Strong Economy Keeps Bay Area Home Prices Climbing, Bucking U.S. Trend

Real estate analysts expect the rise in home prices to slow down over the next two years as U.S. housing markets return to a state of equilibrium, but the Bay Area may prove to be an exception.

Gold coinsIn a recent survey by Reuters, real estate analysts predicted that U.S. home prices would rise 7.5 percent this year and then slow to 4 percent gains by 2016 — a sharp decline from the double-digit increases reported last year.

The 31 analysts surveyed by Reuters said price increases would slow in the coming months because of strict lending standards, slow wage growth, and a lack of first-time buyers. But while lending standards have indeed tightened in the Bay Area in recent years, income growth remains strong and first-time buyers continue to keep our real estate markets active.

While the rest of the country struggles with a lackluster economic recovery, the Bay Area is charging ahead with explosive growth in tech-related jobs and continued expansion of tourism and export-related businesses. In fact, three counties in the region are, statistically, at full employment, with others close behind.

Tech-industry hiring, meanwhile, has raised the average take-home pay in the region and encouraged a steady stream of young first-time buyers, helping to push home prices even higher.

California home prices jumped 15.6 percent in April year over year, according to a CoreLogic report released earlier this week, while other regions of the country saw more moderate growth. And the forecast calls for more of the same.

The U.S. housing market “is improving slowly, which is good,” Mark Goldman, a real estate expert at San Diego State University, told Reuters. “It should be measured. We don’t want to go back to stupid money,” Goldman said, a reference to the beginning of the Great Recession, when subprime lending helped push home prices to unsustainable heights.

Now, he said, “we are seeing a state of equilibrium. I don’t see any symptoms that would cause housing prices to go up or down significantly.”

Worried About Interest Rates? Just Be Glad It’s Not the 1980s


Rising interest rates are a real concern today, but a recent blog post on Freddie Mac’s website helps put the topic in perspective.

The average interest rate on a 30-year, fixed-rate mortgage this week was 4.4 percent, up from 4.32 percent last week and 3.57 percent a year ago.

But in the 1990s, a comparable mortgage averaged 8.12 percent, and in October 1981 mortgage rates peaked at 18.63 percent. Ouch!

Freddie Mac, a federally chartered agency that works to make more money available for home loans, acknowledged that rates aren’t likely to return to November 2012′s record-low 3.31 percent any time soon, but it pointed out that they remain very low by historical levels:

  • In the 1970s, the average 30-year, fixed-rate mortgage was 8.6 percent. Monthly payments on a $200,000 mortgage were $1,589.
  • In the 1980s, The average 30-year, fixed-rate mortgage was 12.7 percent. Monthly payments on a $200,000 mortgage were $2,166.
  • In the 1990s, the average 30-year, fixed-rate mortgage was 8.12 percent. Monthly payments on a $200,000 mortgage were $1,484.
  • In the 2000s, the average 30-year, fixed-rate mortgage was 6.29 percent. Monthly payments on a $200,000 mortgage were $1,237.
  • This week, the average 30-year, fixed-rate mortgage is 4.4 percent. Monthly payments on a $200,000 mortgage are $1,002.

What is the likelihood that mortgage rates might soon return to double digits? Freddie Mac advises that you don’t lose any sleep over it. (And no one wants to revisit this scenario from 1981: At 18.63 percent, monthly payments on a $200,000 mortgage would be $3,117.)

Freddie Mac’s blog post also noted that rising interest rates and prices make many homes unaffordable for a median-income family in high-priced markets such as the Bay Area.

A map accompanying the blog post identifies San Francisco and San Jose as among the least affordable metro areas in the U.S. It also boasts an interactive component that allows you to determine mortgage payments in various cities for a median-priced home.

According to Freddie Mac’s tool, a San Francisco homebuyer who planned to put 20 percent down on a house with a mortgage rate of 4.4 percent would need to pay $3,974 a month to afford the median sales price of $682,000. San Jose buyers would be in for an even heftier monthly commitment: $4,513 to qualify for the $775,000 median price.