The Interplay of Supply and Demand: Understanding San Francisco's High Housing Prices

San Francisco Bay Area Sky High Real Estate Prices

San Francisco has long been known for its high cost of living, especially when it comes to housing. In recent years, the city's housing market has become even more expensive, with prices continuing to rise. This can largely be attributed to the interplay of supply and demand in the city's housing market.

Supply and demand are two key factors that impact the price of housing in San Francisco. When demand for housing in the city is high and supply is low, prices tend to go up. Conversely, when demand is low and supply is high, prices tend to go down. This is the basic economics of the housing market.

There are a few reasons why the supply of housing in San Francisco has not kept up with demand. One major factor is the city's restrictive zoning laws and regulations, which make it difficult to build new housing. In addition, the cost of construction in San Francisco is notoriously high, which further limits the amount of new housing that is built.

Another factor contributing to the high cost of housing in San Francisco is the city's strong job market. Many tech companies are based in the Bay Area, which has led to an influx of highly paid workers who are willing to pay top dollar for housing. This increased demand for housing has put further pressure on prices.

Additionally, San Francisco has limited geographic space, which means that the supply of available land for new housing is limited. This has led to increased competition for existing housing units, which further drives up prices.

Overall, the high cost of housing in San Francisco is largely driven by the interplay of supply and demand in the city's housing market. While there are a variety of factors that impact the supply of housing in the city, the limited supply of land, restrictive zoning laws, and high construction costs are major contributors. Meanwhile, the city's strong job market and high demand for housing among highly paid workers also drive up prices. As a result, housing in San Francisco remains one of the most expensive in the country.

Even with people leaving the San Francisco Bay area, prices remain elevated because of the huge supply and demand imbalance:

"More than 90,000 people left Silicon Valley during the first two years of the COVID-19 pandemic, according to an annual report that found a slowing “exodus” has reverted the tech center’s population to 2013 levels.

A net total of 43,800 residents moved out of the region from July 2021 through June 2022, the fourth consecutive year that the region’s overall population has shrunk and the second year that net domestic migration topped 40,000, according to the Silicon Valley Index. The annual look at the health of the region found housing prices and job numbers continuing to rise well into last year, even as the number of people in the region returned to levels not seen since Google Glass still had a chance to be the next big thing." - MarketWatch

To expand on these dynamics even further, @Mikesimonsen, Co-founder CEO Altos Research, has a great Twitter thread on how home prices can "... still be so unaffordable when the population is declining?"

In short, easy as Mike notes, "The median home can (forever?) remain unaffordable to the median income in the Bay Area because only the richest 2000 can buy."

Again, there are countless variables at play in any local housing market, but at the end of the day supply and demand rules the roost and strongly overshadows many extenuating circumstances.

When you have so many people chasing such a limited supply, there's always a group doing well (good economy or bad) to create a market that wouldn't otherwise exist if there wasn't such a large housing supply / demand imbalance.

Don't lose sight of this otherwise your perspective will be skewed towards what makes sense comparatively even though the same dynamics don't exist across all housing markets!