it was willing to go to extreme measures to try to help area residents buy a home.

In December, San Francisco Federal Credit Union announced a new loan program that will allow San Francisco-area borrowers to finance up to 100% of their mortgage – with no requirement for mortgage insurance – on loans up to $2 million.

Rebecca Reynolds Lytle, senior vice president and chief lending officer for San Francisco Federal Credit Union, said that the POPPYLOAN program was created to address the stark realties of San Francisco’s housing situation.

“We see POPPYLOAN as a game-changer for the San Francisco real estate market,” Reynolds Lytle said.

“Too many of our members have given up hope of buying a home because of escalating home prices and the required down payment,” she continued.

“However, these same families are paying more than a mortgage payment for monthly rent,” Reynolds Lytle said. “Paying $3,600 for a one-bedroom apartment is about the same as making a monthly payment on an $800,000 mortgage. We created POPPYLOAN to help middle class families realize their dream of buying a home without having to move out of the Bay Area.”

Overall, Fitch’s report shows that the national home price average rose 1% in the third quarter of 2015, or 5% year-to-date.

“Fitch Ratings views current price levels in most regions as sustainable and supported by improving unemployment and income growth,” the report states. “New home construction spending has picked up as the inventory of for-sale and under construction homes has fallen, reflecting further curing of the post-recession housing overhang.”

But that’s not the case in San Francisco, where prices are rising too quickly and lenders are resorting to extreme measures just to keep up.

Sound familiar?



San Francisco real estate looking like it did before dot-com crash in 2000

By Daniel Goldstein

Published: Feb 9, 2016 1:54 p.m. ET

Surging rents, skyrocketing real-estate prices and a booming tech sector. Sounds like San Francisco in 2016, right? It also describes the city just before the tech bust of 2000, according to a recent report.

John Burns Real Estate Consulting of Irvine, Calif., and Pacific Union, a San Francisco real-estate brokerage, say that based on the appreciation (and apparent correlation) of venture-capital deals and rent prices, the Bay Area’s rapid property-value and rental-cost appreciation today is looking more like a repeat of the dot-com bust of 2000.

’The San Francisco Bay Area is on our watch list for a correction.’ John Burns, John Burns Real Estate Consulting

“The San Francisco Bay Area is on our watch list for a correction,” said John Burns, his company’s chief executive, in an interview. He said that while San Francisco has become a permanently more expensive place to live and should be one of the most expensive places to live in the world because of its status as the center of the high-tech and Internet economy, the recent increases in home prices and rents have been fueled mainly by speculation.

“Affluent older buyers, often for investment reasons, have identified San Francisco as a place they want to own or live and have driven up prices dramatically,” he said. About a third of all-cash buyers in the Bay Area are purchasing property only as an investment, he said.

Lydia, an 80-year-old New Hampshire voter with alzheimer’s attended rallies, and shared moments with Bernie Sanders and John Kasich.

In the city of San Francisco, the median value of homes has skyrocketed, from $670,000 at the beginning of 2012 to $1.12 million this month, a gain of more than 67%, according to, which puts the gain in the past year alone at 14%.

In a separate report in February, Fitch Ratings’ managing director, Grant Bailey, said that home prices in the Bay Area had climbed to an all-time high in the third quarter of 2015 and are now 10% above their prior peak in 2005 and 62% above their post-recession low of early 2012. “Current home prices are now roughly 16% overvalued relative to the underlying supporting economic fundamentals,” Bailey said.

Bailey noted that the surge in Bay Area home prices over the past three years has occurred at an even more accelerated pace than the growth rate during the 2003-06 housing boom and was last observed in the San Francisco area during the dot-com boom, when prices rose roughly 60% from 1997 to 2000. “Bay Area home prices fell roughly 10% in real terms when the dot-com bubble burst,” Bailey said.

Bailey also said that San Francisco–area incomes have historically been a third more volatile than U.S. incomes as well as more dependent on bonuses and stock options and other incentives than incomes in other real-estate markets. The San Francisco market gets 14% of personal income from capital gains, the fourth-highest proportion of any major real-estate market, Bailey said.

“In terms of wages, San Francisco has among the most industry-concentrated labor forces in the country, with almost one-half of all earnings generated across just three sectors,” Bailey said.

But to gauge when a correction might occur, you need to look to venture-capital deals — and rent prices, according to Burns.

Burns and Pacific Union noted that the size of the average venture deal rose from $4.9 million in 1997 to $17 million in 2000, a 243% increase. At the same time, apartment rents in San Francisco and San Jose increased by 52% and 60%, respectively.

Burns also noted that in the three years that followed — as VC funding collapsed during the 2001 recession and the turmoil that followed the Sept. 11, 2001, terrorist attacks — rents fell with the decline in VC funding, which plunged from an average of $16 million per VC deal in 2001 to just over $7 million by 2004, a decline of over 50%.

During the same time frame, average rents in San Francisco plunged from about $2,300 a month in mid-2001 to about $1,600 by 2004, a decline of about 30%, according to data compiled by Burns’s group from PricewaterhouseCoopers, Axiometrics Inc. and Thomson/Reuters.

Rents in San Jose fell even further, from a similar average of $2,300 a month to $1,400 a month, or a decline of about 39%, Burns’s research showed.

The current tech-sector upswing in the Bay Area is presenting a similar relationship between VC funding and apartment rents, said Burns.

In 2010, the average VC deal in the Bay Area was $6.9 million — a figure that rose to $23.5 million by 2015, Burns said. At the same time, just as in the 1997-to-2000 period, the average monthly rental rates for apartments in San Francisco and San Jose have shot up.

In San Francisco, the average rent soared from about $1,900 a month back in 2010 to more than $3,200 last November, a gain of 68%. In San Jose, the average rent in 2010 was about $1,600 a month. Now it’s $2,800. That’s a 75% rise.

“Rents in San Francisco and San Jose have, respectively, eclipsed prior dot-com bubble peaks,” Burns said. “We think another decline this time around is inevitable.”



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