The other day someone found this blog by searching for “california bay area home price” – I bet they were wondering if prices would ever fall.
Fortunately, a Kevin posted a good explanation:
What would you say to these Manteca folks? — Burbed.com: Your San Francisco Bay Area Home and Mortgage Insanity Blog
The median household income for all bay area counties is $72,000. For Santa Clara County, it’s $78,000.
The median income is not what you should use to guage the median house price. Historically, in virtually every part of the country (including the bay area), the median house price has hovered around 5.0-5.5x the local median income. This means that if the median income is $80,000, the market will support house prices in the range of 400-480k.
The median house is NOT bought by the median income family. Generally speaking, only the top 60-80% of incomes can/should realistically qualify for the mortgage on anything, with the remaining 20-40% renting permanently.
Lop off the bottom 30% of households from the “buyers” category and you wind up moving that median from $80,000 to around $120,000 — suddenly the $500k house looks reasonable. At 20% down and a 6.5% fixed 30 year mortgage you’d be paying under 30% with property taxes included. If you’re making $120k a year and can’t save $100k over the course of 4-5 years while renting, stop buying so much crap.
By that metric, it’s probably safe to say that a reasonable median in the bay area is $400-500k. Currently the median is still nearly $700k. It would take a minimum 20-30% price drop to make things rational.
Unfortunately, bay area buyers are not rational. People are more than willing to spend more than half of their income on a house. Thanks to Prop 13 and reverse mortgages we aren’t seeing old people being “forced” to sell. Greedy owners who are overly concerned with property values refuse to allow any significant new development, despite the huge swaths of unused land all throughout the bay area cities. I fully expect people to continue shelling out outrageous sums of money for shitty houses for many long years.
Not only that, but the median includes a number of… shall we say… Pre-Prop 13 buyers. So it’s actually skewed down. There’s also the fact that most buyers don’t rely on paychecks – everyone has stock and stock options that are soaring.
Long story short: be prepared to spend a lot, to get very little, in a suburb. Prices are set to take off. $15 billion Facebook any one?