Is San Francisco in a Housing Bubble?

By now, you’ve probably heard the speculation. The San Francisco real estate market is in a bubble. The speculators have their reasons. Real estate prices are climbing too quickly, they say. For instance, since 2011, San Francisco rents have risen by 50 percent, while average home prices have climbed 45 percent.

Plus, they say, construction is booming. Cranes have popped up everywhere, and new developments are rising quickly in the south, around Hunter’s Pointe and Mission Bay. That’s partly true, development is ramping up. Last year, San Francisco added roughly 3,000 new units, compared to a historical average of about 2,000 units per year over the last decade. This year, new construction will outpace that 3,000-unit count. In fact, there are roughly 7,000 units under construction.

So what’s the conclusion: Is this the next big Bay Area housing bubble? Or is the city’s bullish housing market being driven by deeper issues? Is this just a classic case of supply and demand?

Rising Home Prices in San Francisco

It’s true that home prices have exploded in the city since 2011. But homes in San Francisco are only slightly overvalued. In fact, according to Jed Kolko, an economist for Trulia, home prices in San Francisco were overvalued by 12 percent at the beginning of 2015. That may sound like a cause for alarm. But remember that at the height of the 2007-2008 bubble, overvaluation had risen to more than 50 percent.

Plus, overvaluation, in and of itself, doesn’t necessarily indicate a housing bubble. It’s more complex than that, and it’s often tied to wage growth.

Here’s another way to look at it: That 12 percent overvaluation is found by comparing median wages with median home prices. Wages have risen steadily since 2011. In 2014, wages grew by about 3 percent during each quarter, according to, and the wages of high-tech workers exploded. For 2013, tech wages grew by 18.9 percent year-over-year, with the average pay about $155,000.

So the rise in home prices – although steep – correlates with wages. The economy in the Bay Area is the strongest that it’s ever been, and unemployment is just 3.8 percent. Thus, one of the main causes of the home price growth is that more people are employed in high-paying jobs, and therefore, home prices reflect the demands of these people

Housing Supply Remains Low, Demand Is Off the Charts

Here’s another reason prices are exploding: San Francisco’s population is growing faster than ever. Since 2010, the city has added nearly 45,000 residents, at a rate of about 10,000 new residents each year. In that same time, just 7,500 new units of housing have been added to the city’s supply. Clearly, the math doesn’t add up.

Unfortunately, the city’s population is expected to continue to grow, to as high as 1 million residents, from the current 850,000. A growing population is adding to the housing demand. Many of the city’s new residents are high-wage earners, they’re employed and they’re willing to invest more in a new home. Thus, prices are exploding, as a demanding population and wages have grown with a low supply of available units.

Supply remains relatively low.

Last year, while the city added 10,000 residents, just 3,000 new units were constructed. Historically, through the 2000s, population growth far outpaced new construction. Since 2000, the city has added more than 100,000 residents, yet just 27,000 new units have been constructed. In other words, development hasn’t kept pace with the growth, and that’s another reason for the impressive demand.

So will it change? In 2015, development is ramping up. Cranes are popping up all over the city, and the number of units currently under-construction is higher than the historical average of about 2,000 new units per year. Currently, according to SocketSite, there are about 7,000 units under construction, and another 5,000 have been permitted. Plus, major developments, including Treasure Island, the SF Shipyard, Candlestick Point and ParkMerced, will add up to 50,000 units over the coming decades. So, for the foreseeable future, supply remains low, compared to demand.

Mega developments in the Transbay development, in the Mid-Mission and throughout the southern edges of the city are set to come online this year or break ground.  Notable developments include:

•181 Park – 74 units

•45 Lansing – 3oo+ units

•Schlage Lock Redevelopment – 1600+ units

•Summit 800 – 182 units

•325 Fremont – 118 Units

•San Francisco Shipyard Phase 1– 88 units

The Bottom Line: Demand Will Continue To Outpace Supply in 2015

Even with ramped up development, the city is still digging its way out of a housing hole. This year, supply will only improve modestly. In fact, already this year, listings are up slightly. It appears demand is here to stay in the near term, and thus, housing prices will likely continue to swell. There is good news though for the buyer, with a more rapid pace of development, price gains may rise more modestly.

Whatever way you look at it, San Francisco is in the middle of a rapid period of expansion. Population is growing, the number of employed residents continues to increase, and the number of units coming online is booming. All of those factors explain why San Francisco real estate prices are predicted to continue to grow. Supply remains low, while demand is off the charts. In other words, experts are saying this isn’t the next big San Francisco housing bubble.

To get in on the exciting San Francisco real estate market, whether you are a buyer or a seller, contact Urban Focus at  415-813-5083 or use our Contact Us link above.