Are “Overpriced” Markets Still Sustainable?

by ZINC Financial
1 month ago

Extreme housing markets at both ends of the spectrum have a tendency to draw in house flippers. After the Great Recession, flippers were pulled to cities like Las Vegas where house prices had plummeted, leaving nowhere for the numbers to go but up. At the other end of the spectrum, markets that seem extremely overpriced compared to other parts of the country pull in house flippers with access to sizeable house flipping loans, too, because no matter how high the numbers are, demand is so strong that properties sell incredibly quickly, and usually above asking price.

But when housing markets get too overpriced, some speculators start throwing around the word “bubble.” A bubble can only get so big before it bursts, demolishing everyone in its path.

The question, then, becomes: is there a way to distinguish between an overpriced market and a hot market? And is it conceivable that what appears “overpriced” to some is actually in-line with market demand?

In a recent Bigger Pockets article, Scott Trench answered “YES” to both questions.

Trench used the example of San Francisco, one of the most expensive housing markets in the country. Using data from the US Census Bureau and the US Bureau od Labor Statistics, Trench found that the average household income in San Francisco is $118,098, and the average household spending per year is $75,380. The average household in San Francisco spends $30,378 per year on housing, which is just over 40% of the total household spending.

There are a few takeaways here. First, the percentage of income spent on housing in San Francisco is substantially higher than the national average (32.9%), but the average household income is also substantially higher. High housing prices do not deter people from moving to San Francisco, generally speaking, because the city offers a wide variety of opportunities to make excellent income.

Compare that to St. Louis, MO, as Trench does in his article. St. Louis lines up almost perfectly with the national averages in every category, including income — $69,351 on average. That’s no shabby number, but it’s nowhere near San Francisco’s $118,098. (Of course, as Trench points out, medians are more useful than averages when talking about income, but the median figures — $61,103 for St. Louis compared to $87,701 for San Francisco – still weigh heavily in San Francisco’s favor.)

Interestingly, when you look at other costs of living like food, healthcare, and transportation, the numbers from both cities are quite close together, which is part of why people in San Francisco can afford to put more money toward their housing.

So, yes, people in San Francisco are paying a lot more than other Americans for their housing, but it isn’t more than they can afford or more than the market can bear.

We tend to share Trench’s view that though housing may look overpriced in some markets, the overall data still shows health. To learn more, give our office a call. We’re always happy to answer questions about our residential rehab loans and the current marketplace.

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