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Why “Overpriced” Markets Like San Francisco May Be Healthier Than You Think

Why “Overpriced” Markets Like San Francisco May Be Healthier Than You Think

8 min read
Scott Trench

Scott Trench is the CEO and President of BiggerPockets. Scott has dedicated his career to helping ordinary Americans ...

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“Housing Prices in Expensive Markets Are Unsustainable! Housing Costs as a Percentage of Median Income Make Absolutely NO Sense! A Crash is Imminent!”

Investors, homebuyers, and ordinary residents of expensive markets around the country seem to share the above sentiments.

In this article, I am going to explain in very simple terms why things are sustainable even in the most expensive markets in the country and why housing costs as a percentage of median income make perfect sense, even in perhaps the most extreme market in the country—San Francisco. I have no idea if a crash is imminent or not, but I personally plan to continue my consistent, yet nonaggressive accumulation of rental properties.

Do not mistake this article as an expression of an opinion that the market will continue to rise, stagnate, or fall. I make no such market predictions. Instead, I want to simply point out that the median/average resident of an expensive market can afford the housing costs of those cities. Housing prices as a percentage of total spending can and will continue to be sustainable, so long as median wages remain above the national average.

Many market pundits like to use the fact that, in many markets, the cost of housing has appreciated at a considerably faster rate than the growth in median income. The problem with this logic is that growth in median income does not linearly correlate with proportional increases in the cost of housing.

san fran

To demonstrate this point, we will compare and contrast two American cities: San Francisco, CA, and St. Louis, MO. I chose San Francisco, CA because it epitomizes a city where housing costs are significantly more expensive than the rest of the country, and where housing expenses comprise a greater percentage of household spending than other parts of the country. I chose St Louis, MO because it exhibits income, housing, and spending trends that are remarkably close to the national average.

Also, I don’t like making work for myself when it’s already been done for me by someone else. The Bureau of Labor Statistics recently released two in-depth studies that nearly perfectly assist me in constructing this article for these two cities. The studies analyze consumer expenditures in San Francisco and St. Louis.

The question we are trying to explore here is this:

Is the median earner in an expensive market like San Francisco spending an unsustainably large amount of money on housing, such that the market cannot bear further increases in home prices and rental rates? Or do the underlying economics for household expenditures support current pricing?

To answer this question, let’s start off with some numbers. All data is from the U.S. Census Bureau (median income) and the U.S. Bureau of Labor Statistics (everything else).

San Francisco

  • Median Income: $87,701
  • Average Income: $118,098
  • Average Household Spending: $75,380
  • Percent of Spending on Housing: 40.3%
  • Dollars Spent on Housing: $30,378
  • Remaining Dollars Spent Elsewhere: $45,002
  • Dollars Spent on Personal Insurance and Pensions: $10,026

Here’s a chart breaking down that $75,380 in spending by category:

SFO Spending

St. Louis, MO

  • Median Income: $61,103
  • Average Income: $69,351
  • Average Household Spending: $57,774
  • Percent of Spending on Housing: 31.7%
  • Dollars Spent on Housing: $18,314
  • Dollars Spent on Everything Else: $39,460
  • Dollars Spent on Personal Insurance and Pensions: $6,760

Here’s a chart breaking down that $57,774 in spending by category:

STL Spending

What do these numbers tell us?

Well, first off, let’s point out that we have a data problem—the spending data is based on averages, but ideally, we’d be looking at median household spending. I typically prefer using numbers spent by the median American, rather than taking averages, because the top earners typically skew the averages way up, and I believe that looking at median spending would give us even better insight into what reality looks like for your ordinary resident of these two cities. But I could not find this level of detail for median spending in these two counties. If you are able to link me to that data, I will revise and repost this article using median figures.

If that totally blows up my argument for you, please feel free to say so in the comments and stop reading.

If you can bear that data problem, then let’s do some analysis and see if we can’t learn something here.

Related: “I Live in a High-Priced U.S. City. Can I Still Invest in My Local Market?”

Point #1: Outside of housing, the average cost of living is remarkably similar in both cities.

After “Housing” and “Personal Insurance and Pensions,” average household spending is remarkably similar for a citizen in San Francisco and a citizen in St. Louis.

A citizen in San Francisco spends about $35,000 after housing and insurance/pensions.

A citizen in St. Louis spends about $33,000 after housing and insurance/pensions.

For all that talk about San Francisco being an expensive place to live, it would seem that your median income earner is making do just fine spending only $2,000 more than a resident of St. Louis.

I take out personal insurance and pensions as well, because this is really a form of savings and life insurance. The increased spending here, in my opinion, is a sign of financial strength, not a cost of living that rises proportionally based on location. Feel free to disagree in the comments! There could be some big insurance spending that residents of San Francisco have to pay that I am unaware of. Note that this excludes health, auto, and home insurance.

