Housing Price Corrections in the Bay Area

Much has been written in the past few months about declines in housing prices across various regions of the US. Generally, analysis will talk about the median price declines in metro areas like Las Vegas, Phoenix, New York City, or the Bay Area and will feature headline numbers from Case-Shiller, NAR, or Zillow. What’s missing from almost every analysis is commentary about what’s happening within these metro areas.

Take for instance the Case-Shiller index which defines the San Francisco area to include the counties of Alameda, Contra Costa, Marin, San Francisco, and San Mateo. Now, as anyone familiar with this area knows, these five counties represent a wide range of geographies and socioeconomic profiles. Not surprisingly, it also includes a wide range of real estate markets – from sub-prime Armageddon in the city of Hayward to relative stability in San Francisco. Indeed, many a San Francisco real estate agent will insist that the city’s comparatively minimal house price decline is proof that there’s something “special” about the city by the bay which makes it immune to the housing plague that’s gripped so many other neighboring cities.

However, some simple analysis indicates that this theory may be about as well founded as the idea that there is something “special” about dot.com companies that exempt them from rational economics.

I’ve compared the boom and bust of housing prices in each of 10 cities in the broader San Francisco metro area (Stockton and Tracy are technically outside of the Case-Shiller five county area but are useful reference points). In each of the 10 cities, I looked at price trends on a price per square foot basis of 3BR homes to adjust for the changes in housing mix that often skews “median price” analysis one way or the other. For each city, I gathered data on (a) the $/SqFt in 2000, (b) the peak $/SqFt level, (c) the date of this peak price, and (d) the current $/SqFt level.

Using this data we can see several potentially telling trends. First, housing prices generally peaked first in the furthest outlying cities. Outlying cities like Santa Rosa and Stockton, for instance, peaked in Jan-06 and Feb-06 respectively, as the subprime market showed its first signs of weakness. Closer cities such as Alameda didn’t peak until more than a year later in April ’07 and San Francisco not until July ’07.

Knowing that housing prices in Stockton and Santa Rosa have been on the decline for about twice as long as Alameda and San Francisco, it probably shouldn’t be a surprise that they’ve also fallen much further from peak levels to current (as of Nov’08). Indeed, Santa Rosa and Stockton have fallen 44% and 59% respectively, while Alameda and San Francisco “only” 18% to 24% - and many neighborhoods in the heart of San Francisco have fallen much less or even posted modest increases.

But wait! Didn’t prices in outlying real estate markets like Stockton boom much more than in San Francisco and neighboring cities? Certainly they did. Stockton, for instance, was up over 225% since 2000 (!!!) while Alameda and San Francisco increased a modest 153% and 125% from their year 2000 base. Even considering this fact, house prices in Stockton and Santa Rosa are just 35 and 38% above their year 2000 nominal level, and 6-9% above the level assuming a healthy 3% per year appreciation. San Francisco is 85% above the level implied by 3% annual gains since 2000. In fact, you’d need to assume an 8% annual appreciation since 2000 to justify current prices – and if you remember San Francisco in the year 2000, it was clearly not a struggling economy.

What may be happening here? It seems pretty clear that the house price decline struck first in the places with highest percent of subprime mortgages and particularly ludicrous price appreciation. These were the cities with a powerful catalyst– a huge segment of home buyers clearly not able to make payments on their houses, thus a surge of foreclosures and a downward spiral of property values. As prices declined in Stockton, a potential home buyer considering the virtues of Stockton vs. Tracy (only about a 20 mile drive between them) were marginally more interested in the Stockton house that had recently come down in price vs. the Tracy house, so prices there declined, foreclosures, etc...

Repeat this process several times and it seems reasonable that price declines “diffuse” from the most at risk markets inward to the relatively less inflated ones. While there are very few buyers who are considering homes in either Stockton or San Francisco, there are many who would consider Stockton vs Tracy, Tracy vs. Livermore, Livermore vs. Hayward, and so forth.

So, it doesn’t seem out of the question that the house price decline in attractive urban markets like San Francisco may have much further to fall in the coming years and may not reach a bottom as soon as the cities hit first by the housing bust. Declines of 30% would bring prices down to a normal level.

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Comments

[investor88:]

Good analysis. As they say "just wait" for it to happen if you ask "why is this not happening as its supposed to?".

2008 Dec 07 08:47 AM

[Dr.Jackpot:]

All this says is that older, more established neighborhoods haven't experienced as much speculation as younger and perhaps less desirable neighborhoods. So what else is new daddy?

2008 Dec 07 10:08 AM

[nym:]

Thanks, Chad. I have a personal interest: I bought my home here in Stockton in 2003 and paid 100 of that 220% increase since 2000. I plan to take advantage of the current market to buy in Vallejo for the better climate. Please contact me at the address in my bio on this site.

2008 Dec 07 10:28 AM

[newreaderAZ:]

What you describe for the Bay Area is playing out in exactly the same way in the metro Phoenix area: houses in new developments on the outskirts and lower-income areas within the City have been decimated by foreclosures and falling prices, while higher-income areas have seen much more modest price declines, limited foreclosure activity and frankly very little sales activity of any kind. These less affected areas will clearly see further price declines, but there is very little forced selling in these areas and little panic to date. The desirability of living closer in (less commute time, closer to needed goods and services), the lower levels of inventory and the fact that these markets have had less speculation and stress should limit the downside potential for values in these areas. The same should be true for houses in San Francisco. That said, if the economy continues on its downward spiral, all bets will be off.

