July 18 (NBD) -- Home prices in the San Francisco Bay Area has been rising for 6 consecutive years and the median price for homes sold in May this year in San Francisco (SF) soared to 875,000 U.S. dollars, up 15.9 percent year on year, according to data from CoreLogic, a U.S. market research firm.

It's noted that prior to the financial crisis in 2007, the median house price in SF touched 895,000 U.S. dollars and the average increase of home price in SF in the first half of 2018 went up by about 20 percent, a historic high record.

SF ranks only second to New York in terms of population density in the U.S. and is a place where many overseas Chinese reside. In order to shed some lights on the reasons behind the home price surge in SF and the future house price trend in the U.S., NBD had an interview with Aaron Terrazas, senior economist with Zillow, the largest online real estate database in the U.S.

Photo/Shetuwang

Most homes sold to U.S. residents

NBD: In the past six months, which district in SF experienced the biggest price increase? Can we find any similar situation in history?

Aaron Terrazas: According to the Zillow Home Value Index (ZHVI), the median home value in the SF metro area has increased 11.2 percent over the past year to 949,800 U.S. dollars and in the city of SF it has increased 10.7 percent to 1,354,100 U.S. dollars (as of May 2018).

Within the city, neighborhoods toward the city's southwest have seen the fastest rates of home value appreciation over the past year-including Westwood Park (23.4 percent), Inner Parkside (21.8 percent), Merced Heights (21.1 percent), Westwood Highlands (20.2 percent) and Outer Parkside (19.5 percent). Neighborhoods toward the city's north–including Marina (-1.3 percent), Lake Street (0.6 percent), and Outer Richmond (3.5 percent)–have seen slower home value growth.

As one of the most attractive and innovative cities in the United States, SF has experienced periods of rapid home value appreciation–during the years of the dotcom boom (1998-2000) and the mid-2000s housing boom (2003-2005) the city saw home value appreciation much faster than it is currently seeing. For instance, in 2000, annual home value appreciation in the city exceeded 30 percent and in late 2004 it touched nearly 24 percent.

NBD: According to your observation, what's the difference between the price hike this time and the previous ones?

Aaron Terrazas: The mid-2000s boom was driven by lax mortgage lending standards which, as a result of legislation enacted after the 2008 Financial Crisis, is not taking place today.

NBD: In the first half of this year, we noticed that the average increase of real estate price in SF went up by about 20 percent, a historic high record. According to the report of CoreLogic, less than 10 percent of houses are sold below 0.5 million U.S. dollars, whereas nearly 60 percent of houses are sold above 0.8 million U.S. dollars. What are the most popular house types? Who are the main buyers?

Aaron Terrazas: Single-family homes in the city of SF are appreciating much more quickly than condos/coops (12.3 percent versus 8.6 percent), in large part because the land associated with single-family homes is increasingly at a premium in the city and there are been more condo/coop construction in recent years.

In line with this trend, larger homes are also appreciating more quickly: Homes with 4 or 5+ bedrooms saw 16.4 percent appreciation over the past year while homes with 3 bedrooms saw 13.2 percent appreciation, home with 2 bedrooms saw 8.8 percent appreciation and homes with 1 bedroom saw 5.3 percent appreciation.

We do not have data on the numbers of buyers who are U.S. residents as opposed to non-residents, but survey data suggest that non-resident buyers tend to be a small fraction of home buyers relative to residents.

NBD: It's reported that the condo price went up slower than other types of homes. Since condos take up a large part of the local market, what leads to this disparity?

Aaron Terrazas: As noted above, condo values have been increasing more slowly than values for single-family homes. This divergence is driven by the combination of rising land values in the land-constrained city and more investment in condo construction.

Tech startups and high-paying talent bring adequate purchasing power

NBD: According to a CNBC report, the hot wave of tech startups pushed the SF house price to a record high which is regarded as a "side-effect" of tech boom. What do you think of it? And what do you think helped push up the home prices?

Aaron Terrazas: There's no doubt that the city's affluence–itself a byproduct of its ability to innovate and attract talent–has contributed to high home values. The SF region led the country out of the recession and began creating jobs and booming economically well before the rest of the country.

However, it is not only a demand-side story. It has historically been extremely difficult and costly to add new units in SF as a result of a cumbersome regulatory process. Supply has not been able to keep up with demand in SF as it has elsewhere in the country.

NBD: SF is the second-densest city in the U.S., after New York City. That density, combined with the continued influx of people into SF, used to lead to an epic housing crisis. In 2015, the median house price in SF was six times higher than the median price of existing homes in the U.S. What do you think is the reason behind that?

Aaron Terrazas: As described in a previous response, SF has seen outsized employment gains, particularly among higher income workers, and also has some of the most restrictive building rules in the country.

Home value appreciation is expected to slow down

NBD: What impacts will the rocketing real estate market in SF bring to the U.S.? Do you think soaring home price in SF signals an overall house price hike across the country?

Aaron Terrazas: Because of the regulatory limits to adding supply in SF (and many neighboring communities), small increases in demand have an exaggerated effect on prices in SF. While there are a handful of other markets that show a similar sensitivity, for most of the United States supply is better able to keep up with demand. I don't necessarily think that housing market trends in SF reflect or signal trends for the rest of the country.

NBD: Do you see bubbles in the current market?

Aaron Terrazas: There are several metrics that economists typically use to gauge whether or not a particular market is over- or under-valued, notably price-to-income ratios (either adjusted or unadjusted for interest rates) and price-to-rent ratios. For the vast majority of housing markets nationwide, all of these ratios are well below their historic norms. There are a handful of markets where these ratios are above their historic norms – mostly West Coast markets. There are legitimate reasons why these ratios may have structurally shifted upward: For instance, stricter building codes.

But whether or not these markets meet the exact definition of being over-valued, home shoppers should undertake due diligence and not over-leverage when buying.

NBD: Can you simply describe the overall situation of the U.S. real estate market?

Aaron Terrazas: Home value appreciation nationwide has accelerated over the past year driven by the combination of strong demand from young adults who finally feel financially secure enough to start buying home, low interest rates, and tight supply. Although home construction has picked up somewhat, it remains low by historic standards as home builders struggle with rising labor and materials costs.

In general, urban and suburban West Coast markets have seen the largest price gains driven by demand and tighter supply constraints. Home value appreciation has also been strong in many South and Southeast cities, but supply has been better able to keep pace in those regions.

NBD: What's your prediction about the future development of the real estate market in SF and other regions in the U.S.?

Aaron Terrazas: We expect that the U.S. real estate market will experience greater headwinds over the next 12 months, in part due to higher interest rates. Our forecast for the 12-month period ending May 2019 suggests that nationwide annual home value appreciation will slow to 6.5 percent, to 7.3 percent in the SF metro area, and 7.4 percent in the city of SF.


Email: gaohan@nbd.com.cn

Editor: Gao Han