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Downsizing Homes Can Save Californians Big Bucks

  • Homeowners in Los Angeles can save $750,000 by trading in a five-bedroom home for a three-bedroom home.
  • Downsizing by two bedrooms in San Francisco can save owners as much as $677,500.
  • Selling a five-bedroom home then buying a three-bedroom home saves six figures in 19 of 20 major California cities.

Many Golden State baby boomers and other empty-nesters may no longer need that spacious home they bought when they were raising a family, and a recent study may give them a significant incentive to downsize.

A PropertyShark study published last month determines how much homeowners in 20 major California cities can save by purchasing a smaller home. The report calculates the savings between trading up a five-bedroom home for a three-bedroom and four bedrooms for two bedrooms. The analysis also includes a chart that calculates savings obtained by simply sacrificing a single bedroom across different home-size ranges.

Anyone who owns a five-bedroom home in Los Angeles might want to seriously consider downsizing to a three-bedroom home, as that move can save $750,000. Even just losing one bedroom in the City of Angels is a sound financial move; the median sales price for a five-bedroom home is $1,475,000, while four-bedroom homes sell for $880,000, for a $595,000 savings.

Irvine homeowners who are willing to trade in five bedrooms for three bedrooms will realize the largest savings in California: $783,000. Elsewhere across Southern California, such a downsize saves from $635,000 in Glendale to $132,750 in Oxnard.

In Northern California, San Francisco homeowners who downsize from a five-bedroom property to three bedrooms can line their pockets with $500,000. The rewards get even larger for San Franciscans who sell a four-bedroom home and buy a two-bedroom home: $677,500.

Making the five-bedroom-to-three-bedroom switch is about equally profitable in two East Bay cities: $620,000 in Oakland and $605,000 in Fremont. In San Jose, which has some of the most expensive real estate in America, owners who sell downsize a five-bedroom home by two rooms will not save quite as much but will still have an extra $358,500 in the bank.

As PropertyShark points out, downsizing a home can bring additional benefits besides financial ones. Larger homes not only take more time and energy to maintain, but those additional unused bedrooms also needed to be heated, cooled, and cleaned.

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Proposition 10: Possibly the Worst Approach to California’s Current Housing Crisis

What is Proposition 10?

Proposition 10 is a statewide ballot initiative in the November 2018 election that aims to repeal the Costa-Hawkins Housing Act. While Proposition 10 has become a polarizing issue, it is critically important to understand what it does and does not do.

What is the Costa-Hawkins Rental Housing Act?

The Costa-Hawkins Rental Housing Act was passed by the California legislature in 1995 and places limits on municipal rent-control ordinances.

The act limits municipal laws in the following ways:

  • In cities that already have rent-control policies, it freezes the eligibility of units that can come under rent control at the age threshold that was in place when the ordinances were adopted. For example, units in San Francisco that fall under rent control are those built prior to June 13, 1979.
  • It prohibits “strict” rent control (for instance, vacancy control), which requires rents to remain controlled even after a tenant moves out. Since Costa-Hawkins passed, owners may still increase the rent equivalent to the change in the cost of living as measured by the Consumer Price Index (averaging about 5 percent). Prior to the enactment of Costa–Hawkins, such strict vacancy controls existed in five California cities: Berkeley, Santa Monica, Cotati, East Palo Alto, and West Hollywood.
  • It exempts all single-family homes, condominiums, and units built after Feb. 1, 1995.

In California, 15 jurisdictions have passed some form of rent control, including “legacy” rent control, meaning cities with ordinances dating back to the late 1970s and early 1980s, such as San Francisco, Los Angeles, Berkeley, and Santa Monica. Bay Area cities such as Mountain View and Richmond have only recently enacted such ordinances. Cities listed as rent controlled by the state of California: Alameda, Berkeley, Beverly Hills, East Palo Alto, Hayward, Los Angeles, Los Gatos, Oakland, Palm Springs, San Francisco, San Jose, Santa Monica, West Hollywood, Mountain View, and Richmond.

The major purposes of the Costa-Hawkins act are to eliminate vacancy control and thereby allow property owners to adjust the rent to market price and to exempt certain categories of rental units from rent control — new construction, single-family homes, and condominiums.

The act leaves the power to determine most other elements of rent control to the cities. Cities remain in control of determining any changes to the rental amount of a tenancy and possess a substantive jurisdiction to regulate evictions and an owner’s ability to otherwise end a tenancy. Accordingly, cities could prohibit an owner from terminating a tenant without “just cause.” Each California city has its own independently enacted rent-control ordinances, which vary widely.

What Would the Repeal of Costa-Hawkins Mean?

Advocates of expanding rent-control policies gathered enough votes to put a bill on the November 2018 ballot. Assembly Bill 1506, also called the Affordable Housing Act, calls for the repeal of Costa-Hawkins. If approved, in addition to repealing Costa-Hawkins, any subsequent amendments to the Affordable Housing Act would require a two-thirds majority vote by the state legislature. However, even if Proposition 10 passes, each city would need to go through the process of passing new legislation before the repeal would have any effect. At that point, it would be up to cities to decide if they want to expand their rent-control regulations or leave the current laws intact.

