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

by | BiggerPockets.com

“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.

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:

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:

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.

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.

Do you agree with this assessment?

Argue your point below!

About Author

Scott Trench

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


  1. Rob Cook


    “My head’s all tied up like a pretzel. I got a pretzel in my head! (see Ricky Bobby). Thank goodness you stopped short of applying calculus to describe the “rate of change of the increase… ” Whew. Alright, I am okay now. 😉

    Very good article and interesting analysis. One easy way to summarize all of this might be, consideration of the disposable income effect. Once a person’s living expenses are taken care of from their income, then the point of departure occurs between those who have money leftover and those who do not. If an average family can live at an average lifestyle and level, on an average income, of say $100K in that locale, then those who might earn, say $120K will have that additional $20K to spend or invest or save. For that avg family there, they would have ZERO extra to utilize. So, since $20K delta is not likely to permit a gross or extravagant increase in lifestyle overall, it is more likely that that fortunate individual will perhaps upgrade their housing price a little with some of the extra funds. Move to the better section of the hood, or whatever. Get a 4 bed instead of a 3 bed in the same neighborhood. This, depending on how many of the families in that sample have more disposable income to put towards housing, will have an upward pressure on housing prices, due to demand push – more money chasing the same property. And peoples’ ability to actually pay more.

    I saw this type of effect occur when women’s’ joining the workforce replaced the old school situation where most women stayed at home. Single income households. When women began to enter the workforce en masse, the housing prices jumped up to absorb that newfound disposable income which, unfortunately, resulted in a not-so-clearly beneficial and a short-lived (from a financial standpoint) increase in the household’s standard of living, despite it now taking both incomes to maintain the same prior standard of living one income could support before. Just economics and the free market at work.

    Anyway, your point is well made, that things are all “relative.” And local. Unless the higher prices of housing, supported as you stated by higher incomes, resulted from a bubble of some type, or the economy is undiversified and therefore subject to a shock if, for example, an automaker shuts down plants, then the relationship between income, housing prices and standard of living should remain reasonably stable.


    • Adam Haman

      Hi Rob, great comment! Can you post a link to anything that further explores the point you mentioned about women joining the workforce? This concept of housing “soaking up” everyone’s disposable income seems right on the money to me. Both Scott’s article and what you mentioned in your comment seem worthy of further exploration. In Scott’s case, this really seems to explain something that I’ve felt for a while, but refused to research. Good stuff!

      • Rob Cook

        @adam haman

        Thanks for your comment, Adam. I do not have any research on this. I was recalling my own analysis and conclusions I formed back in the day, as a real estate Broker and investor, experiencing this shift as it was happening.

        I had many Buyer-Clients who were two-income couples, at high pay levels like $25Ok household (Two Attorneys were common in my Arlington, VA market) that I found myself advising. The issue was, do they buy as much home as they can, based on BOTH incomes, when they were telling me they were planning on having a baby and one spouse staying at home. And I would discuss the ramifications and options, including the idea of maybe only qualifying based on a single income, so they would have the option of one of them stopping work, and still being able to afford their home.

        It was painful, to see people have to struggle with this choice and worse, to see so many families suffer by going from a single income to a two-income household, and not experiencing ANY net benefit or net increase in their quality of life.

        A side issue which is equally depressing and real. Is the reality that many women experience when returning to the job force after having a child, only to find that with the cost of daycare, and commuting and wardrobe costs required by the change, they have to earn $75K a year salary to increase their net household take-home income! And then they are all stressed out, kids are arguably worse off, and the family and quality of life have often been compromised. That is a kick in the…pants.

        Supply and demand. Free market economics. Social engineering by the powers that be. Same song, new verse.

        Not judging, just saying. It is the free market at work. A lot of folks do not feel better off today, than they were 15 years ago, despite all of their efforts and sacrifices.

  2. Ali Hashemi

    Makes sense. Cost of living except for housing and transportation is universal. Therefore as long as people are making more in the cities with higher housing and transportation, housing prices are sustainable.

    I am always baffled by people who argue CA and NYC and CHI and other expensive cities are terrible places to live because of high taxes (costs). If that were true, fewer people would move there and prices would drop. The fact housing prices are high is an indication people WANT to live in these places. A city that’s able to charge higher taxes and still attract residents is stronger (in principal) than a city with low taxes and slower population growth.

    • Scott Trench

      I have to say that I just visited Orange County, CA, and I 100% understand why housing prices are high there. It’s just got to be an incredible place to live. If you can afford it based on your values, why not live in a great place like that!

    • Justin Colletti

      “I am always baffled by people who argue CA and NYC and CHI and other expensive cities are terrible places to live because of high taxes (costs). If that were true, fewer people would move there and prices would drop.”

