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San Francisco house prices: Bubble? What bubble?

So is the city’s real estate market in a bubble?

No, said two housing experts at a SPUR forum this week.

“Are we in a housing bubble? No,” said Tim Cornwell, a principal with The Concord Group, real estate advisors who work for developers, home builders and financial institutions. “We do have an affordability crisis, no doubt. But relative to fundamentals” San Francisco is not in a pricing bubble, he added.

The distinction between an affordability crisis and a housing bubble is important, said Cornwell and Jed Kolko, chief economist with Trulia, who also spoke at the forum.

An area, like San Francisco, has an affordability crisis when prices are high relative to an absolute benchmark like the percentage of income devoted to rent or a mortgage. A housing bubble occurs when prices are high relative to what is normal for the area, they said.

Kolko went into more detail about San Francisco’s housing market.

San Francisco, he said, is the least affordable housing market in the United States. According to Trulia data, just 14 percent of homes for sale are within reach of middle-class buyers. That compares to 34 percent in San Jose and 40 percent in Oakland.

But the city’s home prices don’t appear to be in a bubble, he said. At most, homes are about 6 percent overvalued in the city, he said, compared to the fundamentals of income, rents and supply and demand.

“Long term, that suggests we are in line for a 6 percent price correction,” Kolko said.

Using the same data to compare San Francisco’s home prices in 2006 showed that real estate at that time was 53 percent overvalued. “Now that’s a bubble,” Kolko said.

Not being in a housing bubble is a good thing. But there are still downsides to the city’s affordability crisis, Kolko and Cornwell said. Housing affordability is a significant factor in social equality and for economic competitiveness because if people cannot afford to live in a region, then companies will not locate there.

San Francisco area home prices are continuing to rise, according to Trulia data. But they are not rising as fast as they have in recent months. Last summer, for example, year-over-year asking prices were 20 percent higher. That has moderated to around 11 to 12 percent higher this summer, according to Trulia data.

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