Where’s the Peak?

Blogging has been very light (well, non-existent) because I’m putting the finishing touches on the July Red Dot on MLS of Choice, and… as I’m sure you’ve noticed, a site redesign! So due apologies to everyone.

Then again, there hasn’t been a whole lot of news worth discussing either… until now.

According to a new report from Department of Housing and Urban Development, making $117,400 a year qualifies you for low-income housing in San Francisco. The story from Fortune, and the key graf:

In San Francisco, a family earning just under $120,000 a year is considered “low income.”

That’s according to a new report from the Department of Housing and Urban Development, which calculated that figure according to the median price for a single-family home in the Bay Area, which is now at $947,500.

Further down, the story notes that only 15% of San Francisco county residents could afford a median-priced home.

Thing is, I was recently on a conference call with prospective clients who are a major national real estate company. One of the executives asked a question I wasn’t expecting: “How does this concept work when the market turns?” Even though I had written a lengthy post about the market turning, I wasn’t expecting the question because I didn’t think senior executives at major real estate companies had that issue on their minds. Apparently, they (you all) do.

So let’s chat about this briefly. Where is the peak? What does that actually look like?

Not a Bubble, Y’all!

In that previous post, I wrote:

But, we’re not in a bubble! Or so every economist related to real estate says, according to KCM Blog.

So fine, let’s say we’re not in a housing bubble. It’s all just supply-and-demand, no matter that the average worker can’t afford a median-priced house in 304 of the 404 counties (68% of the housing market) according to Attom Data Solutions.

What I’m curious about is this: What does it look like when the market finally shifts?

My new question is related, but slightly different.

If we’re not in a housing bubble, and it’s all just supply-and-demand, where is the peak?

Only 15% of San Francisco residents can afford the median-priced house. If that’s not a housing bubble, what is? When only 10% can afford the median-priced house? 5%? 1%?

For reference, here’s a table of housing affordability for North America from Numbeo:

Top 20 Markets Housing Affordability

RankCityPrice To Income RatioPrice To Rent Ratio City CentrePrice To Rent Ratio Outside Of City CentreMortgage As A Percentage Of Income
1Vancouver, Canada16.0228.7426.88105.93
2New York, NY, United States12.3419.0316.9088.57
3San Francisco, CA, United States12.3016.0314.7288.87
4Toronto, Canada10.6621.9121.2570.22
5Boston, MA, United States10.3318.6311.7475.06
6Honolulu, HI, United States8.9918.4915.8264.92
7Oakland, CA, United States8.5213.8911.0660.79
8Los Angeles, CA, United States8.4216.0912.8461.15
9Mississauga, Canada7.7817.1118.4450.71
10Fremont, CA, United States7.3315.1914.1950.81
11Victoria, Canada6.5417.3014.4442.96
12Montreal, Canada6.4421.4219.5942.56
13Irvine, CA, United States5.8113.5712.3941.71
14Miami, FL, United States5.7611.557.4142.64
15Jersey City, NJ, United States5.5913.237.8639.95
16Washington, DC, United States5.4412.958.0938.37
17San Diego, CA, United States5.2213.1711.0038.02
18Kelowna, Canada5.2013.4512.8234.60
19Portland, OR, United States5.0612.1411.2537.06
20Ottawa, Canada 5.0219.4014.1632.82

I strongly suspect that the data source is old and outdated, since Denver and Seattle have moved way up in unaffordability, and anyone who thinks Austin is at a 4.0 PTI is cray-cray. But still… there are some numbers to look at here.

But the Mortgage as a Percentage of Income stat is interesting to think about as well. If a family has to spend 75% of their household income on a mortgage, as they would in Boston, that’s not anywhere close to affordable.

