Surprise: Bay Area Real Estate Is Overvalued. What's a Home Buyer to Do?

A new list puts San Francisco and San Jose, Calif., in the top 10 most overvalued real estate markets. But what does that really mean?

San Francisco Real Estate Signs

Photo By Justin Sullivan/Getty Images News Houses are going for way over asking, faster than you can say "open house." Does that make this an overvalued market? 

A new report discussed in Forbes Magazine lists 20 cities with an increase in real estate prices. It's no surprise that San Francisco is at the #2 spot (after Las Vegas) with a 24.5% increase. But rising mortgage rates are starting to slow that rate of growth, though with this being high season for real estate sales, it won't slow down much. 

That slowing isn't necessarily a bad thing for the Bay Area, as that sharp increase has led both San Francisco and San Jose (in the heart of Silicon Valley) to be among the top 10 most overvalued housing markets.

Being overvalued is a complicated algorithm. Fitch Ratings weighed home prices against other neighborhood factors: median income, employment rates, population growth, rental prices and amount of inventory. When home prices do not match up with the local economy, rising more than 15% above sustainable levels, that market is considered overvalued.

Indeed one of the things that has driven prices so high in San Francisco is a lack of inventory — there are only so many buildings in this 7x7-mile space, and only so many more places they can go. And there are also only so many tech jobs. But what are homebuyers supposed to make of this whole issue? If homes here are overvalued, but you need to live somewhere, what's a buyer to do?

No community can keep a correction from happening. Prices go up because there's so much demand in our tech-heavy town. It all depends on the companies: If they continue to do well, things will thrive and values will stay up. If the companies fail, you have the associated fallout.

Socially, this has caused a lot of resentment as families, often struggling, are priced right out of the city and over to the East Bay (or up to Portland). San Francisco does a good job of making sure every developer includes a certain number of BMR units (which are required to be sold below market rate, below the median income for the area), but those are condos, not single-family homes.

For those committed to remaining in this market, all is not lost: The advice that always gets floated in these markets is to get the best deal you can, and work within your budget. As a wise investor (fine, it was my mom) put it to me, "If you buy something you can handle on your income, it doesn't much matter if you end up underwater. You have a place to live that costs less than renting, and you're going to stay there until the kids are in college."

The numbers are the numbers, but buying a home is emotional. This is no market for investors, but everyone needs a place to live. So the market is considered overvalued. Bay Area homebuyers might want to wait, but if you can't, the right home is still out there.

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