2008 Dec 07 11:11 AM

[ecurb:]

We saw this cycle of ebb and flow in the mid-90s housing malaise and have seen it again since 2005 in the Sacramento region, with Yuba/Sutter, Galt, Wheatland, Winters, rapidly declining in price as Roseville, Folsom, and Sacramento County housing repriced . . .the new factor here is foreclosures which are driving prices below 2003 levels. Bought my first house in 91. . .it lost value until 1998 then rose slightly until 03 . . .shoot up like a rocket in 04/05 and has fallen back to earth in pieces since August 05 the peak

2008 Dec 07 11:27 AM

[ecurb:]

Chad. . .fellow commenters. . .here is the question. . . the TARP and historically low interest rates will benefit who? People with FICO scores above 750. . .with the amassing of credit by consumers, the loss of jobs, cutting of credit lines, houses underwater, and foreclosures, won't these interest rates be of benefit to the few?

Also does anyone have an analysis of "jobs" lost versus "unemployment". . .sometimes these "jobs" are unfilled jobs and not people.

Similar to Bob Toll's comment that the real number of new home sales (minus cancellations) will be around 310,000 not the 433,000 widely reported

2008 Dec 07 11:33 AM

[Urbane Gori...:]

Excellent article and analysis. I'm sincerely glad the article wasn't another "The bottom is in in home prices" blurb. Matter of fact, you should forward this to Tim Plaehn, who apparently has property in NorCal and has been calling a bottom for about 6 Months now.

jegan

2008 Dec 07 12:46 PM

[Americanyankee:]

The Bay Area cannot be clearly understood without including Santa Clara County.
After spending 30 years as a real estate broker in "Silicon Valley" I suggest one must consider the dynamics of this segment of California as a whole. Commuting to Santa Clara County and the high prices explains the rapid development and decline of Stockton and Tracy.
Thank you for your analysis, Chad.
Franklin/Phoenix

2008 Dec 07 01:18 PM

[John Wake:]

That fits my working theory as well.

seekingalpha.com/artic...

2008 Dec 07 03:03 PM

[mikeccall:]

San Jose isn't relevant to bay area real estate? This analysis is a limited in scope.

2008 Dec 07 05:47 PM

[Steven Hansen:]

chad, great analysis of the bay area housing market. thank you for that effort.

2008 Dec 07 11:15 PM

[Spudster:]

Good to look into the details.

The theory could be as follows:

Wave 1: Marginal buyers originally forced into outlying areas by affordability are the first to fall, driving down prices in these areas

Wave 2: Volume of sales in 'prime' areas falls as price falls in nearby outlying areas promotes uncertainty in buyers. Buyers in inland areas start migrating outward.

Wave 3: Job losses across the board act as a forcing function to cause those losing jobs (and not able to find new ones) to sell - either to relocate to another part of the country or to a more affordable area. Prices in interior areas start to exhibit greater price reductions. In turn this starts putting more pressure on outlying areas as their relative affordability in Wave 2 drops.

Rinse. Repeat.

2008 Dec 08 10:02 AM

[Chad Gray:]

Thanks for the good comments. John, read your article as well, spot on. As for the San Jose & Santa Clara effect, I excluded them because as you go south from SF (the corridor between SF and San Jose) it's hard to say what's "outlying". Many people live in SF and commute to San Jose or Santa Clara. Others live in Santa Clara and commute to SF.

Most would agree that when you go North (Novato, Santa Rosa) or east (Stockton, Tracy, etc...) it's pretty clear which direction is "outer" and which is "inner".

If anyone knowledgeable about Phoenix was interested in running a similar analysis that would be an interesting second data point (and relatively quick to do). I'll gladly send you the spreadsheet I used if interested.

2008 Dec 08 09:43 PM

[Chad Gray:]

Good comments. As for the San Jose and silicon valley corridor question, you're right that it's important, but I think you'd agree that there are a great deal of people who live in the south bay who drive north, but just as many that live north (SF, San Mateo, Palo Alto, etc...) and commute south. Too bidirectional to determine which is the "outer" location and which is "Inner".

It would be interesting if anyone ran the same comparison for Phoenix. I'd gladly send the same spreadsheet if that saved you time.

2008 Dec 08 09:46 PM

[Montereyblues:]

HI, Very good article. My wife and I sold our house in Stockton Aug 05 and moved to Monterey. Patiently been waiting for prices in Monterey to return to earth. Because Monterey is such a small market it is hard to get meaningful data on just the city of Monterey. Median prices here are much like SF...14mill to $400k, yikes!

This area has a micro market similar to the SF vs Stockton comparison when looking at Monterey vs Seaside (scant 4miles away). Prices in Seaside have been crushed (down 50%) due to massive subprime loans to low income workers. Monterey, Carmel etc, while down significantly from the peak are still extremely pricey on a square foot basis for usually substandard houses. We recently looked at a nifty 1000 sq ft teardown for 600k.
Do you have any data for Monterey 93940 similar to your SF data? That would be very helpful in determining whos really nuts in this market.

Thanks

2008 Dec 09 04:04 PM