Is there a real estate bubble? That seems to be the question on everyone’s mind. If you read the SF Chronicle real estate section today, you’ll see they dedicated the front page to this question. In my humble opinion, there is no bubble. I’m more in the camp that the real estate market operates like a balloon. If air is being blown in, then the market climbs. If air is being let out then the balloon deflates. The market has had a lot of air being pumped in to it the past 10 years. What has been blowing the air in? I’ve seen high demand from buyers; money has become easier to obtain and cheaper than ever before historically; supply is currently low; and the economy is growing. All of these factors contribute to the real estate market. 

So why all this talk about a bubble? Historically, the first quarter of the year is fairly quiet in real estate. This year is no exception to that, though the last two years have been. What we’re seeing is less air being blown in to the balloon, so the real estate market is not growing at the same break-neck speed that it had been the last two years. I attribute this slight decrease to the fact that money is becoming slightly more expensive with the increase in interest rates, and the decrease in affordability. The affordability index in San Francisco was at 9% in December. This index measures the percentage of households that can afford to purchase a median-priced home. The index for the United States is 49%. If you can imagine a balloon that is really hard to blow up, the elasticity is tight, that’s how I imagine the affordability index. There just aren’t as many people who have lungs strong enough to blow up a balloon when the median home price is $712,940. However, there are still enough people who are strong enough to keep demand up. I’m still seeing multiple bids and over asking offers. So, while the balloon isn’t increasing in size as quickly as it was the past two years, it’s still getting bigger. 

One of the most interesting factors that I learned about at an economic summit I attended, courtesy of Union Bank of California, is that job growth in the Bay Area is trending up. We saw the first increase in employment growth in the Bay Area in 2005 than we’d seen in since 2001. What’s even more interesting to note is the growth in the real estate industry as a whole. The construction sector experienced the second greatest growth, and the financial activities sector, including realtors and lenders, experienced the seventh largest growth, out of 14 sectors overall. So, in a way, the real estate industry is contributing to the real estate market growth. New jobs means more people, which means more people looking to buy real estate, keeping demand strong, keeping the real estate market strong.