Wolf Richter: Housing Bubble 2.0 Hits Messy Resistance In California

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

The salary “you must earn” to be able to buy the median home in San Francisco is $125,071 as of November, according to HSA.com. That home costs $705,000 – up 24% from a year ago (DataQuick figured the median price in December at $813,000). San Francisco tops the list of the most unaffordable cities. Next are San Diego and Los Angeles – the California trifecta – then New York City, where a mere $71,245 in income suffices to buy the median home. Households earning the median income of $51,000, well, forget it.

Housing bubbles do that. San Francisco has gone through this before. Its boom-and-bust cycles are legendary. People getting evicted and pushed out of the city because they suddenly can’t afford to live here anymore – that’s not new. But it has heated up again. The tech bubble has attracted billions in fresh money, and tax incentives are handed out to tech companies, and controversy boils over, as it did in the Twitter debacle [read…. The Day The Bubble Became Official].

Hence the allergic reaction in San Francisco to the “Google buses” (though Apple, Yahoo, Genentech, and others have buses too). These gleaming buses share taxpayer-funded bus stops with beat-up San Francisco city buses to pick up employees and haul them out of San Francisco to their campuses on the peninsula. It triggered a series of protests.

On December 9, the first Google bus was blocked. That action got a lot of national attention. So Google and the city had to start grappling with how to calm the waters. And this is what it looked like today:



Perhaps to circumnavigate the issue, Google is testing high-speed catamaran ferries along with a shuttle from the pier to its campus. It would be harder to block them.

Meanwhile, the controversy over the buses came to a head today as the Board of the Municipal Transportation Agency (SFMTA) voted to regulate them, including charging them $1 for every use of a bus stop. So Google had sent an email to its employees who use its buses – promptly leaked to TechCrunch – to encourage them to attend the meeting. Google being Google, it had to tell them what to say: “If you do choose to speak in favor of the proposal we thought you might appreciate some guidance on what to say. Feel free to add your own style and opinion.”

Then the talking points: “I am so proud to live in San Francisco and be a part of this community”; “I support local and small businesses in my neighborhood on a regular basis”; “My shuttle empowers my colleagues and me to reduce our carbon emissions….” Etc., etc. Six of them.

In the end, it’s the housing bubble, which is in full bloom, and locals don’t want to be forced out by costs they can no longer afford. San Francisco may be extreme, but housing bubbles are now re-cropping up across the nation – and so are the very factors that helped inflate the prior housing bubble and then magnified the ferociousness of its implosion.

Home-equity loans are back with a vengeance – up 30.8% in the first nine months of 2013 from prior year and are expected to reach $60 billion for the year, the highest level since 2009 when the market was in collapse mode. But it’s still a far cry from 2006, when such loans hit an all-time crazy record of $430 billion, in a $15 trillion economy!

Using the home as an ATM cranks up consumer spending. If the money is plowed back into the house, such as remodeling a bathroom, it adds some value to the house and lowers the risk of the loan. If it is used to buy gadgets, cars, or vacations, it still cranks up the economy in the US and other countries. But when home prices decline, homeowners and banks get slaughtered.

And Interest-only home loans are back! They’re becoming popular on jumbo loans. In a number of high-cost counties, including San Francisco, these are loans over $625,500 that banks can’t sell to Fannie Mae and Freddie Mac but have to keep on their balance sheets. Bank of America said that 36% of its fourth-quarter mortgages were jumbo loans, up from 23% in the first quarter – a factor of jumping home prices. Wells Fargo, Mitsubishi UFJ’s subsidiary Union Bank, JPMorgan, City National, Bank of the West…. They’re all offering interest-only loans.

And adjustable-rate mortgages! In the Bay Area, they made up 22% of all purchase loans in December, up from 11% in December 2012, the highest ratio since July 2008, according to DataQuick. With the median home in San Francisco going for 813,000, it’s no wonder. Even households with big incomes are having trouble making payments on homes – likely an apartment – in a nicer area, which can easily cost $2 million. In the Bay Area, the median home price jumped 23.9% year over year, and in California 22.1%.

But sales volume has been plunging. In December it was down 17.7% in San Francisco and 12.7% in the Bay Area from a year earlier. In California, volume dropped 12.1% to 34,949 sales, the worst December since 2007 – and 19.7% below the average for all Decembers since 1988. DataQuick hopes that volume is down due to inventory constraints. But when the prior bubble blew up, it looked the same: volume dried up while prices were still rising. Those were among the visible cracks.

