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Which Bounces Back Faster? Phoenix or San Francisco?

Posted by: Peter Coy on October 27, 2006

I wrote an article for the current issue of BusinessWeek called Boom! Bust! Boom? Here’s a link.houses on springs.jpg My main finding is that around 40% of the major markets where there were housing busts eventually came back stronger than ever in terms of inflation-adjusted house prices.

Now I have a question for all you opinionated blog commenters. Which market will come back faster—Phoenix or San Francisco?

You could broaden that question a bit. Which will come back faster, markets like Phoenix and Las Vegas that are still relatively cheap, or markets like San Francisco and Boston that have always been expensive?

Yet another way you could ask the question: Which will come back faster, a city like Phoenix where there’s still lots of open land in the metro area, keeping a lid on land costs? Or one like San Francisco, which sits on a peninsula with very little open land and has strict zoning? Some people argue that prices in Phoenix got way ahead of fundamentals in the past few years because they jumped in spite of abundant land. By this theory, the boom in Phoenix was speculation, and what speculators giveth, speculators taketh away.

Your thoughts welcomed….

Reader Comments

Newspaper Reading Desperate Housewife formerly known as Lizziebeth

October 27, 2006 6:29 PM

Loved your article Boom, Bust, Boom. Edward L. Glaeser pointed out that areas like San Francisco and Boston traditionally bounce back faster and stronger than areas like Atlanta and Houston. It makes perfect sense! Thus I think Phoenix, Florida, Las Vegas... will not rebound like San Francisco and Boston. There is just too much land available. I wonder if Mr. Glaeser wouldn't predict where prices are headed because it seems we've never had a housing market like we have today. So much speculation. I don't think even the smartest economist can predict what will happen. In some areas, like Orlando, ghost towns of empty houses all for sale were built. It will be interesting to see how it plays out in both the speculative areas as well as the "superstar cities".

Toby Munk

October 27, 2006 7:40 PM

In the long-term fundamentals rule! Simple supply / demand. If you can buy land and build and make excessive profits these profits will go away, most likely by means of a softening housing market and NOT by higher land values. Places with limited demand will bounce back.

London went through a rough patch in 1988 and it took the market until the mid 90's to bounce back but now levels are higher than ever before, purely on fundamentals and the scarceness of real estate. So my bet is San Francisco, Boston, and communities with very little supply, like beach front or mountains will do well going forward. I think Aspen, Colorado might just be the perfect example of no supply and a lot of demand.

Simplified: if you can sprawl prices will crawl; if supply is limited prices will be uninhibited ;-)


October 28, 2006 4:13 PM

Of course, San Francisco will rebound faster than Phoenix, but Phoenix does have something in its favor that San Francisco does not and that is a growing population. While the fundamentals in the short term hurt Phoenix, I am bullish on the long term. Why? Despite the retiree image of Phoenix, the city has the population growth trifecta:

1. One of the nations largest 18 and under populations (on a per-capita basis)
2. A large influx of immigrants
3. A never ending supply of retirees and transplants)

If high paying profesional job migration matches the growing population (e.g. firms transfer from California to Arizona) then Phoenix has a strong probability of joining the Boom, Bust, Boom crowd.

In my opinion, I believe that Phoenix will do what Dallas and Houston have not nor will ever do: Grow after a Bust.

Barrett Neihus

October 30, 2006 2:52 AM

I am going to vote for San Fransisco, simply because of geography, lack of available land for expansion, a strong and diverse job base, significant educational and economic resources, the presence of large multi-national corporations, and the fact that it is a pretty nice place to live.


Illinois Insurance

October 30, 2006 9:32 AM

I think without a question San Francisco will come back faster. I predict that San Fran will drop to a level that people still can't afford just because of the lack of land. Look at Manhattan as an example. A 10-15% drop seems likely to me but predict the price will quickly bounce back and jump 20-25% within 2 years of the bottom.

Nigel Swaby

October 30, 2006 1:28 PM

It's apparent that cities with limited space and good economies will typically recover from a bust faster than others. I don't count out these other areas of the country with nice, new homes making a comeback as well as long as their local economies remain strong.

