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Are We in a Real Estate Bubble?

December 14 2016
December 14 2016

With real estate prices roughly doubling across the Peninsula over the last eight years, some people are asking, “Are we in a bubble?”

I recently came across this Forbes article, “5 Signs Your Local Real Estate Market is a Bubble,” and I thought it would be interesting to evaluate each sign and see if it applied to our market here on the Peninsula:

Definition of a Bubble

First, it helps to define what exactly a bubble is. A bubble has been defined as a RAPID acceleration in prices, often fueled by speculation. A good indicator of a bubble is that prices are unsustainable. Prices may be unsustainable for a number of reasons, such as those that follow:

1. Risky Loans with Creditors Lowering Their Standards

You may remember our last bubble that burst around 2009 was largely attributed to the rampant subprime loans with low or zero down payments. In the years before the burst, mortgages were extremely easy to get, and many buyers who should never have qualified purchased homes they couldn’t afford, leading to foreclosures, recession and a collapse of housing prices.

Things ARE different today, especially on the Peninsula. If anything, credit is very tight and lenders are extremely conservative, requiring proof of income and down payments typically ranging from 10-20%. Just try to get a loan from Wells Fargo!

2. Lots of Leverage

Another thing that was evident in the last bubble was lots of speculation in the market and buyers who leveraged their finances and counting on a rapid increase in appreciation.

I don’t see a lot of speculation and leverage in the market here today. Most buyers are looking for a long-term “home,” putting down a sizable down payment and being reasonable about what they can afford. The tougher credit requirements are also keeping leverage in check.

3. Salaries Aren't Keeping Pace with Home Prices

While Peninsula housing prices have doubled in the last eight years, according to the Payscale Index, San Francisco Bay Area salaries have only risen 14% since 2008, so salaries have not kept pace with home prices.

However, Peninsula buyers may have additional income that is not reflected in their annual salaries from liquidity events, stocks and bonuses. It's interesting to note that pay in Santa Clara county is 60% above national rates and it is 47% higher in San Mateo County. At the end of March, annual pay averaged $114,920 in Santa Clara County, $114,140 in San Mateo County and $106,808 in San Francisco, according to the federal government’s closely watched Quarterly Census of Employment and Wages.

4. Decrease in Foreign Demand

For major urban areas like New York City and Miami, international buyers are a big factor in real estate prices. Palo Alto and Atherton have also been impacted by a flux of foreign buyers, significantly Asian buyers.

According to the California Association of Realtors, international buyers in the state dropped to the lowest level in nine years in 2016. Locally, there are signs that the luxury market ($5M+) has cooled among foreign buyers, but lower priced ($1.5-$2.5M) properties are still in strong demand.

5. The Rise of Interest Rates

The Federal Reserve just today announced an interest rate of .25%. This is only the second rate increase in ten years. They are predicting three more increases totaling .75% in 2017.

This rate increase is not likely to have much of a short-term affect on real estate prices since mortgage rates rose in the fall in anticipation of the Fed’s action today. Even if rates do rise in the coming year our local market, with its cash-based purchases and well-heeled buyers, is not greatly affected by a small uptick in interest rates. The group who may be impacted are first-time buyers, who are stretching their finances to get into the market.

So, are we in a bubble? Since we can only know we’re in a bubble after it bursts, we can’t definitively answer the question in the present.

My opinion is that we are not in a bubble. I do believe we are seeing a slight cooling - decrease in prices. Buyers are taking a breather and seem to be waiting and seeing what is going to happen with the new presidential change and new year. Still, I still am a big believer in the values of the local real estate market. All the supply and demand forces seem to point to increased price pressure and no answer to our ever present need for new housing.


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Caitlin Perkins

June 11, 2018 4:12 AM

Real estate bubble is analyzed and overlooked by the analysts. All the users of the real estate and have been incorporated for the use of the things for the humans. The nature has been bifurcated for the bubble of the real estate for the profits.

Madeline Pennington

August 29, 2018 4:40 AM

Business of real estate has been going very well these days and majority of the investors are getting their cut of profit in this business. So it seems to be a wise decision to make real estate investment in kenya in a while.


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