This Will Bust San Francisco’s Insane Home Price Bubble

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Home prices and rents aren’t a joking matter in San Francisco. Buyers are grappling with the concept that the median house costs $1.3 million and the median condo $1.1 million, 65% more than at the peak of the prior bubble that then imploded. It has more than doubled since January 2012. New condos often go for $1,250 or more per square foot.

In order to make a 20% down payment on the median condo, buyers need to have $220,000 saved up, or borrow it from mom and dad. Renters face $3,500 a month for a new 500-square-foot studio apartment, with parking extra….

A condition called the “San Francisco housing crisis.”

It’s not a crisis for anyone speculating in real estate, for brokers, lenders, and all the other folks making money on it, including the city of San Francisco. It’s not a crisis for owners that bought years ago and are now sitting on huge gains. And it’s not a crisis for people in rent-controlled apartments until they get evicted, or until they need a different place to live because the family is getting bigger, and suddenly they find out that they can’t afford anything in the city at all.

Which raises the hot topic of “affordable housing,” a topic of endless political battles that made it on the last ballot. “Affordable housing” is always subsidized by someone, either by taxpayers, including federal taxpayers, by the next generation in San Francisco that has to deal with the “affordable housing” bonds, and/or by renters and buyers of other units. When developers are pressured to include “affordable” units or pay into San Francisco’s affordable housing fund, they’ll add these costs to the costs of other units. The more “affordable” units there are, the more expensive housing gets for everyone else. That’s the bitter irony.

But there has been a dynamic underway that is changing the equation in big way:

Build, Baby, Build!

One of San Francisco’s “biggest new-housing construction booms in history,” Paragon Real estate called it in its report. It’s accompanied by one of the biggest office construction booms in history. Developers are making hay while the sun shines. Banks are lending to developers like there’s no tomorrow. Money comes from all over the world, particularly China. Paragon Chief Market Analyst Patrick Carlisle:

Big Chinese developers have been investing in both large residential and commercial real estate development projects in the Bay Area, and, according to reports, continue to aggressively seek additional opportunities.

The money that washes over San Francisco tsunami-like from time to time creates phenomenal booms, and when it recedes, as it always does, it leaves behind terrifying busts. Now is the boom. Though big cracks have already appeared at the luxury end, with soaring listings and plunging sales. But hey, party on.

“Indeed, it often seems that new projects of one kind or another are being announced on an almost daily basis, and a detailed map delineating all projects in some stage of the pipeline makes many city districts appear to have measles,” Paragon said.

About 59,000 housing units are under construction or in the planning stages, based on the SF Planning Department’s new Q3 report. They’ll come on the market over the next five to six years to increase the city’s housing stock of 382,000 units by over 15%. About 3,500 units already came on the market in 2014. This year, even more units are coming on the market. In 2016, the floodgates will open. And mostly expensive units.

But that’s just the near-ish term. There are three additional mega-construction projects in the pipeline that will take a little longer: Park Merced (5,700 units), Hunters Point which includes the contaminated Navy shipyards (10,300 units), and Treasure Island, also a former Navy site with radioactive contamination, a scandal I wrote about in 2012 (7,800 units). With these projects, the housing supply in the pipeline jumps to over 82,000 units.

Homes in San Francisco are occupied on average by 2.2 people. At this ratio, the new supply would create housing for 180,000 people, in a city with a population of 852,000!

A 21% jump in population, in just a few years!

That’s how insane the math it. Or as Paragon put it, this is the time for developers and investors “to reap the rewards of a high demand/low supply dynamic in one of the most affluent and expensive housing markets in the world.” But it isn’t easy:

Housing supply and affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development the most contentious political topic in San Francisco.

The breath-taking views in a hilly city surrounded by water on three sides can add a lot of value to the unit. So taking away someone’s view is like confiscating property – and entails that sort of reaction.

Furious battles are ongoing in the Board of Supervisors, the Mayor’s office and the Planning Department; with neighborhood associations and special interest groups; and at the ballot box. Development is not for the faint of heart or shallow of pocket: One cannot contemplate building virtually anything in the city without vehement opposition and sometimes a well-funded coalition in opposition. For developers, the equation to be penciled out includes high costs, enormous hassle-factor, and extended project timelines on one side, and the potential for large financial returns on the other.

It works until suddenly it doesn’t:

And if a big financial or real estate market correction (or crash) occurs, as happened in late 2008, projects in process can come to a grinding halt, and new projects substantially altered, delayed or abandoned. Because the timeline in San Francisco can run 3 to 6+ years from initial filing with Planning to construction completion, developers and their lenders make enormous financial bets on what the future will look like.

Timing is everything in real estate development, and can make the difference between large profits and bankruptcy. When the music stops – which it always does sooner or later, though the time range of opportunity can vary greatly – not everyone will find a chair to sit down in. That especially applies to those who over-leveraged their projects.