It is an undeniable fact that the cost of housing in major California metropolitan areas has grown far out of reach for many residents. The housing-cost burden has become the Achilles’ heel of California’s economic future. Proponents of rent control generally believe that price protections are the most effective ways to help tenants avoid displacement, which disproportionately affects seniors, lower-income tenants, and renters of color. Nevertheless, California’s affordability crisis is a direct result of an undersupply of housing built over the last decade. 

According to a recent Department of Housing and Community Development (HCD) report, “California’s Housing Future: Challenges and Opportunities,” housing production has averaged less than 80,000 new homes annually over the last 10 years, and ongoing production continues to fall far below the projected need of 180,000 additional homes annually. With now an almost 2 million housing-unit deficit, there is a need for an additional 1.8 million units to be built by 2025 to meet the state’s projected population and household growth.

If these units are not built, housing will become even less affordable. 

Nevertheless, as research on the impact of rent control across the state and the country has shown, expanding rent control will further exacerbate affordability by adding an additional disincentive to constructing new units and supply of rental units in the market. Specifically, research cited in a recent analysis from University of California, Berkeley shows that rent control reduces the supply of rental housing in the following ways:

  • Rent control incentivizes property owners to sell or convert them to nonresidential units.
  • Rent control reduces the efficient allocation of housing by disincentivizing current tenants to move even when they don’t need all the space or their financial means have improved beyond the need for rent-controlled housing.
  • And critically important now, rent control discourages new development of rental supply by removing developers’ certainty that they will be able to repay their loans and their investors, significantly impacting the feasibility of many construction projects.

For example, a recent study of San Francisco’s 1994 Proposition I, which extended the original rent-control ordinance to include smaller buildings of four units or less, found that these properties were 8 percent more likely to convert to owner-occupied housing. San Francisco consequently faced a notable loss in rental housing, as well as higher prices, due to reduced supply. The offsets amounted to $5 billion of welfare losses to all renters.

Similarly, in West Hollywood, rent control led to the loss of 764 units between 1986 to 2016, with only 10 percent returning to the market as new apartment units. In Santa Monica, out of 3,042 units withdrawn from the market between 1986 and 2017, only one-third were replaced with new rental units (and not necessarily rent-controlled ones). In fact, as a result of the Proposition 10 ballot initiative, some new multifamily projects across the state have already been placed on hold as developers face uncertainty over projects’ feasibility.

Furthermore, some Proposition 10 proponents have argued that the issue is about local government control and allowing jurisdictions that better understand their housing problems to deal with them. Nevertheless, while local jurisdictions are best informed about their own local imbalances — such as homelessness, displacement, and gentrification — a serious lack of local government willingness, and more importantly local residents, to allow low-to-moderate-income development projects has led to California’s 2017 Housing Package.

The package has several regulations that are specifically aimed at holding cities and counties accountable for addressing their housing needs. Over the years, communities have either adopted a noncompliant housing element or failed to submit their housing element to the HCD for timely review.

The package provides greater accountability by:

  • Increasing enforcement of state housing-planning (“housing element”) law and enabling the HCD to refer violations to the Attorney General
  • Strengthening housing-planning laws to ensure that appropriate land is available for new development and increasing transparency on local governments’ progress on meeting legally mandated housing targets
  • Creating a $10,000 per-unit penalty on cities and counties that deny (for unjustified reasons) approval of new homes that are affordable to low- or moderate-income Californians.

In addition, there are a number of chronic local government problems that are driving the current housing crisis, such as strong local community opposition; outdated zoning laws that limit residential density and land-use efficiency; caps on population, housing-growth, or building-height limits; onerous parking- or transportation-improvement requirements; and excessive design review, development fees, and the “fiscalization of land use,” which lead local jurisdictions to favor commercial growth as opposed to residential. Passing Proposition 10 in no way addresses any of these issues. 

What are Proposed Alternatives for Tenant Protections?

The main objective going forward is to ensure meaningful protections to renters without constraining the supply of new housing. Without new housing supply, costs will become even more prohibitive, and rent controls will further incentivize property owners to remove their units from the market.

To that end, there have been numerous suggestions proposed by local and state leaders from real estate, finance, academic, public-policy, and government agencies.

Specifically, the Terner Center from University of California, Berkeley proposes that the state should adopt:

  • A broad “anti-gouging” rent cap applied to all rental units statewide that would make it illegal to raise rents above a specific amount, determined annually by a formula
  • An incentive to developers of new and rehabilitated rental buildings to include on-site, below-market rate units in exchange for property-tax relief
  • Creating a central registry of rent-controlled housing to ensure equity among tenants

In addition, there is broad agreement among leaders that greater efforts should be placed on:

  • Adoption of inclusionary zoning policies combined with density bonuses
  • Development of housing trust funds and other programs for local funding of affordable housing
  • Exemptions from parking and traffic limitations for low-income housing developments
  • Funding for the rehabilitation of older commercial and publicly used property to affordable units
  • Broadening legalization of accessory dwelling units (in-law suites) without additional parking requirements or excessive permitting costs
  • Broadening of zoning ordinances to more readily accommodate quality manufactured housing as an alternative to more expensive conventional housing
  • Mixed-use zoning: inclusion of housing in commercial areas by adding new and existing or redeveloping vacant or underused retail, office, and industrial areas

Lastly, in January 2018, state Senator Scott Wiener introduced Senate Bill 827 in an attempt to increase new high-density housing near transit. While the bill failed to clear its first policy committee in the Senate, the proposal would have considerably increased zoning densities near major transit stops. With some amendments, it could have been a large step in improving the current crisis.