      This does happen periodically though. About once per generation. It happened in my parents’ generation, 30-40 years ago, when they and many others left NYC in droves as economic reality asserted itself, and the cycle reset.

      That cycle is resetting again now. Look at rents in large cities. They are now trending down, while rents in smaller cities are moving up. Now, after many years of moving in, the millenials are moving out.

      Take me for instance. I just left NYC a year ago at age 35 to start a family in a smaller market with better economics and a better quality of life.

      I am among the oldest of the millenials. Countless others like me are beginning to do the same, and this trend will only speed up as time goes on. The cycle is just beginning to reset now.

      Look at the rental data. Look at the spreads available to investors. The big cities, after inhaling new residents for decades, are getting ready once again for a big exhale. It’s already begun. Invest accordingly.

  3. Paul Merriwether

    Great article Scott.

    Those people mentioning the Bay Area ( SF & neighboring cities) as being over price and a crash imminent. What are they talking about? What could possibly be the basis for those comments? High prices only? They clearly don’t know our area at all.

    I let a home go in 2011 because it was in a tough area of Oakland and yes I thought it’s value would never come back to what I owned on it at the time approx $180,000. I paid $50,000 for it around 1983. After foreclosure auction it sold for $90k. It had reached a high of $400k prior to mortgage crisis of 2008 – 2009. Yet that property is now back over $400k.

    I found a future value calculator online it supported the fact that homes in the Bay Area despite the area drugs etc. Homes values have consistently appreciated 5-8% yearly over time. EX: My grandmothers old home she bought around 1947 in N.Oakland we’ll say at $7,000. Over the 71 years at 6.6%/yr appreciation it’s current value should be $654,000. It sold in July 2017 for $650k. It was a 2 bd 1 bth with a brick foundation. They updated the home and added a bath, listed it 2/2018 for $725k, it sold for $978,000 7 days later!!! Check it out and the numbers 1045 53rd St, Oakland, CA.

    I remember a time when for sale signs were everywhere. NO MORE!!! Those days are long gone. You can’t even find a lot to build on except those that are steep up or down slopes, with prices over $200k for 5000 sqft. Not only has the Bay area had a sustained yearly appreciation when you add in SUPPLY & DEMAND a crash makes no sense!!! I’ve check many homes against the calculator and today’s values … the results are all the same sustained yearly appreciation. The truly exciting part is … Nana’s old home should be worth $4.4 million 30 yr’s from today!!! 🙂

    Several factors why this is happening:

    1) Proposition 13 ( property tax law). It’s kept at 1.5 % for older homes back to 1978 values. Taxes go up on the sale of the home to the new buyer based on sales price.

    2) There is such a shortage of homes in the entire state of CA. We can now put Accessory Dwelling Units on our property no larger than 800 sqft for Oakland that will garner $2,000/mth in rent. That translate to I can rent mu home for $3500, convert the garage and get $2000 while I buy another home!!! So now you have every single home owner in the state virtully in the real estate rental business!!! 🙂 🙂

    3) A 2x4x8′ piece of wood in GA sells for virtully the same price as in the Bay Area. Yet the cost to build a room 12 x 12; 144 sqft runs about $400/sqft with a contractor $50,000. A DIY’er what maybe $2000. The value added to our homes is ASTRONOMICAL vs say in Georgia!!! We refi all the time!!! That defray’s all those cost you mentioned. In the next 10 yr’s almost every home in Oakland, CA will be worth more than $1,000,000!!!

    What could possible crash home prices??? If Bay Area price crash .. so will all home values in America.

    • Deanna Opgenort

      To clarify CA Prop 13 -The tax rate is 1% (not 1.5) plus some additional local taxes (school bonds, etc), and the value is fixed by the Fair Market Value at the time of PURCHASE. If the property was already owned by one person//heir/(and I think direct lineal family member) in 1978 the starting tax basis is the value in 1976. Thus Nana was paying 1976 taxes (plus 2% annual increases based on inflation). The person who purchased her house in 2017 paid taxes based on 2017 purchase price of $650k, and the person who next bought it pays taxes based on their purchase price of $725k.
      Prop 13 was passed to prevent the problem of little old widows suddenly becoming forced out of their homes by 100% annual tax increases due to the wild inflation and crazy RE markets of the 1970s

    • Paul Doherty

      I can think of what would crash high California home prices and not anywhere else. Tax incentives that give more companies reason to allow a much larger percentage of their workforces to telecommute full time. Absent the need to be in the same area as an office, people will opt to live where they like, which often won’t be the expensive San Francisco area.

    • Justin Colletti

      “Those people mentioning the Bay Area ( SF & neighboring cities) as being over price and a crash imminent. What are they talking about? What could possibly be the basis for those comments? High prices only?”

