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Bay Area Real Estate Cycles



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Market Cycles in Bay Area Real Estate:
Booms, Bubbles, Crashes & Recoveries

Out of recession comes recovery; recovery builds into market over-exuberance;
over-exuberance leads to negative adjustment; negative adjustment sparks recession.
Begin again.

The scale, length and triggers of each part of different financial and real estate cycles
can vary dramatically, but the stages and their sequence tend to be quite similar.

by Patrick Carlisle, Paragon chief market analyst



NOTE: This is a condensed version of our much longer, full report (with many more charts), which is available here: Article: 30+ Years of San Francisco Real Estate Cycles. A PDF version of this article can be downloaded here: PDF - Bay Area R.E. Market Cycles


Case-Shiller SF Bay Area vs National Home Price Appreciation

Regarding the chart above: The CoreLogic S&P Case-Shiller high-price-tier Home Price Index for the 5-county San Francisco Metro Area, illustrated above by the blue line, applies best to more expensive Bay Area housing markets such as most of San Francisco, Marin, San Mateo and Diablo Valley/Lamorinda. The SF Metro low- and mid-price tiers had much more dramatic bubbles and crashes in 2005-2011, but as of December 2017, have ended up at points somewhat higher than the high-price tier due to accelerating appreciation rates in those segments in recent years. The green line tracks home price appreciation for the United States as a whole. The Case-Shiller Index is predicated on a January 2000 price of 100. “250” signifies a price that has appreciated 150% since January 2000.

Case-Shiller San Francisco Bay Area Home Price Trends
This chart above uses Case-Shiller Index data (for the 5-County SF Metro Area high-price-tier home) to plot total home price percentage increases and decreases between low and high points in cycles. It is very simplified and smoothed out, and does not illustrate any smaller ups and downs between the major nadirs and peaks, nor does it reflect any differences in acceleration in appreciation between those points. Note that there have been, at times, considerable differences in appreciation rates between different markets within the 5-county metro area, and that this is a generalized overview.

Financial-market cycles have been around for hundreds of years, from the 1600’s Dutch tulip mania through today's speculative frenzy in crypto-currencies. Though cycles vary in their details, their causes, effects and trend lines are often similar, providing more context as to how the market works over time. With the increased speed of creative financial-product engineering that began about 4 decades ago, dramatic market cycles seem to be arriving more frequently than before that time.

Human beings have always been worried about (or terrified of) the future, and going back thousands of years, we have constantly attempted to predict what it holds. However, whether using priests, oracles, astrologers, economists, analysts or media pundits, we show no aptitude as a species for having the ability to do so with any accuracy. In 2012, a Nobel-Prize-winning economist, famous for housing market analysis, said that the U.S. real estate market might not recover "in our lifetimes." In hindsight, we now know that the recovery had already begun in some markets such as San Francisco. In 2015, during a period of financial market fluctuations and a slowdown in our local high-tech boom, a very well-respected Bay Area economist predicted that there would soon be “blood in the streets of San Francisco.” But housing and stock markets have soared and the high-tech boom has once again dramatically strengthened since then. (He has since postponed the arrival of blood until 1919 or 1920.)

Our smartest experts can’t get it right, much less the thousands of glib, confident forecasts by utterly unqualified individuals reported on in the media every month. We can't even remember the mistakes of the recent past – one reason why we don't seem to be able to escape the curse of recurring cycles – much less foretell what's going to happen tomorrow. Which leads to the next point.

It is extremely difficult to predict when different parts of a cycle will begin or end in order to time one’s purchase. Case in point: In 2015, a well-respected Berkeley economist confidently prophesied there would soon be "blood in the streets" of San Francisco: Median SF house prices have gone up over 20% since then. Boom times, even periods of “irrational exuberance,” can go on much longer than expected, or get second winds, with huge jumps in values.

