Is the Bay Area at risk of a housing bubble? Here’s what experts say

But four housing experts in the Bay Area said there aren’t local signs of a bubble and the market is expected to stay competitive. They said the two drivers of the region’s stratospheric $1.4 million median home price aren’t going away: tech fortunes and low inventory.

“I think the wealth of the Bay Area will buffer it,” said Patrick Carlisle, Bay Area chief market analyst at real estate brokerage Compass.

Rising mortgage rates are expected to dampen demand, causing home prices to rise more slowly this year and pricing more people out of the market. “The huge interest rate jump will hammer the lower-cost markets where people have less cash,” said Carlisle.

 Is the Bay Area at risk of a housing bubble? Heres what experts say

Real estate agent Billy McNair selling this Menlo Park home.

Santiago Mejia/The Chronicle

But that’s different from falling prices. Carlisle likens today’s market to an overinflated tire that’s sprung a leak, releasing some air.

“You’re still going to be able to drive on it for quite a while, but it’s getting softer,” Carlisle said. “That’s different from a blowout.”

Real estate research firm CoreLogic recently analyzed all the major U.S. housing markets and found 65% were overvalued when comparing home prices to local incomes, including all major regions in Arizona, Florida and Texas. The San Francisco, Oakland and San Jose metro areas were among only 9% of markets considered undervalued, and the only ones on the West Coast.

“Demand is so outsize compared to supply” in the Bay Area, said Selma Hepp, CoreLogic deputy chief economist. “Even if you take out the people who are priced out, you still have substantial demand to keep home prices growing.”

Sunbelt states where prices have boomed and investors have flooded in have less stringent building codes and more areas to expand, bolstering housing inventory compared to the Bay Area. Areas that are adding more housing typically see slower price appreciation, Hepp said.

CoreLogic expects national home prices to rise only 5% between February 2022 and 2023 after a 20% increase in the prior year. But the Bay Area is expected to outperform, with increases of 12.7% in the San Francisco metro area, 13.4% in Oakland and 15.91% in San Jose.

“I do expect to see slowing in home price growth. I don’t think it’s sustainable,” Hepp said of national trends. “It’s not time to panic. Things will slow down, as they should.”

 Is the Bay Area at risk of a housing bubble? Heres what experts say

Real estate agent Billy McNair takes in the scene from a window at a Menlo Park home he is selling.

Santiago Mejia/The Chronicle

Billy McNair, a top broker at Compass with over $320 million in sales last year, said market forces are making real estate more attractive to high-end buyers in Silicon Valley.

McNair’s clients are primarily in tech, private equity and venture capital, and some are rushing to get a home under contract before mortgage rates rise further. The highest inflation in decades makes real estate an attractive hedge, and stock market volatility is also encouraging clients to focus on real estate to lock in gains, he said. Wealth managers have even been advising his clients to buy bigger homes, and McNair said he’s personally looking to invest more in real estate as well.

Price growth may slow as rising mortgage rates mean fewer bids come in, but McNair doesn’t seen any declines on the horizon.

Around the $2 to $4 million price point, homebuyers are typically reliant on stock options as the primary source of funds, so a major downturn in the stock market could hurt real estate. But even in the wake of the 2008 crash, McNair recalls that local prices fell around 15% but soon rebounded in a year.

“Even when we’re seen corrections, in those times, they were fairly minor corrections,” he said.

Tech giants are still hiring rapidly and expanding facilities despite remote work policies, and McNair is seeing some home purchases triggered by people returning to offices.

Jeff Tucker, a senior economist at real estate listings company Zillow, doesn’t see a national or Bay Area bubble either, but believes the housing frenzy is fading.

“I think the pace of price growth is about to slow down. We are likely right now at an inflection point,” he said. “Rising mortgage rates are throwing a lot of cold water on the market.”

Zillow expects U.S. home prices to grow 14.9% between March 2022 and 2023, down from an earlier forecast of 17.8%. Zillow sees slower increases in the San Francisco metro area of 13.8%.

Still, the country has a shortage of millions of homes compared to demand after years of underbuilding, so bidding wars and homes selling in days are still expected in many housing markets.

“All these things were normal in California for several years,” Tucker said. “Unfortunately for buyers around the country, they’ve now gone nationwide.”

“If there’s a buyer waiting for the market to correct, standing on sidelines … I think they’re making a mistake,” said McNair of Compass. “I think the market will continue to rise.”

Roland Li is a San Francisco Chronicle staff writer. Email: Twitter: @rolandlisf


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