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Did SF's Housing Bubble Just Pop?

Scott Lucas | October 7, 2014 | Story Real Estate

Did you hear that? No, no, it's not an earthquake. Something far bigger. Not Tony Bennet butchering God Bless America at the Giants game yesterday. Even bigger: San Francisco's housing market may have just peaked. And while that's not quite the same as saying that our real estate bubble is popping, it's not nothing either.

So—break out the champagne? Start panicking? What's it all mean?

First, let's look at the data. The Case-Schiller index tracks sales price of homes in the United States; the most recent numbers were released last week. In San Francisco, they showed a year-over-year price increase of 10.3%. That sounds high—except that it actually kind of isn't. For the past three years, city housing prices have increased at a rate ranging from 10% to almost 30%. As you can see from the chart above, we've just passed a peak. (That's not a peak in price, remember, it's a peak in growth of prices.) And after the peak comes the decline.

Turns out we've seen this story before—three other times in the last twenty years. Zero Hedge lays out the trend: SF housing-growth peaks were associated with the first Dot Com boom and its bust; the domestic housing bubble and its bust; and the European sovereign debt bubble and its bust. Notice a pattern here? A period of growth followed by a contraction, which at its bottom leads to decreased home prices (that is, the rate of growth goes negative.) If you turn to month by month data, the Case-Schiller index shows that the contraction may have already begun. The sales price of a home dropped by 0.4% in July—the last month for which data is available.

So how bad is this? Well, don't start using your $20 bills for kindling quite yet. The other three slowdowns were associated with big, macroeconomic, world-spanning contractions. That's not the case here, so far. It could be that this phenomenon is locally confined to San Francisco—whose housing market is particularly crazy. It could just be a fluctuation in the data that will cancel itself out next month. It could be that the index is flawed. And this is just houses. Condo prices, for instance, tend to be flatter over time. Rent is a whole 'nother story. All this might be a hiccup—or it might be the beginning of a multi-year contraction. It probably doesn't mean Mark Zuckerberg is ready to abandon the Mission for his plantation on a Hawaiian island. But it does mean it might get easier to buy a home. Speaking of which—how about the one from the Princess Diaries?

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