Home prices in the Bay Area have skyrocketed over the past few years. As we’ve documented, real estate prices in and around San Francisco are some of the highest in the nation and only getting higher.
Worries have popped over during this climb that the market could be approaching bubble territory.
According to the CEO Jeff Mezger of KB Homes, one of the largest homebuilders in the country, that shouldn’t be a concern.
“I don’t think you are anywhere near a bubble price, certainly not at the price points we are playing at,” said Mezger. “Sad to say, but $1.5 million is an affordable in Bay area right now or the City of San Francisco, I’d say.”
According to Mezger, the increasing prices are just a function of simple economics.
“And in terms of that if you look in the Bay area it’s so underserved as an example,” he said. “There is such good demand and so little supply.”
While this is true, as housing bubbles typically an issue not when prices are high, but rather when prices are high and buyers are taking on large loads of debt to make purchases. As the Federal Reserve Bank of San Francisco argued, debt loads for households are not high enough to constitute a bubble.
Mezger’s comments were in response to a question about the higher average pricing that his company has been able to achieve in California. He said this has been because the company is closing developments in cheaper, inland areas and instead opening them in the higher priced San Francisco area.
“I guess, you say it’s pricing power, but it’s really mix and if we close out of a community in inland California and replace it with a higher priced City of San Francisco condo at a $1.5 million, it will look like we are getting a lot of price,” said Mezger. “But it’s really just a relocation of the product where you are at a higher priced sub-market with still an attractive price for that place.”
To be fair, as a homebuilder, it would be surprising if Mezger predicted a housing bubble. Housing bubbles burst, and that would be terrible for his business. But at this point, it doesn’t appear he is trying to keep prices down.
“So, I think, we are seeing some price, we will take price where the market will give it to us,” said Mezger.
Mezger’s thinking is simply that sometimes the demand is there and prices go up, but that doesn’t mean it’s a bubble.