Number one is Palo Alto, epicenter of Silicon Valley craziness, where home prices are now 40% higher than they were at their prior bubble peak. What are we calling this phenomenon? Bubble? Nope. “Housing recovery.” But the middle class has hit a wall. Read…. Cracks Forming In Housing Bubble II (But This Time It’s Different)

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  1. jojomojo

    Here we go again, I’m only 51 but I’ve personally witnessed 5 housing boom and busts in my lifetime (I have moved country a few times). I smelled a rat after number 2, at number 3 it was obvious it was caused by relaxing then tightening bank lending criteria.
    I’m just numb to it all now, rocket science it ain’t. I’m hoping the rest of the planet will cotton on one day and say no to it all. I can excuse the under thirties but anyone who stayed at home my age must be on number 3 at least by now.

    1. scott

      My older house in N. Dallas is finally worth what it sold for in, wait for it….1986.
      A bubble isn’t over until everything has been foreclosed on twice.

  2. jojomojo

    If anyone wanted my opinion on a permanent solution. There aren’t any that won’t be laughed out of town by the ruling elites. However, anyone in the mood for a revolution could consider: Break up and mutualization of the banks, land value tax (not property tax), and intelligent regulation of home loan criteria.

    1. Jess

      Land value tax? Sure! That’ll ensure that all old folks who aren’t rich will have to sell their homes because they won’t be able to afford to pay the taxes on the value of their land, a value which is totally disconnected from their ability to pay, and from the fact that they may have paid off the mortgage long ago. Real life example: My parents bought a house in the L.A. area for $10,500 in 1954. Quaint little community destined today to be very popular with the nouveau riche for its schools, location, etc.

      Old termite-ridden cottage across the street was recently demolished and the lot — same size as the one my parent’s old house sits on — just sold for….

      $1.6 mil.

      Now, image my mom, who outlived my dad by 26 years, making the annual “land value” tax payment on $1.6 mil assessment using her monthly $838 CalPers pension and her $1,037 per month SS check.

      1. jojomojo

        I understand the issue of retirees with LVT. I would propose they are given a tax exemption equal to the LVT of a median home. In a redistributive society, other classes of citizen would also qualify for exemptions.

  3. j gibbs

    After the ‘interest only’ loan comes the ‘salary only’ loan. You just deposit your salary checks into the bank as you get them, and the bank applies the credit to the loan interest. The unpaid interest is added to principal, but projected raises and promotions satisfy everybody worried about the soundness of those loans.

    How does the borrower live between checks? I suppose he could try panhandling at the stoops of the Google buses.

  4. middle seaman

    What eludes me is proposed solutions to the problem that causes the SF or SD housing bubbles.

    The mostly young people who work for Google, MS and Facebook as well, are carefully selected and they are paid well above the pay for similar jobs for less glamorous companies. Their benefits are sky high. These mainly 20s and 30s people end up with a lot of money to buy houses.

    This system works well and represents the best the country offers. Now, how do avoid a bubble without causing damage to a well oiled machine?

  5. Murky

    “Palo Alto, epicenter of Silicon Valley craziness”

    I live in Menlo Park, right at the center of this housing madness. Facebook headquarters is in Menlo Park. Google is in nearby Mountain View. Likewise, Yahoo and dozens of other high tech companies are now in my neighborhood. Several ten thousand of their cash-rich employees crowd into local rentals, spiking up prices. Two years ago my rent was a lowball $850 for a 1 bedroom apartment. That same apartment now costs me $1500 per month. And I’m still way under the base-line. Other people in my neighborhood pay $1800 for a 1 bedroom apartment. Two bedroom apartments go for about $2300. And San Francisco is completely nuts; 3k per month for a two bedroom apartment.

    Bay Area landlords are deliriously happy with the easy money. Meanwhile, ordinary working folk like me are being stripped of every dollar just to pay rent. It’s also insulting that most of these techies are from out of state and do not have local roots. It’s only their money that talks.

    There’s nothing to be done that I can see, besides getting run over by people with more money.

    1. tyaresun

      Rent control is the only solution. Rents cannot go up beyond inflation rate, or the rate of increase allowed for the purposes of calculating property taxes.

      1. Ed S.

        Given that Prop 13 limits RE taxes to 2% increase in assessed value per year (of the purchase price – starting in 1978), limited rental increases in exactly the same manner seems fair.

        And when the LL re-rents and raises the rent to “market”, the property can be re-assessed to “market” as well.

        The 40 year giveaway needs to end — particularly with commercial real estate.

