The Next Housing Bubble
About 14 years ago home prices in the Bay Area were soaring year after year. A lot of people were betting on appreciation, buying whatever property they could get their hands on with the expectation to get a significant return after holding onto it for 6 months to a year. Obviously, this trend was not unique to the Bay Area and the aftermath was the housing bubble bursting in 2008. What followed was 4 years of prices falling, in some areas as much as 60%. Some may ask, “how did this happen?” or “how did everyone miss such a disaster?”
Unfortunately due to predatory lending, a major lack of regulatory control and financial education, unknowing borrowers were encouraged to take out substantial amounts of debt they’d never be able to afford. At the time very few believed the housing market, the cornerstone of the US economy, would go anywhere but up. Sadly this was not sustainable as millions of borrowers with sub-prime loans (loans with significant risk) began to default simultaneously and prices cratered, bringing down the financial markets with it.
Fast forward to today, the Bay Area is ranked as one of the hottest markets in the country. House prices have risen and in many places above pre-recession values. With soaring home prices we've seen increased development and gentrification forcing many to look further and further away from the Bay Area in search of affordable housing. Properties in areas once deemed affordable, such as the Berkeley flats and West Oakland, are seeing homes sold for over $1 million and well over asking price. With prices skyrocketing in San Francisco, the Peninsula and Marin, home buyers from those regions find some sense of relief by relocating to the East Bay.
This all begs the question, are we in the middle of another bubble? Ask investors, agents or the general public and you’ll receive numerous predictions of the future. Many investors will assure you now is the time to cash out because the end is near. Real estate agents often say the market is going strong and will only go up. The general public, especially buyers, insists the bubble is about to burst and after having a few offers rejected say they’ll, “just wait for the next housing market crash before buying.”
So which is it, are we teetering at the peak with nowhere to go but down, or is the market so hot prices will continue to climb for the next decade? The short answer is no one can predict the future, but we can take a look at the current condition and make our best guess based on housing, economic and growth trends of the local area.
Unemployment levels are at an all time low, but so are affordability and inventory levels. We have a growing population and very constrained housing supply. Only about 21% of Bay Area residents can afford the median home price, down from 23% just a year ago. The problem is how can prices continue to rise when the vast majority of people who live here can’t even afford to buy? While it seems housing prices aren’t expected to rise as rapidly as in previous years, unless we are affected by some major event, the market is still considered very strong.
It’s comforting to think nothing bad could ever happen but the wise prepare for what is inevitable. At some point the market will turn and prices will fall, but history shows us that the collapse of 2008 is potentially a once in a life time event in terms of economic scale. Nevertheless, buy smart and never rely on appreciation.