Key Takeaways From Pacific Union’s San Francisco Bay Area Real Estate and Economic Forecast to 2020
Yesterday, Pacific Union held its fourth annual Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting to project Bay Area activity through 2020. Below are some key, high-level takeaways from the live event. To watch the full one-hour presentation, click here.
- Most U.S. housing markets remain at low-to-normal risk levels, both in the short term and the medium term.
- Mortgage rates are projected to grow by about 80 basis points by 2020, increasing annually at about a 20 basis-point pace.
- Across the Bay Area, housing markets are generally at normal risk, though San Francisco and Silicon Valley show some sings of above-normal risk due to a lack of affordability. While there is no evidence of a tech correction, if one occurs, these two markets would see their risks increase.
- Employment growth remains steady, though the increasing share of jobs in lower-income groups does not bode well for affordability in the Bay Area, especially in Sonoma and Napa counties.
- Proposed tax changes could significantly reduce future buyers’ deductions, making it more expensive to own a home. Also, the proposed changes could further disincentivize current homeowners from selling, thus exacerbating the region’s inventory shortage.
- An analysis of the impact of the wildfires on Sonoma County and Napa County real estate markets suggests:
- The rebuilding of homes will occur over several years.
- A revised forecast of 1 percent to 3 percent higher home prices than previously expected due to the decline in homes for sale
- A revised forecast of 2 percent to 4 percent higher new home construction costs than previously expected in the first year of rebuilding due to the additional demand for labor and materials. This special bump in cost above previous expectations should moderate down in future years.
- This year saw more strong home price growth in California. Across the entire Bay Area, the median home price increase averaged 9 percent year to date through September.
- An analysis of individual Bay Area communities shows that there is continual variation in home price fluctuation, which is driven by local market conditions and relates to prices in neighboring communities but most importantly is tied to jobs and income growth.
- In segmenting the markets by median home price changes, we use four categories: normal, double-digit, slowing, and heated.
Normal (up to 10 percent appreciation): Similar to last year, most Bay Area markets fall into this category, and median prices average about $761,000. These were generally more affordable markets, and no San Mateo County city falls into this category. Among cities with normal appreciation, an average of 56 percent of homes sold for more than asking price for an average 6 percent premium.
Double-Digit (10 percent to 20 percent growth): Unlike last year, double-digit percent median price growth was seen in many San Mateo County and Santa Clara County cities. Median prices averaged about $1.15 million. Many of these markets lost steam last year, but Silicon Valley’s strong job market helped prop them up. Buyer competition also increased, with 67 percent of homes selling for more than asking price for an average 9 percent premium.
Heated (20 percent to 40 percent appreciation): This year, two cities in Marin County — Sausalito and Tiburon — saw median price growth of more than 20 percent, a respective 22 percent and 28 percent. Overall, the median price in ZIP codes with the highest growth rates was $1.16 million, unlike last year, when the median price in heated markets averaged $800,000. Two ZIP codes that were heated last year continued at the same price growth rate: 94610 in Oakland and 94303 in Palo Alto. In Sonoma County, two of the fire-impacted cities, Glen Ellen and Kenwood, have also seen strong price growth in 2017.
Slowing (22 percent depreciation to flat): Although fewer cities saw slowing prices this year than last year, these are again relatively more expensive markets where the median home price averaged $1,900,000. Still, about 43 percent of homes in these areas sold for more than asking price, for an average 8 percent premium.
- Affordability and access to transportation and jobs continue to drive differences in home price appreciation. The highest appreciation was seen in markets where job growth with higher-income jobs led the local economy. By contrast, areas where job growth was dominated by lower-paying jobs saw slowing appreciation.
- When analyzing how the landscape has changed from last year, the main differentiator is intensified buyer competition in almost all markets. More homes are again selling above asking price in 2017 across the Bay Area — particularly in San Francisco, San Mateo, and Santa Clara counties — and in higher price ranges. Premiums paid this year are also higher in all counties.
- Overall, Bay Area inventory has continually dropped in 2017, with year-to-date supply down 14 percent. Santa Clara County has seen the largest inventory decline this year, down by 25 percent, while Alameda County has seen the smallest supply drop, with 5 percent less inventory year to date. Furthermore, while the inventory of homes priced higher than $2 million saw some improvement earlier in 2017, year-over-year changes now show declines.
- While condominium prices in San Francisco took a breather in 2017 for newly constructed units, the continued price increase for resale units and the declining inventory of new units are likely to prop up prices going forward. In addition, stronger activity for units priced at less than $1,300 per square foot suggests that higher-end condominiums hitting the market may find more challenging conditions.
- Lake Tahoe’s housing market has benefited from wealth creation in the Bay Area, and sales of homes priced above $3 million jumped by 141 percent year over year in the third quarter.
- From 2018 to 2020, home prices are projected to grow by 12 percent in Napa County; 12 percent in Sonoma County; 2 percent in Santa Clara County; 2 percent in Marin, San Francisco, and San Mateo counties; and 5 percent in Alameda and Contra Costa counties.
- Lastly, the panel agreed that price trajectories are more likely to resemble a tabletop compared with the mountain peak that occurred following the housing bust in 2006, where the tabletop suggests moderating price growth through 2020. Nevertheless, unexpected changes to housing supply and demand or job and income growth would destabilize the housing market and lead to a different outcome.
Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.