      2. bigpics

        Rent control never works as inserting gov’t into the contract between landlords (and builders) and renters ends up severely distorting dynamic market factors that have to play out to have a healthy (and well-maintained and naturally evolving) urban rental unit market.

        NYC’s long and tarnished history shows this in so many ways. The inevitable side effects are one of the reasons the middle class has “paradoxically” been mostly driven out of Manhattan

        1. Murky

          I haven’t figured out yet whether rent-control is a problem or a solution. I just checked for cities in California having rent control, and here’s the list:

          Berkeley, Beverly Hills, Campbell, East Palo Alto, Fremont, Hayward, Los Angeles, Los Gatos, Oakland, Palm Springs, San Francisco, San Jose, Santa Monica, Thousand Oaks, West Hollywood.

          Not sure whether New York’s experience with rent control is similar to what’s been going on in California. Wikipedia does have a detailed article discussing the pros and cons of rent-control in both locations. Reading it as I post the link.


  6. Aaron Layman

    Things aren’t much different in here in Houston. Just substitute the Energy Corridor for Silicon Valley and the picture is about the same. Only difference is that we at least have loose (or complete lack of) zoning which has allowed builders to develop more land.
    Of course the concept of affordable housing seems to be lost on the local Realtor set. With consecutive months of new record highs dating back to last summer, it’s all about the festive cheer of rising asset prices. What’s going to be interesting is when Houston area homeowners get their new assessments of their property values from the local appraisal boards. With average property tax rates of around 3.0 percent (many newer homes around 3.7 percent) Texas homeowners are going to get pinched in a big way!

    1. scott

      CA prices are high because property taxes are laughably low due to Prop 13. Apply a 3% property tax to a Palo Alto bungalow (originally sold for $20K) worth $1M and see what happens.

        1. Cal

          Governor Brown’s family owns huge amounts of oil stocks in a blind trust. Ever wonder why there’s no oil extraction tax in California like there is in every other state?

        2. Mr. Pitt

          CA’s poor educational system isn’t the result of prop. 13. It’s the result of the state attracting people from countries with even worse educational systems. It’s the Brazilanization of California.

      1. Cal

        The 1 Million dollar bungalow pays $15,000 a year in property taxes plus bond costs now that a techie has bought it. 1.5% of assessed value.

        The only people that pay low Prop 13 taxes are people that have been living continously in the home —–and paying taxes and bond costs every year since 1978—- when the law went into effect.

        1. Jess

          Yes, and that’s the beauty of Prop 13: when the banks inflate a huge bubble, ordinary folks don’t get trampled by inflated property taxes that have no bearing on their ability to pay or their income level.

    2. sleepy

      My wife lived in Houston during the oil bust of the early 80s, and it wasn’t pretty. Two-bedroom condos on the southwest side that had been purchased for $70,000 ended up selling for $18,000.

      1. LizinOregon

        I was in Houston then too and learned the meaning of being “underwater” on a mortgage from my friends who bought those condos. It is a lesson I have never forgotten and it has influenced my home-buying for the rest of my life.

        I was horrified to read above that a person would buy a $700k house with an annual income of $125k.

  7. MacCruiskeen

    Here in the Boston area it is the same story. After a few moribund years, the housing market has seriously heated up. What’s interesting is that after a few years of steadily increasing rents, the rental market is showing signs of softening (expensive new buildings slow to rent, landlords breaking out incentives, etc.) while the condo/house market is still very active. Which means the buy/rent cost ratio is starting to rise. It’s not quite as out of whack yet as it got during the Great Bubble, but a possible indicator of irrational mania taking hold.

    1. NotTimothyGeithner

      Eastern Mass will be a disaster when the next bubble starts to come down. They don’t have a local youthful population anymore, and the same property bubble has priced new business formation out of reach which would bring young people.

      Many of those homeowners are expecting to downsize after having paid hideous mortgage payments all these years. I expect the Mass housing bubble already passed into irrational exuberance.

      Its like that everywhere, but the Boston suburbs are going to be disaster zones.

  8. Banger

    I’m not sure that price rises in selected areas where the elites live means anything in the housing area. It just reflects new ghetto patterns in the U.S. and dramatic income disparities. I don’t see how the items talked about in this article have anything to do with a bubble except a bubble in SF and environs. As long as incomes remain high why would you see this as a bubble? I doubt Google and those companies now fully vested into the imperial system would ever lose income.

  9. MikeNY

    The Fed’s m.o. is, “The only solution to a burst bubble is to blow a BIGGER bubble.”

