Don’t panic over drop in home prices

Yes, the Bay Area’s home-price boom is over. But that does not mean a real estate crash is on the way. What’s happening now is more like a return to normal market conditions. Such conditions existed for decades prior to the late, lamented dot-com bonanza that ushered in the 21st century locally.

The nationwide housing market is cooling down, according to two major realty trend studies released last week. But a close look at regional statistics reveals that homes in the nine-county greater Bay Area still retain all their value. It’s just that prices here are not rising as quickly as they did during the peak of the dot-com boom, and homes stay on the market for a longer time before getting sold.

The number of Bay Area homes sold this July dropped 31 percent from the same month last year. Prices still rose 3.5 percent, which is just about normal over the long-term trend. Admittedly, that’s nowhere near the consistent double-digit price increases we experienced during the past few years.

A classic business cycle seems to be taking effect, with a superheated real estate economy slowing down to allow prices, interest rates, supply and demand to come back into greater equilibrium before the next upturn. Fundamental market conditions for housing in San Francisco and San Mateo County remain among the strongest in the U.S.

Only a limited amount of land is available here to build an increased supply of new housing. And with a highly attractive quality of life and a steadily recovering business economy, local housing demand is unlikely to slow significantly in the foreseeable future.

Bay Area housing supply is also restricted by a reflex resistance to change among many existing residents, who like their neighborhoods just the way they are now and do not want any kind of higher density. Predictable neighbor opposition is only one of the barriers that developers must overcome in order to build just about anything new in The City or on the Peninsula.

This all makes the current housing cool-down good for buyers, not so good for sellers and riskier for homeowners who overextended themselves to get into higher-priced homes by taking a chance on adjustable-rate mortgages. Those mortages would only be affordable if real estate values continued rising quickly while interest rates hold steady.

If local government is truly serious about increasing the housing supply and helping the economy’s continued growth, there is a clear direction. Officials could significantly improve market conditions for builders by easing the convoluted burden of zoning and permit restrictions.

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