      Look at the spreads between owning a property and renting it. If that spread is low to negative, the market is unsustainable from an investor’s perspective, regardless of whether or not the tenants can make rent.

      “Homes values have consistently appreciated 5-8% yearly over time.”

      Wow. Echoes of 2006. There are three major problems with that analysis:

      1) Even if that were true, prices do not appreciate in a straight line. Do you have a sufficient margin of safety to weather the inevitable downdrafts? (Not to mention that you can’t spend appreciation until you sell, or unless you increase your borrowing costs.)

      2) By doing your analysis near a market peak, you skew the percentages artificially upward.

      3) Most of that price appreciation isn’t “appreciation” at all. It’s just a loss in the purchasing power of your currency.

      Adjusted for what the government calls “inflation”, housing markets have barely recovered from their prior peak. Compared to a more stable monetary baseline, like gold, home prices are still down dramatically since 2006.

  4. Howdy Scott,
    This was an interesting article. I’m not 100% sure I understand what you’re arguing but here are some thoughts I had while reading it.

    If the overall argument is simply “are housing prices sustainable in places like NYC and SF” then sure, I agree with you and I’m not sure if anyone could really pose a strong argument otherwise. San Francisco (the Bay area) and NYC (Manhattan) have for quite some time, been the most expensive places to live in the United States. Why? Simple supply and demand. Both the Bay area and NYC are constricted from a land point of view. Sure, they can build up, but there is still a constraint on # of units (supply) which allows the high prices for housing because there is also high demand.

    The sustainability in prices is, in part, because people do tend to get paid more. For example, I have a remote job and can live anywhere in the United States. I get paid $X amount salary if I live anywhere except for San Francisco. The second I move to San Fran to live, my pay goes up substantially to cover the higher cost of living. I do think it’s unfortunate you haven’t been able to find numbers on median household spending, because it’s 100% true that average isn’t the right metric here and is undoubtedly being heavily skewed upwards because of the fat tail on the right side of the distribution. Plus, then comparing a median statistic of income to the average in spending is… well… kind of weird.

    Where I start to disagree is first, that all other costs except for housing and transportation are equal. I’ve lived or visited a number of cities in the U.S. and can tell you that food costs are definitely not equal across the board. Even a burger at McDonalds is not the same price in Manhattan vs. Des Moines, Iowa. Grocery prices are significantly different depending on where you live. This is why the company I work for also has different guidelines for food depending on where you’re traveling. It is extremely difficult to find a place to actually sit down and eat dinner in the Bay area without spending $30+.

    Unfortunately, I don’t have much trust in how the U.S. Census Bureau collects their data, and I would guess that it’s pretty different from “real life” for most folks. Here are two other websites that show cost of living differences and both conclude that cost for other categories than housing will be significantly different between St. Louis, MO and San Francisco, CA.


    Finally, I’m not sure whether or not you’re arguing if, because housing prices are sustainable in SF/NYC, that they’re good places to live and/or invest in real estate. My opinion is no for living and maybe for investing, but that’s just an opinion backed up by no facts. 😛

    Basically, I do not agree with you that the only cost of living difference is housing and transportation. I do agree with you that high housing costs in places like SF and NYC can definitely be sustainable because there are always going to be very rich people who can afford the high rents. Most people I know that work in the Bay area and have “normal” jobs that are still paying them an outrageous amount compared to what they’d make elsewhere still cannot afford to live in desired neighborhoods in the Bay area. Most commute in from suburbs like Berkeley or further south.

    • Scott Trench

      Thanks for commenting Julie!

      My argument overall is that a market cannot be valued on the basis of income/rent or income to housing prices in general. As you deviate farther from the national average in income, nearly ALL of the increase in after-tax take-home pay can be spent on housing. This means that housing costs can scale nearly dollar for dollar with increases in wages (after-tax).

      I think that it is definitely wise to question the source of the data, and I had definitely further feared (and wrote it into the article) that folks would be wise to note and discuss the fact that the data is based on averages, not median spending.

      Very fair to disagree that there are other costs that change outside of housing and transportation! Food might be another that could be slightly different. But, I will say that I found it fascinating that outside of housing and personal insurance and pensions, that folks in both STL and SFO spent within about $2,000 on average. Somehow, they are both enjoying life at those levels of spending!

