Tech-Hub Real Estate: 5 Facts
In January, asking home prices rose 1.1 percent month-over-month, the largest monthly gain since June 2013. But the quarter-over-quarter price increase of 2.1 percent remains below spring 2013 levels, when asking prices accelerated at their fastest rate in the recovery. Year-over-year, asking prices are up 11.4 percent nationally and are positive in 97 of the 100 largest metros. To see what’s really happening to housing markets in tech hubs, we looked more broadly at America’s top 10 technology centers. Using Census data, we defined tech hubs as the 10 U.S. metros, among the 100 largest metros, where Internet industries and occupations play the biggest role in the local economy. We focused on this sector because it’s been booming recently – and it’s also been the target of housing tensions. The analysis compares these 10 tech-heavy metros with the other 90 of the 100 largest metros. The top tech hubs in America include San Jose, Calif.; San Francisco; and Oakland, Calif., in the Bay Area; Seattle and San Diego, also on the West Coast; Washington, D.C., and neighboring Bethesda-Frederick-Rockville, Md.; Middlesex County, Mass., the home of Harvard University and the Massachusetts Institute of Technology; and, finally, Raleigh, N.C., and Austin, Texas. This analysis uncovered five truths about housing markets in tech hubs:
Rising Home Prices are in Line with National Average
Today, asking prices have risen most in housing markets that were hardest hit during the bust. The year-over-year price gain for the 10 tech hubs averaged 13.4 percent, ahead of the 11.4 percent gain for the other 90 large metros. The reason for the gap is that tech hubs, relative to other metros, had steeper price declines during the bust and have fewer homes stuck in foreclosure today – and both of those factors are driving the current price rebound. Adjusted for price declines during the bust and foreclosure inventory today, the year-over-year price change is no different in tech hubs, on average, than in other large metros. The year-over-year increase in asking prices among the 10 tech hubs ranged from a high of 24.4 percent in Oakland to a low of 6.5 percent in Raleigh. Only Oakland ranked in the top 10 for year-over-year price increases among the 100 largest metros, while four tech hubs – Middlesex County, Raleigh, Bethesda and Washington – ranked in the bottom half of the list.
Rents are Rising Faster in Tech Hubs than in the Rest of the Country
Nationally, rents rose 3.3 percent year-over-year, but rents are climbing much more steeply in the top three tech hubs – San Jose, Seattle and San Francisco. For the 10 tech hubs overall, rents rose 5.7 percent year-over-year, nearly twice as fast as the 3 percent increase for the other 90 metros. However, rents in tech hubs are high to begin with. At $3,350 for a two-bedroom home, the San Francisco metro area has the most expensive rentals in the country. Although rents in Seattle, Raleigh and Austin are less than half of rents in San Francisco, the typical two-bedroom in a tech hub rents for 37 percent more than in the other 90 metros ($2,053 versus $1,504).
Buying a Home in a Tech Hub is much more Expensive than in other Housing Markets
Comparable homes cost 82 percent more in tech hubs, on average, than in other large metros ($242 versus $133 per square foot). And while people living in tech hubs have higher incomes, they’re not high enough to bridge the affordability gap. Just 48 percent of the homes listed for sale in tech hubs were affordable to the middle class (based on median metro household income), versus 63 percent in other metros. Of course, there are huge differences in affordability even among tech hubs: just 14 percent of for-sale homes in San Francisco are affordable, compared with more than 60 percent in Raleigh, Bethesda and Washington. Still, the overall gap between housing prices in tech hubs and other large metros is 82 percent – a huge difference that’s much bigger than the gap in rents.
Housing in Tech Hubs was Expensive even Before the Modern Internet Era
Today, as mentioned above, home prices are 82 percent higher in tech hubs than in other housing markets. But let’s take a trip back in time to 1990, before the dawn of the commercial Internet era, to see if housing was cheaper before tech boomed. Applying historical metro-level price changes from the Federal Housing Finance Agency to current prices per square foot, we found that the same size house in 1990 cost 52 percent more in those 10 tech hubs than in the other large metros. In other words, most of the current 82 percent gap in home prices between tech hubs and other metros predates the modern Internet era. Today’s tech hubs had expensive housing before dot-commers, Internet bubbles and all that came with them. Decades ago, many of the housing markets that would become tech hubs had advantages like major research universities, technically skilled workers, thriving computer manufacturing industries or nice climates. Places with advantages like these tend to be more expensive, and they turned out to be fertile soil for the today’s tech industry.
Housing Affordability in Tech Hubs Depends a lot on Housing Construction
San Francisco’s high home prices are extreme – but so is the lack of construction. Since 1990, there have been just 117 new housing units permitted per 1,000 housing units that existed in 1990 in San Francisco. That’s the lowest of the 10 tech hubs and among the lowest of all the 100 largest metros, even with the recent San Francisco construction boom. Relative to San Francisco, Raleigh and Austin have 10 and eight times as much construction, respectively. Geography limits construction in the Bay Area – it’s hard to build in the ocean, in the bay, or on steep hills – but regulations and development costs hurt, too.