If you build it, they will come...eventually.


October 30, 2006 9:03 PM

Depends on how - and when - it's measured. Phoenix will crash harder, which means it will start back from a lower base than Frisco. As a percentage, incremental gains will be greater in Phoenix.

On the other hand, Phoenix will sit at the bottom longer, so Frisco will be ahead early in the game on both $ and %.

Measured against the bubble peak, Frisco will drop the least and rise back the closest on the rebound. So if you're measuring % from the top at any point in time during the next five years, Frisco will win.

David A. Porter

October 31, 2006 6:36 AM


I must vote for Phoenix. Here are my reasons:

1.) Phoenix is far more affordable than San Francisco.
2.) Baby Boomers are coming in droves.
3.) 30 year olds are coming in droves FROM California and other west coast state because of the significant cost difference. A 30 year old can buy a very nice home in the Phoenix area for $250,000.

Besides, the city is called Phoenix. The Phoenix rises from the ashes....right?

Geoff B

October 31, 2006 4:42 PM

I cast my vote for San Francisco as well, but with a little less confidence than I've read in some of the other posts here.

I agree with all the reasons cited: San Francisco is supply constrained because of geography and zoning, didn't go through a huge building boom, is desirable, has a high income population...

But in the end, just how high can prices really, truly go? I read somewhere that a buyer who uses traditional purchasing (30year fixed, amortized, 20% down, 28-33% payment to income ratio) would need a family income of 250K to buy the median priced house in SF (which is around 800K). And look around SF some time - the median isn't a 4/2, 2500sqft house with a nice yard in a good neighborhood. A house like that would go for *well* over a mil.

So we have a situation in SF where a first time home buyer would need to earn well in excess of 250K a year, along with having a down payment of 200K or so, to own a house that someone in Pheonix would view as nice but unremarkable. Of course, most of these these buyers don't actually earn 250K a year or even half that. What's really happening is that buyers are using adjustable rate, interest only, short term loans, paying a higher percentage of their incomes, and putting less down. In other words, they are stretching themselves to the point where they have no "give" left.

"Give" is what keeps people out of forclosure when something disruptive happens - such as job loss or a sharp spike in interest rates.

Personally, I don't think it'll be enough to knock prices down badly, especially since tech is rebounding. We'll hear some sad stories out of SF, but by and large I'd bet that this ultra-rich town will hold on to most of the gains of the past five years. So if I have to roll the dice, I'd bet on SF over Pheonix... but I do recognize that it's a bet that could end badly.

the Home Agents

November 2, 2006 5:30 PM

We're glad to see that you rate Las Vegas as a market where prices "are still relatively cheap." Every day at we help buyers locate homes in the Las Vegas Valley and all four cities in and around it: Las Vegas; Henderson; Boulder City; and, North Las Vegas.

Arizona Real Estate Notebook

November 5, 2006 1:18 PM

Until 2004 and 2005, Arizona home prices increased steadily.

Arizona didn't have the price spikes seen in California. On the other hand, Arizona didn't have the California style price crashes either.

Arizona home prices had much less volatility than California prices.

Now, it seems Arizona may have been drawn into the California real estate sphere of influence.

I attribute it to the internet. The internet made it much easier (reduced the cost) for California investors to research Arizona properties. If they decided to buy, they could do it during a weekend trip. Huge numbers did. Some California investors even bought homes sight unseen!

In the olden days, an investor had to come to Phoenix and spend days learning the market, often on more than one trip, before they felt comfortable that they understood the market enough to make a purchase.

Will Phoenix revert to it's slow and steady appreciation ways or has it been sucked into the California real estate market forever? We'll see.

s jackson

November 11, 2006 9:34 PM

I happen to be an investor and own one property in the phoenix area. I thank god I sold my other property in phoenix when I did some sucker from california bought it for $260,000.00 I paid only 126k in 2000 and sold in aug of 2005 .I then took my net profit of 88k and put it down on 2 properties in rio rancho new mexico. wow I made 64k in equity now the locals are scared that values are going to drop like phoenix did.I think there wrong and with the decline in investors in the area I think it's time to hunt up some deals. fix and flip time for me .