  5. John Barnette

    San Francisco resident here. And a Realtor since 2000 and a real estate investor…and grew up in the Midwest. Chicago burbs, Indianapolis, and Columbus Ohio. I appreciate your application of data to this subject. Pretty heady analysis. I am curious how data for SF residents is taken. Only the city and county of SF? Or broader Bay Area. As city of SF is quite similar to Manhattan in many ways. Median wages are adjusting to an even more extreme proportion for sure. There was just a recent article about both thr growth of SF city population and demographic nature. Overall population up approximately 10-15% in the last decade or so. Yet population of those without a college degree is dropping and increasing of those with a degree. Thus one would expect more of a substantial rise in incomes. The middle class in SF city is disappearing. Either urban poor class that is either homeless, government assisted housing, long term rent controlled rental, or even long long time homeowner and retired with relatively low income. That is the only way housing costs are held down. I have a feeling the statistical analysis did not compensate for many residents living in artificially inexpensive rent controlled apartments. I also think another data issue could be many people come to SF to work in the service industry and trades who do not and cannot afford to live in the city. While at the same time there is a huge population of tech workers who live in SF and work outside of the city proper. Low income people who are employeed and paid in SF and live outside. Paired with high income people who live in the city yet work elsewhere.

    Plus there is a shocking amount of people who live a fabulous lifestyle and own or rent high end property that do not need to work. It is a destination city. This skews things as well.

    As far as basic questions of sustainability and possibly investibility. So long as the economy and very specifically tech and bio-tech economy stays strong and employees a lot of people starting at 6 figure salaries, you will have population growth and housing demand. It really is that simple. Add to that geographic restrictions on places to build and ridiculous nimby and governmental endless red tape and costs of doing business you will have a very solid support for housing values.

    That all said, the local market is not universally the same. It is still supply and demand driven. There is somewhat of a glut of “luxury” highrise condos and apartments. Not as many takers for that type of product. The high end (about $3m and up) market is somewhat softer. Again supply and not as many who can afford that. However the market for single family houses under $3m and especially under about $1.5m is spectacular. There are way many more buyers. No inventory being built within 20 to 30 miles of SF. And lots of millennials starting families and having babies and willing to spend a high portion of income to do so.

    One more insight I have. Going a bit off topic. The quality and size of residential living unit per person is far inferior in SF and absolutely on a quality per square foot basis. All very hard to measure. People at nearly every income level do give up space and often quality to live in the city. This is true everywhere of course. SF is just so dense. Typlical sfr lot of only 2500 square foot. Typical house of about half that. Whether house or a flat (floor unit in a stacked 2-4 unit bldg), you most likely have at least 3 if not 4 or even 5 people living in that 1200 square feet of space. Not uncommon to have old single pane windows, old heating systems or wall furnace. No AC. Not needed. Old electric, etc. Wood contruction, no insulation, 1 bathroom.

    So the quality and total space the median level resident gets in STL is likely quite superior than what the median gets in SF.

    The median sfr in SF just cleared $1.6m and median rent for an average 2 or smaller 3 bedroom SFR is likely about $7000. Check out what that gets you on Craigslist or Zillow.

    I have no idea what median home values or comparable rent rates are in STL. But I have a feeling that it is a bit nicer.

    I choose to live in SF and not the Midwest though. There is more to life than the home you live in. I place more value on lifestyle and environment than relative value of home.

    Damn…keeps going. What I do have a hard time understanding are the incredible numbers being paid for rent controlled apartment buildings. The typical older 5-20 unit building in an average SF neighborhood (or Berkeley, Mountainview, Palo Alto, nice Oakland, etc) often sells for 18-22 GRM or very low single digit CAP rates. I just can’t make sense. Rent control is a huge dice roll. You actually prey and hope to get turnover. But not guaranteed especially as prices keep escalating. However there is rarely any downside risk if you have a building with a lot of under market rents. So it is “safe” from numbers point. Except and capital costs, disasters, etc. Lots of sales are cash or large down payment. They need to be for underwriting. Also suggests investors trading up through 1031 and prefer safe stable asset in A class city vs better cash flow elsewhere. Very much off topic but get to talk local shop with a national audience.

    Thanks for reading

    • Scott Trench

      Thanks so much for your incredible local perspective and insight. I think that you make some great points about the quality of housing that you get at that higher price point, and I, too, often wonder at the multiples paid for property in the commercial multifamily space in these large cities.

    • Mark Hogan

      I’m working (as an architect) with some owners of these large apartment buildings and the investors are often looking for a very safe asset. As you mentioned, there is basically no downside risk. A lot of money has come in from overseas (particularly China) from people looking for safe assets. There is also a lot more turnover than you might think in those older buildings, and many existing one bedroom units can be gut renovated and turned into two bedrooms very inexpensively when they turn over.

  6. John Murray

    Scott you are comparing oranges and apples here. The average age of SF is 38.5 years and SF has the least amount of children in the nation compared to other major cities. Kids are almost non existent in SF. SL median age is 33.5 years and way more kids. Kids cost money, this is a no brainer.

