Why the Housing Bubble Will Not Burst: Tents, Big Macs and the 101
Doctors are often asked by their friends about a nagging ache. As a Realtor in the Bay Area, I am often dragged into conversations by friends and acquaintances how they believe that there is a housing bubble that will burst, which will result in tumbling housing prices. Why will that not happen? It is simple – the Tents, Big Macs, and the 101.
There are two major causes of rapid decreases in housing prices: (1) national, economic downturns and (2) local housing-specific forces. No housing market is impervious to a national, economic downturn: like the Dot.Com crash in 2002 or the financial crisis of 2007. The conversations that I am dragged into, however, focus on the second potential cause of loss of home values, local forces. Some people claim that housing prices are so high here that they must collapse.
The law of supply and demand determines housing prices. The supply side of that relationship has little impact on Bay Area housing prices. Aside from people renting out tents in their backyard or people deciding to live in RVs, there is no ability to increase the supply of homes in the Bay area by any meaningful measure that would cause a decrease in home prices.
Now that we know that the demand side of the equation determines home prices and whether a bubble is about to burst, what causes such high demand for home sales? Well, that’s easy to answer… companies like Apple, Google, LinkedIn, etc. Absent a national, financial crisis, the tech and biotech industry giants (along with countless startups with similar aspirations) in the Silicon Valley will continue to employ 200,000+ technology workers here.
And now the 101. If someone asks me if I think the housing market is going to crash here, I talk to them about highway 101 that connects San Francisco and San Jose. If you lived here in 2007, you can tell tales of how light the traffic was on the 101 because, sadly, so many people lost their jobs. Four years ago, when I drove from Palo Alto to San Carlos, the traffic would become bumper to bumper during rush hour at Belmont’s Ralston exit of 101, as people try to cross the San Mateo Bridge to the East Bay. Two years ago, I noticed that the traffic snarl started at San Carlos’ Holly exit. Today, the 101 can become a parking lot at Redwood City’s Whipple exit – four exits before the Sa Mateo Bridge exit.
That takes me to Big Macs, or more particularly, the Big Mac Index. Pam Woodall introduced the Big Mac Index as a way to measure whether one currency is over or under valued relative to another country. The Big Mac is the same (delicious or awful – depending on your point of view) sandwich in each country. And the price in each country is determined by same factors: the cost of labor, real estate for the store, the ingredients, etc. With respect to the Big Mac Index, to borrow from Forrest Gump, “that is all that I have to say about that.”
But I think there should be a 101 Index as it relates to housing prices. We all know people who endure a 2 to 3 hours of commute each day. Many of these people are the ones I see parked on the 101, traveling at a snail’s pace over the San Mateo Bridge to the East Bay. Many people subjugate themselves with these long commutes because of the high housing prices on this side of the bridge.
My 101 Index measures when traffic starts backing up on the 101 towards the San Mateo Bridge. Seated in the cars at a dead stop across 4 lanes of traffic, miles from the San Mateo Bridge, are many potential buyers of homes who will step in and purchase a home on this side of the Bay if there was slight downturn in prices. (Of course, many people would prefer to live in the East Bay regardless of home prices or traffic).
Traffic across the bridges increases the demand of home buyers from the East Bay (or that would otherwise consider living there). Our seemingly incurable traffic problem also reduces the supply of homes because homes in many portions of the East Bay do not, in many people’s eyes, have viable commutes to the Silicon Valley.
These East Bay commuters are the backstop against a localized housing bubble bursting. If there was another recession, of course, housing prices would be impacted here like any other housing market across this country. And regardless of the traffic, our housing market cannot sustain year after year 5% to 10% growth in housing prices. Also, rising mortgage rates can soften the real estate market in every city nationwide. But that is not the question I am addressing.
When people tell me that they are going to wait to buy a home because they think housing prices will plummet, I can simply point to the 101 and my 101 Index. It’s currently at Whipple. It shows that the traffic is only getting worse and that there is a large supply of potential home buyers stuck in traffic each day, ready purchase on this side of the Bay if home prices start to free fall.