Ask someone in San Francisco what that area’s major problem is and they’ll likely complain about housing prices and how they keep getting worse. The first graph shows us this complaint is likely accurate. Indeed, house prices in the Bay Area have increased faster than the national average, with a significant run-up around the year 2000. Why has this been happening? Are people flocking there and has the increased demand for housing driven up the prices?

The second graph shows us that a large influx of residents is unlikely to be the reason behind high housing prices: The size of the working population in the area compared with the U.S. average or even the California average has in fact decreased. Thus, proportionally fewer people are living in the Bay Area, yet house prices have still gone up. What’s that all about?

The third graph traces the evolution of personal incomes in the Bay Area compared with the U.S. average. And here we see that the buying power in the Bay Area has increased significantly more than for the rest of the country. Assuming the housing stock has remained basically unchanged, there have been fewer people with much more money chasing the same houses. So house prices increase. Note how incomes increase pretty fast around the year 2000, precisely when houses got significantly more expensive. We can’t confirm this assumption because FRED doesn’t offer data for the inventory of houses in the Bay Area. Yet, the area is known for its aversion to new housing developments, so the assumption is at least likely to apply when comparing the area with the U.S. overall, which we’ve done throughout this post.

How these graphs were created: For the first graph, search for “San Francisco house price” and take the Case-Shiller series. Click on the “Edit Graph” button and add the U.S. national house price index. Apply formula a/b and choose as units the index scale, setting 100 at the end of the 1990-1991 recession. Proceed similarly for the other graphs.

Suggested by Christian Zimmermann.