    • Scott Trench

      Hey John – this is a great point that there are more kids in STL (I haven’t confirmed that, but will take your word for it). Does this, in your opinion, have an effect on my argument on how increases in median incomes can be nearly totally spent on housing?

      • John Murray

        Scott the average adjusted gross incomes of Palo Alto, Atherton and SF are pretty impressive. Tech and IPO are off the hook, I left the Bay Area many years ago and became a multimillionaire. 2 of my friends did the same and they are multimillionaires. The Bay Area was a great springboard to wealth, my advise when you get the chance divest your real estate holdings and launch your road to multimillionaire. Pack up your wife, kids and the dogs, Scott’s going to find his fortune!

  7. Gino Barbaro

    HI Scott
    there was no mention of taxes in either state. California is notoriously a burdensome state for taxes, and almost EVERY California investor that I speak to is looking to invest elsewhere. That to me is the tell tale sign of a healthy real estate market. If you can’t cash flow with an investment, and cost of living is out of control, the writing is on the wall.

    • Colin March

      Exactly. This was also the first time I had seen a metric of % of “spending” on housing. What matters is % of NET income on housing. There may not be a crash, but future returns should lower (just like when the S&P 500 P/E is very high, that doesn’t predict a crash but it does suggest lower future returns).

    • Scott Trench

      Thanks for the comment Gino! I think that taxes are very important, but the good news is that almost all of this story can be told JUST by looking at SPENDING. So, this analysis does not need to look at taxes, because we analyze spending net of taxes.

      Or, to address your point, Colin, this study looks at NET income (assuming that total spending is inclusive of “savings” in that personal insurance and pensions category).

  8. sam sal

    I can tell you first hand the SF bay area is a very healthy market. I have sold/been involved in 70+flips here the last few years and well over 100 in total.

    Every single buyer has been very well qualified. We are talking high credit scores, high bank balances, high down payments. Its become obvious the banks have really tightened up there underwriting, and there seems to be no end in sight to the demand from these types of buyers.

    These arent the type of people that abandon there home in a fire sale if things go south.

    The reason for all this demand is obvious, the pay, opportunity, convenience and lifestyle are far better here.

    PAY: A competent, entry level assistant will cost you 20-30 an hour, basic labor starts at 20-25 an hour. The engineers, designers, experinced trade guys are swamped with high paying work

    OPPORTUNITY: no matter what your field, if you are savvy there is demand and opportunity here. With so much disposable income its an ideal place to start a business or find a job.

    CONVENIENCE: very easy to get around, even if you are a pedestrian. I could literally walk to several good quality grocery stores, restaurants and banks, etc from where i live

    LIFESTYLE: Although not as nice as southern cal or Florida, the weather here is great, food options are superb and hard to match in any region, many things to do on any given day. Plenty of natural scenery, You are always near the beach, snow, forest.

    Just my .02 folks !!

  9. Jose Calderon

    When me and my friend say housing prices are unsustainable. We usually mean that house prices have increase at a faster rate the wages and that will not be sustainable. For example in you bought in 2012-2013 you could easy buy a single family home 3/2 for around 500k-650k. And you would be spending around 30k-36k in housing. But those prices have double interest have gone up a bit. So in order to buy a house that is $1.2M you need to spend $74K housing alone. Your $2500(30K / 12) can get you 1/1 in some parts of the Bay but for SF you better bring more than 3K.

    • Scott Trench

      Thanks Jose – and my goal with this piece is/was to convince you that housing prices CAN increase at a faster rate than wages and that this WILL be sustainable.

      In San Francisco County, average home prices in 2012 were $695,000, and $809,000 in 2013. In 2017, that average jumped to $1.2M. Zillow.com/data. Median incomes were $72,000 and $77,000 in 2012 and 2013, and rose to $96,600 in 2017 (note that in the article, I list $87,000 – that’s because I was tying out the median income to the period studied (2015-2016) in the spending report).

      Because mortgage interest on a new home purchase is largely tax deductible, much of that increase in housing expense CAN be absorbed by a large percentage of potential home buyers. Literally, they have %15,000 – $20,000 more to spend on housing costs each year, with the rest of their expeneses remaining the same.

  10. TJ Borromeo

    Sounds like the formula for getting at an assets value using this method is :
    Median asset price + (Median income locally – median income nationally) * rate of change in median income locally * inflation = calculated value per time period (that was used to calculate rate of change)

    Does this sound sane? Now to find the data. I know Detroit Open Data portal could allow you to perhaps get at the below median nationally case and carry out your valuation on Midtown in Detroit. This should be its own analysis series. Why aren’t we making a template for people to plug in apis so that studies like this could be crowdsourced?

