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PropertyRadar: No, California is not in a housing bubble

Home sales fall to lowest level since 2008

San Francisco Bay area

San Francisco Bay Area home sales plummeted to the lowest of any month since February 2008 as average home prices soared into the millions.

The extreme rise in home prices, however, is not a sign that the housing market is in a bubble and about to pop, Madeline Schnapp, director of economic research for PropertyRadar, explained in a recent report.

Looking at the latest facts for February, San Francisco Bay Area home sales, including condominiums, fell 2.8% from January 2017 and were down 4.1% from February 2016, marking the lowest of any month since February 2008.

And at the county level, sales were down double digits from last year in four of the region’s eight counties, with Marin and San Mateo counties posting the largest year-over-year declines of 13.7% and 12.4%, respectively.

“Double-digit home sale declines in Marin and San Mateo counties reflect their median prices topping $1 million,” noted Schnapp. “It’s no wonder headlines are dominated by stories of Millennial homebuyers wanting out.”

The San Francisco Bay Area February median home price (single-family residence) jumped 7.9% to $750,000, up from $695,000 in January 2017 and up 12.8% from $665,000 a year earlier.

Home prices have increased so much that Schnapp noted, “When we examine heatmaps of home values in the San Francisco Bay Area counties, large swaths are color-coded red, indicating values north of $2 million.”

But all of the surging home prices do not add up to a housing bubble, Schnapp stated.

“It’s a market dislocation caused largely by government policy,” said Schnapp. "A housing bubble requires both an unwarranted surge in prices followed by a massive selloff.”

“A massive selloff — a bubble bursting — is unlikely because a regulatory change in 2009 means that even if consumers default on their loans, banks will now sit on inventory rather than foreclose and sell like they did in 2008," she continued.

Instead, Schnapp attributed the higher prices to a combination of factors, including plentiful jobs and below-market rate loans that require little down.

The real problem comes down to bad government policy, she said.

“Local, state and federal housing regulations have made it all but impossible for builders to meet housing demand in California’s growing economy,” said Schnapp. “Conceptually, the solutions to California’s affordability crisis are simple, but politically we should expect the current situation to continue for the foreseeable future.”

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