    Despite my moniker, I spend most of my time in SF. And yes, it’s crazy here. There is construction and housing renovation going on everywhere. The $1 per stop on the Google buses is ludicrously low and sums up to something like $1.5 million a year. In addition to the Disneyfication of SF, the really insidious aspect of this is that it removes the techies from the res publica. They have their own campus all the amenities, their own ‘public’ transportation, and, increasingly, their own partying neighborhoods. They don’t need to, and clearly don’t want to, mix with the rabble. It’s a third-world mentality.

    But I feel the anger is bubbling. Maybe SF is the first place it will reach a boil…?

    1. MyLessThanPrimeBeef

      They are rich enough to become independent nations.

      I am surprised they have not declared so already.

  10. sleepy

    Aside from the tech boom, are there other factors driving up housing prices in San Francisco such as foreign money or institutional, all-cash purchasers?

    I am aware that those two factors are significant drivers in Southern Cal.

    1. MyLessThanPrimeBeef

      It’s not like we don’t have enough domestic 1%ers, do we really need to attract foreign 1%ers to come here?

      Why can’t we give preference to foreign 99%ers…legally, I mean? Who cares about the foreign 1%ers and their ‘money to invest to create American jobs?’ Those money should be taken away for running slave-like factories in the first place.

      I understand the foreign 99% may be a burden to us here, but why not visas for yoga teachers or meditation instructors? They are likely to find work here. Let these people in, instead of the foreign 1%.

      1. sleepy

        I don’t have any disagreement with your take on immigration, though I wasn’t referring to immigration, but about California real-estate prices being driven up to some extent by foreign investment. You don’t have to plan on immigrating to the US to buy property in the US as far as I know.

        1. Mr. Pitt

          With a limited amount of (desirable) land and water, demand is the key to California’s real estate prices. Immigration is the root of California’s problems. The state has been in immigration/emigration equilibrium with the rest of the US since the early 1990’s because compared to other places in the US, California’s benefits are not substantially greater than the costs. In contrast, California continues to be more attractive than Mexico, the Philippines, China, etc. Reaching equilibrium with such huge countries does not bode well for California.

  11. Fair Economist

    My mother-in-law is trying to buy a condo in Fremont (a city in the SF area). In that particular city a major factor is foreign money from people trying to get foothold for their children or (I suspect) people trying to shelter money. She had several condos she was interested in get snapped up by mainland Chinese buyers even though IMO they were already overpriced. I don’t think there’s enough of this to drive an entire metropolitan area, at least not directly (sometimes small real effects set off a speculative bubble) but it’s certainly enough to affect individual communities.

    Foreign buyers were proposed back in the crash as something that would “save” us from falling prices. I didn’t see any of it them but I am seeing some now.

    1. sleepy

      I have read that foreign demand, particularly Asian, has been a major factor–not the only one of course–in housing prices in Vancouver BC.

      1. Carla

        Visited Vancouver 20 years ago and we were told then by our B&B hosts that buyers wanting an “out” from Hong Kong before its “reunification” with China had bought up most of the city, driving prices sky high. Since that happened two decades ago, maybe Vancouver’s Asian owners are selling to Asian buyers today? Dunno. It’s a gorgeous city, that’s for sure.

    2. Clive

      Ditto London. Some high rise (100 unit+) apartment blocks are being pre-sold in Asia without even making it into the local listings first. #Bubblewatch.

  12. Maggie Wall

    I live in Santa Barbara where the culprits are the University of California which is actively recruiting out of state and foreign students, wealthy of course, because they pay higher tuition. They’ve long outgrown there ability to house these students either on campus or the adjacent community of Isla Vista.
    The second culprit is locals turning their rental property into a vacation rental, taking hundreds of mostly small houses, guest houses and converted garages, and apartments into tourist housing.
    Both of these have resulted in $3000-$4000/ month 2 bdm apartments and small houses which no local wage earner can afford.
    The cities of SB and Goleta and the County of SB have complained to the University to no avail but Tourism is king here and no one will say a bad word about it.

    1. hehaw

      I suspect some of that mainland Chinese demand is to buy-in to the U.S. education system for their high school kids to position them for U.S. university. School funding is down and under assault by privatization elties, so I have noticed that metropolitan public schools are welcoming foreign students on F1 visas. (It’s no longer a higher ed money grab.)
      The student trafficking companies can’t get enough paid-for home stay parents, even ones with criminal records, so some Chinese and Korean national parents are buying pads for their kids in California, Seattle, etc.

  13. bob smith

    this time it really is different. This time, China has printed tens and tens of trillions of dollars. And one of the places china has decided to move that fiat confetti party to, just happens to be bay area real estate.

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