  11. Deanna Opgenort

    In SF proper, once you start talking statistics, absolutely the elephant in the room is rent control. $mill per door multi-family can easily have grandfathered RC tenants paying $1,000/month, which throws the averages off. So much of the rental stock is under RC it throws off the median as well. If a middle income SF resident loses their RC home they usually end up having to move out of the city.

    • Scott Trench

      This is a great comment! However, I wonder if this actually helps make our AVERAGE numbers more applicable. Typically, most averages are skewed UP by expensive luxury places at the top. I wonder if in this case, the fact that there are rent controls means that our average is actually closer to the median than we would see in other areas.

  12. Patrick Huey

    I’m aware that there are differences between markets like San Francisco, New York City, Boston, and Los Angeles compatible to middle of the road markets like St. Louis, Topeka, or Columbus, Ohio, but a lot of responses here remind me exactly of what people were saying about the housing market in 2007 and early 2008. The reality is housing prices have gotten ridiculously expensive in the entire Bay Area, and lower-wage workers are being priced out of the market. Not everyone works for Google, Apple, Facebook, or the myriad of high-tech start-ups in the srea, and even then some of these companies have been struggling as of late (Snap, Uber). Plus, where are the teachers, police officers, firefighters, and municipal workers supposed to live?

    Then there is the issue of taxes. California has the highest taxes in the nation. (I’m not saying this is bad thing or have a convulsive reaction to anything about taxes like many people do.) But taxes add considerable costs to housing, as buyers will pay increased mortgage costs to pay them, and renters will have those costs passed on to them by their landlords. Likewise, sales taxes make everyday purchases like food and gas more expensive that in other areas of the country. So even with higher median wages that the rest of the country, many residents are just barely breaking even compared to the middle American counterparts. And who’s to say the high tech companies aren’t going to crash at some point? Google and Facebook could be forced to split up their units or face other regulations, Uber has yet to turn any kind of profit, and a lot of these blockchain and cryptocurrency start-ups will fail to make any moves in the marketplace and go out of business. And when the jobs do start declining, as they will eventually, the foreclosures and evictions are to going to rise significantly.

    • Leslie Bandy

      Property taxes are about 1.3% here and because of Prop. 13 are tied to the price at which you bought your property rather than adjusting completely based on your most recent assessment. So, much like rent control distort median rents to current market rents, median property taxes are not reflective of what the average new home buyer is paying.

      California property property tax mill rates are actually quite low compared to most states (#17 of 50, lower than NE, TX, WI, PA, KS, IA, and a whole lot of others), but our real estate prices are so much higher that we end up paying a higher yearly dollar amount. I’ve looked at rental property in Houston but am always surprised at how high their property taxes are – seems to be around $300/month for a $140K house vs. $580/month for a $500K house here. And that difference is further distorted over time due to Prop. 13.

    • Scott Trench

      Thanks for this comment Patrick and thanks for the followup on property taxes Leslie!

      The thing about taxes, is that this data from the US Census depicts SPENDING, net of taxes. So, while California has high taxes, which reduces the percentage of disposable income that folks have as a percentage of their take-home pay, this study is net of that effect.

      Moving past that, you made a point, “where are the teachers, police officers, firefighters and municipal workers supposed to live.” And to this I’d respond that it looks like they are going to have to be in dual-income households, work second jobs, or move. I’m not saying in this article that the market is fair, or that it works for everyone. But I am saying that the numbers suggest that the median household can afford housing and a relatively similar standard of living, at least from the perspective of net spending after housing and personal insurance and pensions are concerned. If you can’t get to the median income level, I’ve got no trouble believing that you are in for a rough existence in SFO.

  13. Steven Lybeck

    The challenge I see with this analysis is that it doesn’t really consider the effects of supply and demand.

    At the median income level, there is basically no rental housing available in San Francisco and no unsubsidized owner-occupied options.

    The major driver of increased housing prices in the San Francisco Bay Area is not household disposable income but lack of housing supply. It’s that there are more than enough super-high-income households (2x or more the median) to absorb any housing that comes on the market.

    What this suggests to me is that a real estate investment risk in the Bay Area (or coast areas in general) is having supply increase in a meaningful way.

    I think that would be healthy for our job market and for the many people who have insecure housing situations here. But it would also definitely leave some RE investors holding the bag if they overpay without mapping out all the scenarios that could play out here.

    • Scott Trench

      Steven – thank you for this comment! I think that this article IS an analysis, but mostly into that “Demand” side of things. The point is that asides from housing, the median/average San Francisco residents spends within 10% of what a resident of St. Louis spends. This means that nearly all net income above that amount can and, as demonstrated by the data, does go towards housing.

      You are absolutely right that, as in many markets, increased supply is a risk that could lead to slower appreciation.