This historic onslaught of new housing units coincides with the receding tsunami of money: the crazy valuations of the startup boom driving much of San Francisco’s boom-and-bust economy are already running into trouble, which is how a startup bust begins. And that sort of thing, ironically, will eventually make housing a lot more affordable, even as lenders and investors are licking their wounds, unless the Fed steps in once again with some miracle cure to muck up the workings of the market.

The bottom is already falling out of luxury real estate in San Francisco, particularly in condos. Read…  San Francisco’s Luxury Condo Bubble Turns into Condo Glut

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  24 comments for “This Will Bust San Francisco’s Insane Home Price Bubble

  1. Michael Francis
    November 22, 2015 at 4:25 am

    If the average occupancy rate increases from 2.2 to 2.5, as happens when times get tough, (children moving back home or increased shared accomodation), that alone could end the party.

  2. californiawoman
    November 22, 2015 at 8:51 am

    Thanks for the S.F. real estate updates. I live nearby so am very curious about what is happening.

  3. Petunia
    November 22, 2015 at 9:14 am

    I saw these same conditions in Miami in 2008. The Florida economy was being driving by construction, instead of tech as in SF, and when the banks cut everybody’s credit lines, the economy just stopped. At the time there were thousands of apartments coming to market, and many depositors had to walk away because they could not close. Eventually the properties got picked up by foreign investors for pennies on the dollar.

    Now Miami is going through a building boom again. The prices are outrageous and the salaries low. The traffic is unbearable with local streets becoming toll roads. The skyline view is great but the street view not so much. Most of the high end property is investor owned and it doesn’t support local businesses. If the foreign money or government spending dries up, it will happen again.

    • HarryPrince
      November 29, 2015 at 7:12 am

      Florida is that way. Always has been that way. We are talking about SF.

  4. Markar
    November 22, 2015 at 10:39 am

    I sold my Victorian in Bernal Hgts at the end of 2000 for what I thought was an obscene amount of money and moved away. I hate to imagine what it’s worth now. But as congested as that 49 sq. mile “fantasy island” city was back then, I can’t imagine the horror of the place with 1 million people.

  5. josap
    November 22, 2015 at 10:58 am

    How far away to those who work in regular jobs have to travel? People in retail, food service, teachers, bus drivers etc. If the cost of gas goes up can they still afford to go to work?

    Or does the person working in the mall make $100K a year? And still can’t afford to live anywhere near work?

    House prices and rents in that range make no sense.

  6. NotSoSure
    November 22, 2015 at 11:22 am

    I think we need some analysis of the impact of negative interest rate, which can lengthen the party even more.

    My guess is that the upper bound on the prices will only be realized after 5 or so more years of drought. Once people realize that this place is turning back to become a desert, it’s game over. Las Vegas will be the first poster child when Lake Mead finally dries up.

    • Nick Kelly
      November 23, 2015 at 1:08 am

      Check econcat88 You Tube video ‘Lake Las Vegas’ made Sept. 2015.
      A broke casino and really swank ghost town complex.
      Hard to believe.

      • Toddy
        November 23, 2015 at 3:14 am

        Or check china ghost cities.

        Assuming that linking a youtubebis OK here…

  7. November 22, 2015 at 7:00 pm

    Hey Wolf, make sure that if you take a walk at night, you pass by one of the condo megaprojects that is finished, you check to see if the lights are on in the one and only condo that was actually bought by someone in the entire complex just before the housing market collapse.

    And report back!

    • Roddy6667
      November 22, 2015 at 9:00 pm

      I read an article a few years ago about a guy in a luxury high rise in Miami who was in the same situation. A few got in early. All of them except him got out, losing their deposits. He ended up responsible for 100% of the condo fees for the whole building.

    • NotSoSure
      November 22, 2015 at 9:23 pm

      The units could be rented out.

      • November 22, 2015 at 9:40 pm

        You’re missing it altogether. Back in 2009, In Florida, there were condo towers that stood empty. There was the story of one condo tower with only one tenant.

        Here’s one story you can read:

        Quote from the owner: “It’s a beautiful building,” said their attorney, John Ewing, who is representing 27 others who made deposits on units. “The problem is, it’s a very lonely building.”

        • HeyIdiots
          November 29, 2015 at 7:17 am

          The discussion is San Francisco real estate, not what happens in Miami when the hurricane comes through, or when the economy takes a dump in Florida….

  8. Kevin Beck
    November 22, 2015 at 7:22 pm

    I think the major issue is one that was exposed in the article: NBMVism.

    If those people want to protect their views, they should be paying for the value of the land they are taking off-market, too. Instead, what do they do?
    They do what well-trained complainants do: They complain to their local board of supervisors! Then the board of supervisors will usurp the property rights of the developer by making it illegal to build on certain parcels of property.

    The city of San Francisco needs to have a free-market explanation happen to them, the hard way.

    • Sean
      November 23, 2015 at 5:07 pm

      If you own a house with a nice view, and that is part of the appeal of your property, and hence part of its value, why wouldn’t I raise a stink about someone developing a four-story mansion smack dab in front of my sea-facing balcony? If anything, shouldn’t the developer pay ME for diminishing the value of my home? Is “the view” part of my property rights?

