San Francisco, the Mecca of tech innovation and startup dreams, is facing a surprising twist in its typically red-hot housing market. Imagine paying 27% above the asking price for a cosy San Francisco home, only to find yourself, eight years later, compelled to list it at a price 22% below your original investment. Shocking? Yes. Isolated? Sadly, no.
Let’s crunch some numbers: eight years ago, a property purchased for $1.4 million is now listed at a paltry $1.1 million. That’s not just a bad investment; it’s the portrait of “negative equity,” a scenario where the mortgage owed on a property exceeds its market value. This grim trend is now affecting 1.2 million American homeowners, according to Corelogic, and it’s just the tip of the iceberg.
Over the past year, the homeowners with mortgages, constituting 63% of all properties, witnessed an equity plunge to the tune of $108.4 billion. Zoom into California, and the picture becomes even more disheartening: the average home here lost $60,000 in equity in just a year.
While house prices in San Francisco had enjoyed years of robust growth, they are currently down by 5% year-on-year, falling at their fastest pace since 2011. It’s as if the real estate escalator that only knew how to go up has suddenly reversed direction, and there’s a growing panic about finding the emergency stop button.
What’s behind this surprising downturn? The tech industry, which pumped Silicon Valley full of affluence and high-paid jobs, has started to lay off employees en masse. An eye-popping 410,000 tech workers have been given their marching orders since January 2022. With this exodus from the employment charts, a surge of property supply has hit the market, contributing to plummeting prices. It’s the real-life version of a stock market crash, but with bricks and mortar.
It’s not just a Bay Area anomaly either. The Fed has hinted that labour market weaknesses may be a necessary evil to tame inflation, steadfastly committed to their 2% target. So if you thought this was just a San Francisco phenomenon, better buckle up; this could be the spark that lights the housing market powder keg in 2024.
Now let’s delve into some more local statistics. The median home price in San Francisco dropped by 13.3% year-over-year by April 2023, more than tripling the average U.S. decrease. It’s become so bad that one in every eight homes sold in the Bay Area was done at a loss, often resulting in a typical homeowner losing over $100,000 on their initial investment.
All these factors paint a worrying image: homeowners in San Francisco are now four times more likely than the average U.S. home seller to make a loss on their property. The housing market slowdown is further exacerbated by rising mortgage rates in the post-COVID era, alongside shifts towards remote work and mass tech layoffs. It appears to be a perfect storm, where multiple external influences converge to produce a housing market headache that could potentially transform into a full-blown crisis.
Is this the moment when we start talking about the burst of a housing bubble in San Francisco? While it’s too early to say for sure, the signs are troubling. If layoffs extend beyond the tech industry, if the Fed-induced unemployment takes root, and if housing affordability continues to be a supply issue, then we might just see similar housing trends unfurling across the United States.
So, when tech can’t keep house prices up, and the Fed is playing a risky game with unemployment to control inflation, you’ve got to wonder: Are we on the brink of a housing reset? A hard reboot that nobody was prepared for? Only time will tell, but for now, San Francisco’s crumbling foundations are a cautionary tale for us all.
