Tuesday, September 25, 2018

Bay Area Home Price Appreciation Has Accelerated Again

Last year, Bay area home price growth had slowed.  In addition, it seemed that the limits on mortgage interest and SALT deductions in the new tax law combined with higher mortgage rates would bite harder in the high-priced Bay Area.  Thus, I felt home value appreciation would slow down further if not flatten out in the Bay Area.

It appears I was wrong.  Check out this graph of SF home values as measured by the Case-Shiller Index (from MarketWatch).  Bay area home values are growing at a 10%+ annual rate while other areas have slowed.  Median home prices show the same trend.

What explains this rebound?  The tax law certainly had plenty of benefits for high-income Bay Area residents, so perhaps the gain to their overall after tax income fueled demand more than the loss of tax deductions.  And speaking of income, Bay Area wages continue to grow at super fast rates.  The latest QCEW data shows annual wage gains of about 10% in Bay Area counties.  With housing scarce in the area, it is natural that area residents would spend some of those gains on housing, and incomes have grown proportionally with the housing costs.

For a few years (2016, 2017), Valley housing costs were rising faster than the Bay Area, narrowing the gap.  Now it appears that the housing cost differential between the Bay Area and inland areas is widening again which along with rising mortgage rates, increases the incentive for middle class households to migrate inland. 

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