Deciphering the Bay Area’s dizzying housing trends
Trulia economist explains the story behind the numbers: Why does inventory continue to shrink, and what can be done to moderate the prices of homes?
Bay Area housing trends are easily summarized: As the supply of available homes dries up, prices go up. It’s the law of supply and demand. ¶ But why is the housing supply — insiders use the term “inventory” — so tight to begin with? And what can be done to expand the supply? For answers, we turned to Ralph McLaughlin, chief economist with Trulia, the residential real estate website. ¶ McLaughlin, 36, is a former college professor who brings a conversational ease to subjects that might otherwise seem convoluted. He also has a keen sense of the Bay Area market: Raised in San Jose, he lives in Alameda in the East Bay, and he works in San Francisco, where Trulia is headquartered. For these reasons, we turned to him for the story behind the numbers. ¶ This interview has been edited for clarity and length.
Q In a nutshell, what was the story of Bay Area real estate in 2017?
A It was yet another year of price appreciation outpacing income growth and falling inventory that doesn’t seem to be reversing course anytime soon. It’s the same story we’ve been hearing for the last three to four years, but it’s becoming increasingly problematic
for homebuyers. They’re likely to be more frustrated than they’ve ever been.
And that keeps me up at night — being from the Bay Area, it’s very tough knowing so many childhood friends who no longer live here because they can’t afford it. Recent data show the average person moving into the Bay Area earns $8,500 more than the average person who leaves: $90,000 for those coming in and $81,500 for those going out. That’s strong evidence that many middle-income Bay Areans are being priced out and replaced by earners with higher paying jobs. Q Why does the region’s inventory keep shrinking? We hear about year-over-year decreases of 30, 40 and even 50 percent or more in some parts of the region.
AThere are two reasons why inventory continues to fall and prices continue to rise, and the unfortunate reality is that the problem is likely to get worse before it gets better.
The first reason is that we just aren’t building enough homes. And building new homes is extremely important for inventory because they create a chain reaction effect: You build a new house, then someone buys that house, and the buyer likely sells their existing house, and the person who buys that house will sell their home. And that continues down the line until an investor or first-time homebuyer buys that house. So one new home may lead to a four-to-five-fold increase in existing inventory.
Second, the Bay Area — and San Jose in particular — has an aging population. Most homeowners are between 40 and 60 years old, and that’s a time in life when they’re less likely to move. This demographic is less likely to move because they have children in the house, or they have no incentive to move because retirement is imminent. So you have a demographic roadblock to expanding inventory. Q Let’s look ahead: What impact will the congressional tax overhaul have on the supply of Bay Area housing? A The tax plan may actually make the inventory problem worse. That’s because the cap on the mortgage interest deduction has been reduced from $1 million to $750,000. This is likely to slow the market for homes where homebuyers would have to take out a mortgage for more than this amount. In addition, because existing homeowners are grandfathered in at the $1 million level, they’ll be incentivized to stay put and not move. Q What are some policy changes that could expand the housing supply? A At the national level, we could incentivize investors who snapped up homes in 2012 — at the bottom of the housing market — to sell. Many of these homes, especially singlefamily ones, would otherwise be available stock for first-time homebuyers. So if we gave investors a onetime free pass on capital gains, they might put those homes on the market. Q But maybe they’d wind up being purchased by other investors. A Not likely. This isn’t a great time to be an investor in the Bay Area, so we would hope those properties would be bought up and occupied by families.
Q
Why isn’t it a great time to be an investor? A
If I bought a house in 2012, the rent I
would get on that house would have been enough to pay for the mortgage. If I bought a house today, that’s not as likely, even though rents have risen in the interim. This is because prices have risen much more relative to rents, and that makes investing in rental properties less attractive. Q Let’s hear a second policy that could help expand inventory. A We could do a better job at providing housing for those that need it most. While not a perfect market solution, preserving existing affordable housing, stabilizing rent growth, and otherwise promoting the development of below-market-rate units helps households who might have to otherwise migrate out of the region stay here. We could also do a better job at encouraging the development of market-rate units, and while they don’t directly benefit low-income households, doing so helps keep higher-income households from looking down market for homes.
Q And what about the bubble? Will it burst?
A I don’t think there’s a bubble at all because growth in the market is being driven by economic fundamentals: Strong job growth and low supply equals high prices. The best that we can hope for is that price growth moderates to a place that is closer to inflation and that wage growth slowly catches up. But that will take a long time, probably decades if things continue as they are. It’s taken decades to get us into this mess, and if we don’t step up our housing game soon, it could take us decades to get out.