You can argue all day long about which household experiences the better quality of life at these spending levels, but the fact of the matter is that your resident in these two cities is getting by at those levels of spending, so therefore, we must conclude that they enjoy a similar quality of life—or would, by and large, relocate.

One notable item to consider is transportation. It seems that transportation expenses are lower as a percentage of household spending in SFO than STL. This makes sense to me—public transportation was great, and traffic was terrible last time I was in SFO, whereas I found fewer attractive public transit options and more reasonable traffic when I passed through STL.

san francisco

Point #2: Housing is nearly twice as expensive in San Francisco as it is in St. Louis.

Remember, this is average housing. I’m aware that for the people at the very bottom of the economic ladder, very affordable housing exists in and around St. Louis, but that this same affordable housing does not similarly exist in San Francisco. That’s a real problem, but it’s outside the scope of this article, which is geared towards helping your everyday real estate investor develop their opinion about their own markets.

Housing costs in San Francisco average $30,378 per year, and housing costs in St. Louis, MO average $18,314 per year.

To put this in perspective, median household income is 30% greater in San Francisco than it is in St. Louis, MO. But housing costs are 65% higher.

As much as the people in expensive housing markets stamp their feet and complain about how overpriced their markets are, the fact of the matter is that the folks earning median incomes are able to sustain the burden of housing costs. The data is quite clear—median households in their respective markets do not spend materially different amounts of money on their lifestyles outside of housing expenses. ALL of that increase in median income, net of taxes, can therefore be spent on housing, and one could theoretically enjoy a very similar quality of life in both regions.

And because the cost of life outside of housing expenses is roughly equal in most parts of the country, housing prices do not scale linearly with growth in median income.

They scale exponentially.

Think about this for a second: Imagine that San Francisco’s median income rises by enough such that the median household all of a sudden has an additional $5,000 per year in disposable income. If everyone still wants housing, then all or nearly all of that $5,000 increase will be spent on housing. Housing costs will rise to 44% of household spending, still further out of touch with the rest of the country—and everyone will continue getting by and enjoy basically the same lifestyle they do today.

Related: How I Landed a Solid 4-Plex in Denver, One of the Hottest Markets in the Country

And this story works both for rents and the price of housing. A $6,000 increase in after-tax, take-home pay enables a household to afford the payments on roughly $100,000 more in property value. (Monthly payments, just principal and interest, on a $100,000 mortgage at 4.5% interest comes out to about $500 per month or $6,000 per year.) And, of course, they can make a $6,000 annual increase in rent work too.


The ratio of median incomes to housing prices are not an effective manner of gauging the health of your market, particularly if median incomes in your market deviate substantially from the national average. Much, if not most of, household spending is on goods and services that are priced at relatively similar levels, no matter what part of the country you reside in. A TV, new piece of clothing, groceries, and the like cost me pretty much the same in St. Louis or San Francisco.

Don’t believe me? Go to Amazon.com. I can buy basically anything I want and ship it anywhere in the continental United States for free with my Prime Account. I get the same price and speed of delivery regardless of whether I ship to Denver, St. Louis, New York, or San Francisco.

Again, this means that all or nearly all of the increase in median incomes in expensive cities can go towards rent and/or mortgage payments. It means that your city may well have a healthy housing market that is sustainable for as long as median incomes remain proportionally higher than in other parts of the country.

I haven’t done this study on the opposite track—looking at markets with median incomes well below the national average—but I suspect the same trend to be true. In markets with much lower median incomes, I expect the median resident in those areas has next to nothing to spend on housing, resulting in housing expenses that are a relatively small percentage of household spending. That, or housing prices make up a large amount of household spending and quality if life IS worse for the median household than in areas that are closer to the national median.

If you fail to grasp this concept and instead measure the health of housing markets by measuring median incomes as a ratio of housing prices, then I believe that you run the risk of misunderstanding markets that have median wages materially deviating from the national average.

I suspect that a better way to predict the impact of median income growth on housing prices in expensive markets is to predict whether the median income in said city will diverge further and increase faster than the national average or revert towards and increase more slowly than the national average. In the former case (and assuming all else is equal), continued above-average pricing inflation is both sustainable and to be expected. In the latter case, I’d expect below-average appreciation both in rents and prices. The further median incomes divert from the mean, the more extreme the housing market will appear, even though median residents are perfectly capable of sustaining their lifestyles.

Because the cost of food, clothing, transportation, and the like are materially similar in every city in the country, nearly 100 percent of the increase in after-tax, take-home pay in more expensive cities can go towards rent or housing payments. That means that folks can afford to spend larger and larger percentages of their take-home pay on housing and still come out ahead.

Remember, our average resident of San Francisco saves MORE in both real dollars and as a percentage of total spending on insurance (like life insurance) and pensions than our average resident in St. Louis in spite of higher housing costs as a percentage of total spending.

We’re republishing this article to help out our newer readers.

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