On the other hand, negative shocks can appear with startling suddenness, often triggered by unexpected economic or political events that hammer confidence. They then adversely affect a wide variety of market dominos, dramatically reverse the positive trends in growth, investment, employment, and new wealth creation, and then balloon into periods of extended decline and stagnation. These negative adjustments can be in the nature of a bubble popping, the slow deflation of a punctured tire, or some combination of the two.

Going back many decades, all the major Bay Area recessions have been tied to national or international economic crises. Considering the fundamental strengths of the local economy, absent a major natural disaster, it is unlikely that a major downturn would occur due simply to local issues. However, local issues can exacerbate a cycle: The 1989 earthquake intensified the effects of the national recession in the early 1990’s; our greater exposure to dotcom businesses produced a spike up and down with the NASDAQ bubble & 2000-2001 crash; and our current high-tech boom has poured fuel on our up-cycle during the current recovery.

All bubbles are ultimately based on irrational exuberance, the worship of runaway greed, criminal behavior or, not uncommonly, all three mashed up together. Whether exemplified by junk bonds, stock market hysteria, gorging on untenable levels of debt, a corporate ponzi-scheme mentality, an abandonment of reasonable risk assessment, and/or incomprehensible or dishonest financial engineering, the bubble is relentlessly pumped bigger and tighter. And since human beings appear utterly unable or unwilling to learn the lessons of past cycles, it is kind of like the movie "Groundhog Day," except that in the movie at least, Bill Murray actually grew wiser over time.

The 2008 crash was truly abnormal in its scale, and much greater than other downturns going back to the Great Depression. The 2005-2007 bubble was fueled by home buying and refinancing with unaffordable amounts of debt on a staggering level, promoted by predatory lending practices, promises of unending home-price appreciation, and an abysmal decline in underwriting standards - and then eagerly facilitated by smug, rapacious, Wall Street flimflammery and self-abasing credit ratings agencies. Millions came to own homes they could never afford to pay for and the rot was distributed throughout the financial system. The market adjustments of the early 1990's and early-2000’s saw declines in Bay Area home values in the range of 10% to 11%, which were bad enough, but nothing compared to the terrible 2008 - 2011 declines of 20% to 60%.

Whatever the phase of the cycle, people think it will last forever. Going up: “The world is different now, the old rules don't apply anymore, and there’s no reason why the up cycle can’t continue indefinitely.” And when the market turns: “Homeownership has always been a terrible investment and the market will not recover for decades” (or even "in our lifetimes" as one Nobel-Prize-winning economist said in 2012). But the economy mends, the population grows, people start families, inflation accumulates over the years, and the repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumped back in – or "explodes" might be a better description – and home prices started to rise again.

The nature of cycles is to keep turning.

As long as one doesn’t have to sell during a down cycle, Bay Area homeownership has almost always been a good or even spectacular investment (though admittedly if one does have to sell at the bottom of the market, the results can be very painful). This is due to the ability to finance one’s purchase (and refinance when rates drop), tax benefits, the gradual pay-off of the mortgage (the “forced savings” effect), inflation and long-term appreciation trends.

The best way to overcome cycles is to buy a home for the longer term, one whose monthly cost is readily affordable for you, ideally using a long-term, fixed-rate loan, while keeping an adequate financial reserve for emergencies, and then resisting the urge to use your home as an ATM during times of significant appreciation. If one keeps to those rules, then it usually true, quoting a NYT editorial, “Renting can make sense as a lifestyle choice... As a means to building wealth, however, there is no practical substitute for homeownership.”


SF Bay Area Home Price Appreciation since 1990



A PDF version of this article can be downloaded here: PDF - Bay Area R.E. Market Cycles

Greater detail is available in our full report: 30+ Years of SF Bay Area Real Estate Cycles

Main Paragon Market Reports Page

Positive & Negative Factors in Bay Area Markets

San Francisco Real Estate Market Report

Survey of Bay Area Real Estate Markets

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It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Longer term trends are much more meaningful than short-term.

© 2018 Paragon Real Estate Group