Historically high housing prices in Santa Cruz and the Bay Area are on the minds of many. It naturally follows to ask, are we in a housing bubble? A bubble occurs when prices are decoupled from the true value of an asset, and due to the expectation that prices will continue to rise, they do so until the bubble bursts. Therefore, the question is, are people buying real estate in the Bay Area simply because they believe that the prices will continue to rise, or is there another explanation for these higher than normal prices?
Possible justifications include high demand and low supply, higher incomes, and overall more productive local economy. As this article explains, there has been mildly faster job growth in the bay area, particularly in San Francisco, in comparison with the rest of the nation. The industries growing the fastest are professional services and information jobs, which encompass many of the jobs we refer to as “tech.” This implies that the economy, and not just the housing market, is improving in the Bay Area. However, a few key points make one less confident:
- Close to 80% of our local tech sector is not profitable and reliant on venture capital. In short, if the investment slows these companies’ growth will follow.
- Affordability has become a major issue for workers and businesses alike. This being the “most expensive place in the country to live and work in” companies face infrastructure constraints – lack of office space, scarcity of affordable housing and transportation congestion.
- American consumers are driving the economic expansion locally and nationally. If confidence falls and people stop spending, the economy will slow down.
- Easy money for high net worth individuals may be driving up prices as described here. If this practice does not slow with the economy (especially the tech sector), this would imply we are in bubble territory. Especially given that some of these individuals hold wealth in company stock.
So, while improved economic activity has influenced the increase in housing prices, this economic development may lack stability in the long run. The Bay area has shown signs of cooling, and real estate prices appear to be following suit, especially in the Luxury market. Most economists would see this slow down as healthy and point out that it may show a shift from irrational exuberance to healthy optimism, our greatest ally against a housing bubble.