Sheridan Tatsuno

November 12, 2006 10:10 AM

San Francisco will recover faster for a variety of reasons: limited land, tough zoning, telecommuting to Silicon Valley jobs, top universities, weather, cultural variety, retiring boomers, rich foreign investors, etc, etc. But one possible showstopper: 70% probability of major earthquake over 7.0 on the Richter scale during the next 30 years, just buy good earthquake insurance and also invest in nearby suburban areas.

Preston Nigil

June 19, 2007 5:05 PM

Interesting someone mentioned Las Vegas as having unlimited land. Actually Las Vegas is landlocked surrounded by federal BLM land, and other entities The supply of buildable land in Las Vegas is predicted to be finished in about 15 years.

Combine that with a continuing strong economy, unemployment in the Vegas area below the national average, and a net influx of residents monthly and I think you will see the Las Vegas area rebound and appreciate very will after the trough created by the 2004/2005 speculator impact.

In the 1950s everyone said that Las Vegas would not support any more hotels.......need we say more? I think once the speculation and subprime lending settles in the dust the Las Vegas area will see a much better recovery.

Aman Mathur

July 7, 2008 6:40 PM

Availability of land is just one factor. True affordability is the critical factor. Remember how we got into the mess in the first place. It was 35K earning families competing with investors in areas 20 miles from downtown Phoenix all the way to the next county. Comparing Phoenix with SF is like comparing a watermelon with an almond. One is large, but comprises 95% water and very little nutrient, another small but rich in nutrient. SF populace has a much higher family income on average compared to another South-West US town. It does better than even LA and San Diego and lies in California just below San Jose (its twin city).
Interest rates are on the rise. Sub-prime lenders are out. Incomes are flat. Joblessness is up. Are any large companies moving to Phoenix? No. Phoenicians can afford 150K homes, maybe 170K but not 215K much less 240K. And now the $4+ gas prices, it makes difficukt to commute 30 miles each way. Driving distances in Vegas are only half of what they are in Phoenix. The question is who will bounce faster, meaning who will reach the bottom first and begin to ascend. My prediction based on the above. 1) SF, 2) Vegas, 3) Phoenix (not counting Scottsdale). I don’t know much about Boston or Florida. Valuable advise: keep away from zealot realtors – they are part of the problem.

SF Bay Area Buyer

July 8, 2008 6:57 PM

What Aman and the article fail to mention is SF RE prices do fall and fall big time. Its already known that 25% of RE was purchased by speculators over the past 3-4 years. I wonder if Aman can count all the new large and small developments coming on the market over the past 5 years. Heck just walk to the Ball Park.. Developers have been puting up 40 story Condo-zilla in SF this year alone.

As for High Incomes in San Francisco... guess again please... its actually smaller by 10% then San Jose, a non-glam city 50 miles south. There are not that many high paying jobs in the city that would justify prices in the city...

As history in SF has shown us prices do fall and fall big.

SF Bay Area Buyer

July 8, 2008 6:58 PM

What Aman and the article fail to mention is SF RE prices do fall and fall big time. Its already known that 25% of RE was purchased by speculators over the past 3-4 years. I wonder if Aman can count all the new large and small developments coming on the market over the past 5 years. Heck just walk to the Ball Park.. Developers have been puting up 40 story Condo-zilla in SF this year alone.

As for High Incomes in San Francisco... guess again please... its actually smaller by 10% then San Jose, a non-glam city 50 miles south. There are not that many high paying jobs in the city that would justify prices in the city...

As history in SF has shown us prices do fall and fall big.

SF Bay Area Buyer

July 8, 2008 7:03 PM

Nearly 2 years later.. and can you say the same ... not even close.

SF based on is still showing price and sales volumn declines. And we are still no where near the bottom.

So the bounce back theory is null and void... forclosures are plenty and still pilling up...By the end of this year will market the begining of the Alt-A resets.

Baby!!! You havent seen anything ! I will be waiting to pick up my new home for 40-50 cents on the dollar.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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