San Francisco's out-of-control housing market might start looking more 'normal' by the end of the year

Reuters/Noah Berger

San Francisco's housing market is very slowly cooling down.

The city is one of the most dire examples of the current housing crunch, in which potential homebuyers are plentiful and ready but inventory is insufficient.

On Tuesday, the S&P/Case-Shiller home price index showed that San Francisco's market may become more "normal" in the coming months, though affordability would remain a problem, according to Ralph McLaughlin, Trulia's chief economist.

For now, the pace of home-price growth is slowing. The S&P/Case-Shiller 20-city composite fell by 0.1% month-on-month in June, the third straight decline, while it rose 5.13% year-on-year.

June marked the fifth consecutive month in which the year-on-year increase was equal to or smaller than the prior month's print. One caveat here, however, is that the S&P/Case-Shiller index is more reflective of price changes for premium homes, McLaughlin said.

Here's McLaughlin, writing in a note on Tuesday (emphasis ours):

"Though Western markets dominate U.S. price growth, San Francisco continues to show a noticeable cool down. Home prices in the City by the Bay increased of 6.4%, which is the smallest annual gain since August 2012. The continued slowdown suggests the San Francisco housing market might start looking more 'normal' by the end of the year, but the market still has a long way to go before most Bay Area homebuyers would agree."

Home prices rose at a faster pace than wage growth.

That worsened affordability and made the US housing market great for sellers but not so much for buyers. But this disproportion is slowly balancing out in buyers' favor.

"In a handful of areas, including pricier markets like San Diego, inventory is starting to creep back up," Zillow chief economist Svenja Gudell said in note on Tuesday. "As conditions in more local markets begin to shift and become more balanced between buyers and sellers, the national market will follow suit."

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