california housing market Photo: Joe Taylor/Flickr

Zillow senior economist Aaron Terrazas was the keynote speaker at the San Francisco Association of Realtors’ Membership Appreciation event this past Friday. The presentation highlighted the high cost of living in California and market forecasts for the Bay Area.

Home values to increase over the the next year

Over the next 12 months, Terrazas projects home values will grow by 2.4 percent in the US, while the San Francisco metro area itself (San Francisco, San Mateo, Contra Costa up to Sonoma) is expected to see a 3.6 percent increase in house prices.

Terrazas explains there will be “strong growth, particularly in the Peninsula, downtown and San Francisco itself, and slower growth further toward the East Bay.”

Some ugly numbers

Ten of the 11 least affordable housing markets in the US are in California (the other is Honolulu), and mortgage affordability is worse than the nationwide average in 24 of California’s 25 metro areas.

california mortgage affordability Graphic: Zillow

Making the average income, a San Francisco resident would need to commit 41 percent of their gross pre-tax income to be able to afford the average house price. Depending on their tax bracket mortgage it would be 50 to 60 percent actual income, roughly speaking. If mortgage rates increase to five percent (for a 30-year fixed loan), a typical mortgage would potentially increase to 49 percent of their gross pre-tax income.

Nearly one out of four renters in San Francisco believe they will not be able to buy a home. That’s more than any other metro area in the country, according to Zillow’s July 2015 Housing Confidence Survey in July.

“Any way you look at it, California is really this bleeding edge of the country where homes are expensive,” Terrazas said “Californians historically puts up with a lot.”

What’s going on in California?

San Francisco is certainly not the only expensive market in the state. Home values are climbing up and down the Californian coast — in San Jose, Santa Cruz, Santa Barbara and Los Angeles.

“Something is happening here that is making people kind of really nervous. There is perception of a disconnect of what homes are worth and what people are making,” Terrazas said.

bay area home values Graphic: Zillow

While California home values have grown considerably in comparison to the rest of the country, data shows that California incomes have not grown with them.

Mortgage lending remains tight and the market has not fully recovered from the dot-com bubble. Today’s levels are basically two thirds of where they were in the mid 2000s.

On a national level, Terrazas explains that down payments are “emerging challenging contractual issue for the first-time buyers for those with little equity.” As a result, first-time buyers are either increasing their savings or going to the “Bank of Mom and Dad.” The latter users, according to data, are not necessarily the wealthiest or the poorest.

Apple workers live in homes five times the national median price

The Wall Street Journal recently commissioned Zillow to look at tech companies and home values. The median average home for an Apple employee is $1.14 million. Zillow reviewed home values census tract data in the broader Bay Area of where Apple, Facebook and Google employee homes are concentrated. There is speculation that the introduction of the first generation iPhone boosted employee compensation and could be linked to median home price averages, although no relationship can be confirmed.

In 2010, for the typical Apple employee, the median average home was three times more expensive than the national median price. Today it is five times more expensive. This same increase was not found for fellow tech workers at Google and Facebook.

How optimistic are Millennials on home ownership?

Bay Area millennials, 18 to 34 year olds, are “bullish” on home ownership nationwide. However, when it comes to the Bay Area itself, Millennials’ optimism toward owning a home decreases due to housing affordability.

Is it all gloom and doom for the Bay Area?

Yes indeed, there are many Bay Area residents seeking more affordable places to live such as Seattle, Portland, Austin and Salt Lake City, according to website traffic and user behavior on Zillow.

“The reality is for every one of those, there are a dozen people in those cities who are looking at coming here,” Terrazas said, adding that for every person in their thirties who is ready to settle down somewhere cheaper, “there are ton of 22 year olds that will do anything to come here.”

He also noted that older, established families are looking to move back.


Everyone knows that increasing supply is the best way out of the shortage. Zillow compared new permits to rent affordability, and California metros stood out.

“Construction isn’t keeping up with the new comers,” Terrazas explained, even as density is increasing. “Once you go above five or six stories, it becomes much more costly.”

Nationwide, 12 to 14 percent negative equity is still a problem, holding down the bottom tier inventory. But negative equity is exceptionally low in San Francisco at three percent. But that doesn’t mean it isn’t an issue.

In conclusion

“California is expensive. It always has been expensive” Terrazas joked. “The easiest way to make it less expensive is to stop creating so many good jobs, and I don’t think anyone thinks that is a good idea.”

“California still is a pretty good place to live,” Terrazas continued, “If people get upset with the ups and downs of the California housing market, then they should move someplace more boring, more common. Like Kansas. And if they do, we hope they will get data from Zillow and [realtors].”

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