Real estate prices, as with all other assets, are a function of supply and demand. In the case of San Francisco, supply has remained relatively constant (due to stability in the housing stock) and demand has increased.
Without looking at the data, I'd imagine the recent explosion of the technology industry in the Bay Area has been the largest driver of demand for houses. An increased number of people moving to the area for employment will naturally increase the demand for houses.
However, Fed policies also contribute to the demand for housing. As the Fed has kept interest rates close to 0%, it is much easier to finance mortgages for houses, so the housing becomes more affordable (when considering amortization). Additionally, these policies have also driven investment into higher yielding assets, such as equities, in search for greater return. This has had the effect of increasing many individuals' wealth, making them more capable of purchasing houses.
With increases in the ability to pay for housing (assuming housing is a normal good), there will be an increase in demand for housing.
The zero interest rate definitely does contribute, but a bigger deal for mortgage rates is that the Fed continues to buy $24-26 billion a month in mortgage-backed securities. It is keeping its total holdings of MBS constant, but since total holdings are still over $1.7 trillion, that results in a lot of purchases each month to cover the reduction in principal from people paying off mortgages in existing MBS.
>The zero interest rate definitely does contribute, but a bigger deal for mortgage rates is that the Fed continues to buy $24-26 billion a month in mortgage-backed securities
I think you've got the right idea, but you are misinterpreting things slightly. Purchasing MBS contributes to ZIRP (as opposed to serving a separate policy objective). MBS are interest rate products based on mortgages instead of US Government credit (although you can view MBS as a US Treasury + some spread). In sustaining purchases of MBS (supporting their price), the Fed drives down their yields (note that yields necessarily move inversely with price). In effect, these purchases result in lower interest rates and go hand in hand with ZIRP.
> that results in a lot of purchases each month to cover the reduction in principal from people paying off mortgages in existing MBS.
I'm not sure what you mean by this. A person's principal is only changed when she makes a payment on the principal. Fed's purchases will affect the yield on the MBS.
"... it is much easier to finance mortgages for houses, so the housing becomes more affordable ..."
Not necessarily. Widespread access to greater amounts of affordable credit also means that more people can afford to buy more expensive houses, which puts upward pressure on housing prices. So sure, you might get a better rate, but that better rate may well be negated by a higher purchase price.
>Real estate prices are not solely a function of supply and demand. If the value of your money goes down, so too will the price of your house.
Sorry, but that statement is pure nonsense. If the value of your money goes down, you will need more if it to purchase any good (since it is less valuable). Therefore the price of your house has increased, since you need a nominally greater amount of money to purchase the house.
And, yes, all asset prices are ultimately determined by supply and demand. Suppose you are the last person on earth. You necessarily own all houses on earth. However, you cannot sell them for any price, so no price exists. Now suppose you own the only house on earth (with its current population). I imagine you might be unwilling to give up the comforts of a home at any price (although people will likely offer huge sums for the house). As you can see, the supply and demand of assets fundamentally determines their values.
The housing prices don't really adjust for foreign exchange rates of a currency most of the time. There are forces in both directions with foreign and local buyers both being impacted in different ways.
> The housing prices don't really adjust for foreign exchange rates of a currency most of the time.
That's really not a correct statement. The drivers of currency fluctuations are absolutely going to affect the value of housing (interest rates, legal infrastructure, etc.) As a prime example, consider the housing market in Vancouver. Prices have increased significantly, in large part due to capital flight from China. As holding RMB became less attractive, buyers altered their asset allocations.
> There are forces in both directions with foreign and local buyers both being impacted in different ways.
That's tautological. Holding one currency has the opportunity cost of not holding other currencies. If EURUSD increases, then holders of EUR will benefit exactly as much as holders of USD suffer (relative to one another).
I encourage you to look at an actual graph of housing prices and foreign exchange rates. They really don't track each other.
Short and long term there are different and very complex with multiple feedback loops. Also, most people have home loans and houses are not currency. Further, having your currency appreciate is bad for many parts of the economy.
Sure, long term there are impacts especially with foreign investors. But it's also vary local with Las Vegas housing market tracking different things than rural Minnesota. Even as interest rates have long term impacts.
> I encourage you to look at an actual graph of housing prices and foreign exchange rates. They really don't track each other.
I'd be very interested to see such a graph. I'd also be interested to know what you mean by foreign exchange rates (I've been assuming you're talking about USD relative to all other currencies). [0] seems to indicate that FX rates affect real estate prices.
> Also, most people have home loans and houses are not currency.
I really struggle to see how that's relevant in the slightest. No one claimed that houses are currency.
> Further, having your currency appreciate is bad for many parts of the economy.
That supports the notion that FX fluctuations will affect real estate prices. A region with worse economic prospects will likely have less demand for housing than an otherwise identical area with better economic prospects.
Without looking at the data, I'd imagine the recent explosion of the technology industry in the Bay Area has been the largest driver of demand for houses. An increased number of people moving to the area for employment will naturally increase the demand for houses.
However, Fed policies also contribute to the demand for housing. As the Fed has kept interest rates close to 0%, it is much easier to finance mortgages for houses, so the housing becomes more affordable (when considering amortization). Additionally, these policies have also driven investment into higher yielding assets, such as equities, in search for greater return. This has had the effect of increasing many individuals' wealth, making them more capable of purchasing houses.
With increases in the ability to pay for housing (assuming housing is a normal good), there will be an increase in demand for housing.