  14. Great analysis. The wildcard is whether technology will enable more knowledge workers to work off-site in the future. Actually the technology exists, but it hasn’t been embraced by management yet. Having owned in the Silicon Valley, I felt vulnerable to relying on the old industrial model of workers driving into work every morning. Is this an outdated paradigm?

  15. Justin Colletti

    Interesting analysis, but from an investor’s perspective, I’m not sure it matters much.

    As an investor, the primary question for me is “Is there a reasonable spread between the cost of carrying a property and the price someone will pay to rent it”? That question needs to be answered first.

    Only once that question is answered in the positive does it make sense to ask and answer the next question, which you’ve raised: “Is it sustainable for renters in the market?” As an investor, it does not make sense to ask or answer these questions in the reverse order.

    My guess is that SF is like most other overpriced markets, where the answer to that first and primary question is usually “no”. Whether it is sustainable for the renters is irrelevant. If you buy a property at a money-losing price, then you are simply subsidizing your renters, and transferring your capital to them. This means that for an investor, it is not sustainable to buy properties as anything other than a speculation.

    Bottom line is that if income does not cover expenses, with a margin of safety for potential market downturns, vacancies, or deflationary events, then it is not sustainable *from the perspective of an investor.* If cashflow from the property is not sufficient, then it can reasonably be called “overpriced”, and you are not investing. You are speculating.

    The problem with speculation using debt is twofold:

    1) Much of the price appreciation you experience if you do get lucky is not price “appreciation” at all. It is merely a decline in the purchasing power of the currency. This is often doubly so when properties are already overpriced. (See the 1970s for instance.)

    2) Prices do not appreciate in a straight line. If you don’t have a sufficient margin of safety, hiccups along the way can shake you out of your position, and you can be left worse of than if you never invested (or should I say “speculated”) at all.

    Invest in properties that don’t make sense at your own risk! If you are hoping for inflation to save you, maybe you’ll get lucky. But maybe you won’t. And even if you do, you might not even end up any better off in terms of real purchasing power.

    Sure, you can come out a little ahead by having what is effectively a short position on the dollar. But if that’s your goal, why not buy something that is underpriced and likely to appreciate more instead? There is a good chance that further inflation will just keep the price of a property stable where it would have otherwise crashed, and so you remain underwater on the property of years to come, even in the case of a big inflation. Meanwhile, your utility, maintenance costs and property taxes keep going up, up up!

    Good luck to you!

    • Scott Trench

      Justin – thank you very much for this comment. I think that you are spot on – this has little impact on whether or not you can simply get a property to cover it’s debt service (if you are buying with a traditional 25% down) and operating expenses. Either the numbers work, or they don’t and many folks looking to invest in SFO may find that they simply bleed money.

      However, THAT discussion has been fleshed out so many times on BiggerPockets that i thought it would be boring to go over again. So, the purpose of this article was to explore if housing prices were sustainable for the people in that metro. I think that if you are waiting for a crash in SFO, you could be waiting a long time. The goal was more to help investors think through, perhaps in a new way, how incomes relate to housing prices in expensive markets. This may influence their decision-making and hopefully get them closer towards taking action.

      If I were in SFO and came to this analysis, I’d stop waiting for a crash and begin instead actively looking to invest out of state.

      • Justin Colletti

        Fair enough Scott! Thanks for the added nuance and context. Great reply and advice.

        FWIW, I agree that a nominal price crash in the larger urban real estate markets seems unlikely. The Fed can always just print the currency to keep that from happening, as they have done before.

        What seems more likely to me is that we’ll have a replay of the 1970s, in which asset and real estate prices remain pretty much stable from here in nominal terms, while the cost of everything else goes up around them.

        This will slowly hollow out investors’ positions, due to increased carry costs and taxes, even while their nominal purchase price and rates remain the same–or even increase somewhat.

        This trend has already begun. First off, smaller markets are seeing rising rents, while larger bubble markets are seeing flat or decreasing rents.

        The millenials are moving out to smaller markets. I myself am evidence of this, as one of the oldest of the millenials. (A “FIFO” millenial if you will.) This occurred in the 70s as well.

        Meanwhile, adjusted for what the government calls “inflation”, the bubble markets have barely recovered from their prior peaks. And, tracked in a more stable monetary baseline, like gold, real estate prices are still down dramatically since 2006.

        I would agree however, that it is foolish to wait around for a nominal dollar price correction in the bubble markets. It may never come.

        It is much more likely that, just like a generation ago, this bubble will slowly deflate over the course of a decade due to dollar inflation. The effect on investors is, ultimately, almost the same. Invest accordingly!

  16. Sam Schrimsher

    Scott, enjoyed hearing your perspective on this. You made a lot of good points, I had not thought about the percentage of income on housing not being a linear thing before.

