So, the median home prices in San Fransisco are up lately… but the sales are down? Doesn’t this kind of buck the age old economic principle of supply and demand? When there’s less demand aren’t prices supposed to go down as well? That’s what I learned in Economics 101 way back in my college days (a couple years back:)
The answer is… YES… and… NO.
Yes to the fact that this does kind of buck the supply and demand theory. With the supply and demand theory, as supplies rise it becomes a buyers market and prices tend to go down. As demand rises, there is less to go around and competition between people drives prices up. Somewhere in the middle is a sweet spot that provides just enough supply to meet the demand. This is where the suppliers have stability and good profits… and buyers have a reliable supply and decent prices.
In San Fransisco supplies are up, and overall demand is down. But… the median home price (as of March) has slipped up 3.1% in the Bay Area to $639,000 from February according to the SF bloggers over at the Daily Pundit.
Does this mean that the earths inner vortex is playing dirty tricks on those powers that be that set home prices in San Fransisco? Nope… here’s why.
Yes, the median home prices in San Fran are up and supply is up as well. Just like with any overall picture of anything (a Presidential election, a national real estate market, etc. ), the overall picture doesn’t tell the entire story. Have you heard of the 80/20 rule? If not… it goes something like this. In just about anything you can say that the 80/20 rule applies. The top 20% of the income earners in the U.S. earn approximately 80% of the total income in the U.S. 20% of a company’s customers will take up 80% of their time. A company’s top 20% of customers will bring in 80% of the company’s income…
… you get the idea.
What is going on in San Fransisco is an application of the 80/20 rule. The median prices are up even though supplies are up because the top end of the market is still selling like crazy. Multimillion dollar homes are selling great still because of the influx of new high-paying tech jobs in the Silicon Valley. The lower and middle of the market are the ones who are taking the hit.
With the upper end of the market still climbing… and the lower end dropping in value… the overall home price growth rate is still going up. The upper end is still appreciating at large enough pace that it is single handedly pulling the median home price up.
So… the top 20% of home buyers and the top 20% of homes in the Bay Area are accounting for approximately 80% of the growth in the area. The top end of the market is extremely healthy (no bubble there right now) and the rest of the market has peaked and is feeling the reaction of less buyers.
When you have an area like the Bay Area that has seen huge home value increases in recent years and has such a high amount of extremely high-paying jobs… top end home prices are bound to be strong and on the up trend.
An important lesson learned is that you can’t look at an overall picture for an accurate picture of exactly what’s going on… you need to break it down and analyze the parts to see what is truly going on. Then and only then can you make an informed decison.
80/20 rule… just try it… apply it to everything you think of and see really how well it applies to the world.
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