      In practice, NBMVism is the belief that the existing property owners property rights > Developer’s property rights in this particular instance. You’re arguing for the reversal of this, for which cases could be made that taller, larger units more efficiently house people, have more current and developed technologies in their construction, etc. But is this a good enough argument for why the rights of the existing property owner should be abridged?

      • Salamander
        November 24, 2015 at 5:14 am

        No, as a matter of law, the “view” is not part of your property right. Check it out.

      • HeyIdiots
        November 29, 2015 at 7:20 am

        Sure, if you like your view and you dont want it obstructed, then you better have money to buy the lot in front of your property so that you dont end up with an obstructed view.

        • November 29, 2015 at 4:44 pm

          Since you think you’re the smartest person in the room, I saw almost the exact thing happen in Houston, TX. Construction came to a complete halt. Apartment complexes were half built. Shopping centers half built. Houses up for sale…everywhere. I just couldn’t believe it.

          If you don’t think that could happen anywhere else, even SF, you are completely deluded.

  9. Dakar
    November 23, 2015 at 7:27 pm

    Unless the residential construction exceeds the additional residential demand created by new office, commercial, etc, the imbalance between jobs and housing will not abate.

  10. tommy
    November 24, 2015 at 8:35 pm

    I’ve been reading your site for a long time Wolf, and really appreciate it mixed with Naked capitalism. Prins, Hudson,Martens, etc.
    Just one thing I wanted to add, that people outside of cities don’t understand. Density in working class areas is always 4 to 10 times per sq foot as in rich areas. So when we talk ‘units’ of housing, and they are mostly for the top 10%, we are not talking about increasing density of people, when the rich tend to live in large sq footage by themselves, or that .5 of a child or partner. Building things ‘higher’ does not make for a more dense city, if it is unaffordable to the working class. Most new construction never has been anyway for a hundred years in cities. We have always occupied old stock, and crowded in. For example just on my block Folsom and 24th, I can count at least 60 less people, due to evictions, TIC’s etc. One Block. I’m not exaggerating. While these ‘cleansed’ units are actually occupied. And there are no condo towers here. I’m talking old victorians that would have in the 70’s/80’s/90’s housed on EACH floor 5 to 8 people. In ‘my’ house alone there are three floors of total 20 people. If ellised, as we expect by new owner, there will be only 6 people at the most after we are gone. So, not only was this a Fed and global made bubble of the FIRE sector again, it also entailed at least 40,000 long time residents being pushed out (pulling kids out of schools, losing jobs, since we have to move far away, losing all community we build up our whole lives etc)….just for the 10% speculators. Believe me, there are thousands of people in the bay area that know what the hell is going on, and though for now, you only see little protests, the anger is bubbling hot…and in many other cities. When this depression hits, I hope the reaction is organized and productive and militant, but being how atomized our country is, I fear the worst. Still, I truly only blame the rich. And our government, no matter what party is in charge. And no matter how ugly it gets.

    • HeyIdiots
      November 29, 2015 at 7:24 am

      wow, your numbers sure did add up fast, from talking about eight or nine people per floor to arguing that forty thousand people have been evicted, sounds like you are pulling numbers out your rear end.

    • Brian M
      December 1, 2015 at 8:35 pm

      So what is the solution?

      “Developers” and “speculators” it makes everyone sound so guilty!

      What about affluent people who are paying Fort Wayne Indiana rents because of rent control for forty years? Do they suddenly have all the rights?

      What if I wanted to live in your apartment and pay $50 a month. That is my “right” isn’t it?

      I imagine the old Victorian mansions were originally not built for 40 people. But families.

      • December 2, 2015 at 1:31 am


        There is nothing wrong with being either the developer or the speculator. In fact, we need more “naked capitalism” and less government intervention.

        As long as governments stay out of the equation and don’t try to “save” these short-sighted investors, who is the real loser and who is affected? Only the investors or speculators are harmed. Neither you nor I nor other taxpayers are harmed at all. And that’s the beauty of “naked capitalism”!! Why the hell should you and I support people who are too stupid to make the right decision and invest their money properly?

        During the oil bust of the early/mid 80s, the cost of housing just plummeted in Houston. I was given a computer printout of houses available in the Clear Lake area of Houston that was almost an inch thick that had many, many houses on the market for far less than what the mortgages were on them. Hundreds of people walked away from their property.

        But for each person that walked away from a home that was heavily discounted, there was someone else, with lower wages who was prudent with his money that was able to finally own a home and went in and bought it. I recall talking with a sweet hispanic middle aged woman who worked at a kiosk selling lunch who did just that. She proudly told me she and her husband bought a home then and ultimately owned it outright having paid off their mortgage.

        I’ve always lived in areas that had no rent controls. I recall back in the 60s and 70s in the surrounding New York city areas many apartment dwellings were “mysteriously” burned to the ground because the owners couldn’t rent them out for what would be a fair market rate due to rental controls. Also, many rental properties converted to condos that the owners could sell and make money. Rent controls forced them to do this. The results being the rental market was further squeezed, driving prices even higher.

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