Recently, we posed the question on the blog, “Is San Francisco in a Housing Bubble?” Our conclusion: It’s not. Instead, the rising housing costs can be attributed to the law of supply and demand. Inventory remains extremely low, while the city’s well-paid workforce has grown rapidly since the recession. In fact, demand – i.e. more buyers and renters – is greater than ever.
Here’s more proof of the growth in demand: Earlier this month, the state released updated data showing that San Francisco now has an estimated 520,900 workers – an all-time high. Consequently, the city’s unemployment rate dipped slightly to 3.6 percent, which is the lowest it has been 2000. Now, all of these additional employed residents, often in highly paid fields like technology and finance, are competing for a limited housing inventory. That’s one of the biggest reasons we’re seeing consistent overbidding, record fast turnaround, and exploding rents.
Plus, at the same time, housing supply just hasn’t been keeping pace.
Modest Development Leads to Low Inventory
Another problem is that as the economy has recovered, the city has only produced a modest number of new units. To illustrate the point: Since 2009, the city’s workforce has grown by 20 percent, or by roughly 95,000 jobs. In that same timeframe, just 2,075 new units were added to the inventory each year, or a total of about 10,000 units. That’s a nearly 10-to-1 ratio of workers to new units.
In fact, according to SF Planning 2014 Housing Inventory report, from 2011-2014 just more than 7,000 new units were added to the city’s housing inventory. Similarly, in that timeframe, employment grew by roughly 55,000 people. In the last four years, the number of employed residents grew seven times faster than new construction.
But is the city turning a corner? There is evidence that the pace of development is picking up. In fact, in 2014, a 20-year record of 3,000+ units were added to the inventory, and in 2015, there is a similar number of developments that will be built. Yet, will the pace of construction ever catch the demands of the city’s growing workforce? It’s yet to be seen, but it will likely take years for the city to dig itself out of the hole. Plus, if the economy remains healthy, demand will continue to remain high.
That’s why we’ve seen recent developments, like rents increasing by nearly 15 percent from 2014 and 2015, the feeding frenzies at open houses, and a record number of luxury condo sales. In other words, there’s no need to worry about a bubble just yet, because demand remains high and housing prices are not exclusively overinflated.