The economists behind the Demographia Housing Affordability Survey use this definition of affordability:

  • Affordable (3.0 & Under)
  • Moderately Unaffordable (3.1-4.0)
  • Seriously Unaffordable (4.1-5.0)
  • Severely Unaffordable (5.1 & Over)

They have Q3/2017 data, and show that the following US cities are Severely Unaffordable:

  • San Jose, 10.3
  • Los Angeles, 9.4
  • Honolulu, 9.2
  • San Francisco, 9.1
  • San Diego, 8.4
  • Miami, 6.5
  • Seattle, 5.9
  • Denver, 5.7
  • New York, 5.7
  • Riverside-San Bernardino, 5.7
  • Boston, 5.5
  • Portland, 5.5

But, we’re not in a bubble — it’s all a function of supply and demand. Fine.

The Psychology of the Peak

In conversation with my very smart and very knowledgeable real estate broker wife, it turns out that this issue of “the peak” is highly psychological. She called it a “gut feeling” that experienced real estate professionals get about the top of the market.

Because it’s not about the median family buying the median house. It’s usually a specific buyer client who has specific financial means, looking to buy a specific house. A client could be making $200K a year, but have huge student loans, medical expenses, and whatnot, and it would be a stretch to afford a $4,000/mo house payment. That’s not a “market peak” as much as it is a “you shouldn’t buy that house” situation.

Nonetheless, real estate agents work in a market, with buyers and sellers all the time. They develop (or ought to) a sense of when things are heading up or down.

So here’s what I’d like to ask my readers to do.

First, think about that gut feeling, your intuition, your sense of when things are heading up or down. What sorts of things do you look at to feel out what’s going on with the market?

Second, based on those things you look at, where do you feel the real estate market is in your local area? Is it still on the upslope towards the peak? Is it at the peak now? Or is it on the downslope past the peak?

Third, what would convince you beyond the shadow of doubt that your market has hit the top?

Once you’ve thought about those things, maybe you can go back and re-read the piece linked to above about what a market shift could look like, and tell us how you see things progressing.

Thanks everyone!



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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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4 thoughts on “Where’s the Peak?”

  1. Welcome back ROB.

    What sorts of things do you look at to feel out what’s going on with the market? The price of sales.

    …where do you feel the real estate market is in your local area (Hinsdale, IL)?
    Prices, especially new construction, have reached higher highs. New construction sets the tone for the whole market (here). As for the future? There will be losses, some significant as the new construction from back in the 2000’s in now considered a “fixer” (here).

    …….what would convince you beyond the shadow of doubt that your market has hit the top? The market 🙂


  2. Great article Rob. Yes, real estate markets happen in cycles and those that design a business model for the peak of the cycle should not be surprised when it ceases to function in the valley of the cycle. Get out at the peak, sit tight rent) and wait for the bottom and then get back in. Or get out at the peak and just stay out. That always works, but that is ironically seldom the direction of choice.

  3. Along this line: A reporter at Forbes had a piece on “when does a recession begin”? He went back to 1900 and analyzed the 9 recessions up to 2007-8. Conclusion:

    When the unemployment number hits a new low, on average, recession begins 3.8 months later. Last month’s unemployment was 0.1% above the historic number. So, if June’s number is lower, put on your seat belts.
    When FHA accepts 520 credit scores and some mortgage lenders will accept 500, just what the hell do you you think is going to happen, plus, they will ignore bankruptcy and still do the mortgage. I think I’ll bury my head in the sand and play like it will not happen.

    Yes, Virginia, there is huge bubble.

  4. Miami is already a buyer’s market, especially condos and some price points of luxury single family homes. Tracking days on market and inventory trends, one could watch it coming. We can guess prices won’t go down just a couple percent when we have such an extreme inventory glut of 45 months of luxury condo inventory with very little absorption momentum. I have been tracking the MIAMI luxury condo market for just a little over a year now and while prices have only gone down minimally overall, the needle on the inventory glut has not moved at all. I also know that all the new construction condo inventory skews the numbers as it hides the prices of the older condos going down and it also hides the fact that ALMOST EVERYONE who bought a preconstruction condo since 2015 will be selling at a loss if they sold today, with many of them easily losing 15-20% easy.

    The point when people fee like things will never stop going up is the point when it’s time to get out, just as when you feel like the market won’t ever recover is the time to buy.

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