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Home Bidding Wars Are Back in San Francisco

The recovering tech industry and lack of supply boost prices

Hyuck Jae Lee and his wife, Seung Hye, vied with a dozen other suitors last month to buy a three-bedroom, 1,400-square-foot house in San Francisco's Inner Richmond neighborhood, a half block from Golden Gate Park. After having been outbid on a nearby home, the couple triumphed with an $875,000 offer, 14 percent above the asking price. "We feel like we're stepping into our San Francisco life," says Lee, a 38-year-old Silicon Valley engineer.

Four years after the housing bust began, at least one major market is hot again. Sales of houses and condominiums in the Bay Area jumped 50 percent in the first quarter from a year earlier and the median price rose 5.4 percent, to $685,000, according to a multiple listings analysis by Terradatum. San Francisco metro area values increased 16 percent in March from a year earlier, the biggest jump of any city in the S&P/Case-Shiller Home-Price Index (MHP). The 20-city composite measure climbed 2.3 percent.

"San Francisco has conditions of very restricted supply and lots of things that can push demand: an attractive climate, innovative economy, and high quality of life," says Harvard University economist Edward Glaeser, who has studied U.S. housing bubbles. In addition, the Bay Area's focus on technology and exports makes the region an early beneficiary of the U.S. recovery. A revitalized technology industry "almost certainly" drove the creation of 1,200 new jobs in the city from February through April, says Ted Egan, chief economist in the San Francisco controller's office. "I wouldn't go nuts, but I would expect to see more improvement."

Some factors may slow housing gains throughout the U.S., including the expiration of home-buyer tax credits and end of the Federal Reserve's purchase of mortgage bonds, says Robert Shiller, Yale University economist and co-creator of the home price index. Yet San Francisco's limited housing supply and global appeal help offset broader economic forces. "In supply-constrained and highly attractive markets there is no natural landing point for prices," says Glaeser. That helps explain why the San Francisco metropolitan area has ranked first or second among the most expensive U.S. housing markets for 19 of the past 20 years, according to data compiled by the National Association of Realtors.

Katherine Yung and Kevin Brandstetter understand that. They beat out 25 other bidders for a 1,600-square-foot house in the Golden Gate Heights neighborhood, offering $931,000, $162,000 over the asking price. The three-bedroom home has ocean views and an updated kitchen and borders on a small park. "Maybe we way overbid, but we came up with a number that was worth it for us," says Yung, who met her husband in medical school in St. Louis. "Now that we're in California, it's nice to see the ocean and the mountains."

The bottom line: San Francisco has unique attributes that help keep home prices high. With the tech sector recovering, buyers are willing to pay top dollar.

Levy is a reporter at Bloomberg News.

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