    Do you know if the percent of money spent on housing percentage includes people who have been in their homes a long time and have low mortgages? Just wondering if that’s mixed into the averages pool and perhaps makes it seem like a smaller percentage of income is needed for housing than is actually the case if you were to purchase a house today?

    I live near SF. In regards to point#2 of your article on SF. You mention that affordable housing is not available for people at the bottom of the economic ladder, I agree and I’d actually say that also applies to people in the middle of that ladder in any desirable area of the SF Bay Area. My definition of desirable is not having a horrendous commute, not in a high crime area, and reasonably performing public schools.

    Granted, a lot of people are doing really well here. However, most people have very little discretionary money and people are migrating further and further from the job centers like SF, Oakland, and San Jose because they can’t afford to live there, consequently they now have awful commutes.

    As an aside, Oakland has historically been affordable, that is no longer the case, and many of those folks have had to move further out to areas like Antioch.

    Business insider recently penned an article that said there’s been a big increase in demand for communal living in SF, for teachers and other folks, basically for people with sub 90k incomes. Article states that teachers in SF earn 25% more income than the nationwide average, yet they can’t afford their own place. Pretty telling.


  17. angela yan

    Greetings from SF. Coming from a city that perceives itself so expensive was impressed when I first arrived to Columbus Ohio. For me, a way to judge how expensive a city is by a pint of beer or a cup of coffee, for me it would be a glass of house wine.

    When I pulled up to Columbus Ohio on a trip to buy investment property, I was impressed by the Valet attendant that the hotel charge was $30 per day. I wanted to give him a “high 5, right on Columbus!”

    The hotel swanky bar was charging $12 to $15 a cocktail. These are pretty much SF prices so I was impressed by the disposable income there are in Columbus. Perhaps because housing is cheaper in comparison to wages relatively?

    I bought a 9 unit and a 4 unit that weekend. Will probably return to buy more once these properties stabilize.

  18. John Barnette

    All great analysis and thoughts. Scott I think you are on to something. It is hard to show or measure by the data but I see it living here. People in lower to moderate income levels cannot really afford to buy or rent in SF anymore unless they receive government assistance, have a bunch of roommates (communal living of some sort), have another source of income or assets outside their job, or are holding on to their rent controlled apartment for as long as they can. The others move to less expensive communities further away…namely far east and north Bay. Those in the say $150,000 income range are at the beginning point of being able to afford a larger family size rental or look to buy a modest place. And moving up the pay scale those who do want to get into the ownership game with their first purchase tend to devote an large portion of income to housing vs other life expenses. And this often continues… As your analysis shows. So I do think it is sustainable so long as the jobs and wages are here to support.

    Investing. I have actually been quite successful in building a nice little portfolio of 10 properties that are cash flowing exceptionally well. Was much easier to acquire in 2010-2013. But I was even able to buy a BRRR sfr property in the suburb of Richmond. Was looking nearly all year. A reo sale right before Thanksgiving. Lazy agent and asset manager. Good price. 40% down, 10 yr interest only ARM at 3.7%. Rented to a highly scrutinized section 8 family being displaced out of a crappy HUD building being torn down. Cash flow will be around $1500 a month. Down was from cash out refi of other properties and savings from modest lifestyle. Cannot complete the last R for a while because I have a stiff prepay…but will happen in about 6 years market dependent.

    It is very hard to be a cash flow investor in the Bay Area but not impossible. I won’t buy a negative return asset now for appreciation potential at this point in the cycle. Risk reward equation doesn’t make sense. But when we do get a correction…and we absolutely will at some point, I would feel comfortable trading up some cash flow positive section 8 rental properties into better SF properties that are distressed and discounted and perhaps not as good on paper.

    Makes sense?

  19. Leslie Howard

    Great points. However a couple of simple points to consider. I lived in L.A. for 5 years which also has an exceptionally increasing market. I can’t really speak on house rentals but I can tell you from personal experience, annual rental increases of 10% eventually become unsustainable.

  20. Christopher Johnson

    Thanks for the great article Scott! We only started investing a couple of years ago in RE, but don’t plan on stopping (Just bought another one in Olde Town Arvada). I was curious if you’ve done a similar analysis on the Denver market. If so, I’d love to take a look at it. If not, I’ll probably end up doing my own in a similar fashion. I do love making spreadsheets and graphs… Thanks again!

    PS. For anyone else in the Denver area that’s curious, here is the same data for us:

  21. Marti Dulalas

    Thank you for the info! For someone who is just starting out with a budget of $20k to start investing. I’m having a hard time finding my first deal living in San Francisco. Any recommendations on emerging/growing markets in CA or other states that I can get a home price for around $150k?

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