If California cities such as Los Angeles and San Francisco want to compete on a global stage and remain economic and innovation powerhouses both in the U.S. and globally and ensure that children who are born here can remain to live here in the future, preserving Costa-Hawkins and refocusing attention on the above proposed alternatives will be more productive.

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.

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California Home Price Growth to Moderate in 2019, Forecast Says

  • California’s median single-family home sales price is expected to hit $593,400 by the end of next year, an annual gain of 3.1 percent.
  • More than one-third of homebuyers in the Bay Area and Southern California are forecast to leave the county in which they resided this year.
  • In 2019, California’s gross domestic product is projected to grow by 2.4 percent, with the unemployment rate holding steady at 4.3 percent.

Golden State home price appreciation is projected to slow to a six-year low in 2019, although rising mortgage rates will reduce affordability even further.

The California Association of Realtors’ 2019 Housing Market Forecast expects that the median single-family home price will end this year at $575,800, up by 7.0 percent on an annual basis. Mortgage rates are forecast to end 2018 at 4.7 percent, reducing the number of Californians who can afford a home to 28 percent.

The state’s median home price is projected to rise by another 3.1 percent in 2019 to $593,400, a far cry from the 27.5 percent growth recorded in 2013. Assuming that mortgage rates move up to 5.2 percent by the end of 2019, just one-quarter of Californians will be able to afford a home purchase. Next year, home sales are projected to decline by 3.3 percent, almost identical to 2018’s projected decrease.

“While home prices are predicted to temper next year, interest rates will likely rise and compound housing affordability issues,” CAR President Steve White said in a statement. “Would-be buyers who are concerned that home prices may have peaked will wait on the sidelines until they have more clarity on where the housing market is headed. This could hold back housing demand and hamper home sales in 2019.”

Housing affordability challenges are expected to drive out-migration trends next year, as Californians move to less expensive counties or out of the state entirely. This year, 28 percent of homebuyers are projected to leave the county in which they currently reside. In the Bay Area and Southern California, that number ticks up to 35 percent.

While worsening affordability is unwelcome news for California home shoppers, the state’s economy should remain on solid footing next year. CAR projects that the state’s gross domestic product will grow by 2.4 percent, down slightly from 2018 expectations. The job market should continue to thrive, with the unemployment rate holding steady at 4.3 percent by the end of next year.

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Shared with permission from the Pacific Union Blog

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San Francisco Has the Nation’s Tightest Housing Supply Conditions

The San Francisco metropolitan area had a 2.0-month supply of homes for sale in July, the lowest of any major U.S. housing market.
Home prices in San Francisco rose by 11 percent year over year in July, nearly double the national rate of appreciation.
More than 80 percent of homes in San Francisco sold for list price or higher, the most in the country.

The San Francisco skyline as seen from Twin PeaksAlthough inventory has been improving modestly in the Bay Area over the past couple of months, it is still insufficient to meet demand, causing most homes in the San Francisco metropolitan area to sell for premiums this summer.

That’s according to a pair of new reports from CoreLogic, one of which says that the U.S. had a 3.2-month supply of homes for sale in July, up from 3.1 percent one year earlier. The company attributes the slight improvement to both rising mortgage rates and declining home sales.

The San Francisco metro area had a 2.0-month supply of homes for sale, the lowest of the 20 major housing markets for which CoreLogic tracks data. Summer inventory conditions were nearly as tight in San Jose, which had a 2.2-month supply of homes for sale.

Not enough homes on the market to satisfy demand pushed CoreLogic’s July Home Price Index up by 11 percent in San Francisco, one of the highest rates of appreciation in the U.S. That’s nearly double the 6.2 percent annual price gains recorded nationwide, and the company says that its index has now surpassed its prerecession peak.

Nationwide, the share of homes that sold for at or more than asking price has also exceeded its precrisis high, with 40 percent of properties falling into that category — nearly three times more than a decade ago. In San Francisco, 81 percent of homes sold for list price or higher, the most in the U.S. San Francisco homebuyers spent an average of 9.7 percent more than asking price, while those in San Jose paid 5.4 percent premiums.

Even if California and Bay Area market conditions remain challenging for homebuyers, recent statistics offer cause for some optimism. The latest monthly home sales report from the California Association of Realtors says that active listings in the state increased for the fifth straight month in August, while the nine-county Bay Area saw its months’ supply of inventory increase to 2.3, up from 1.9 one year earlier.

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California: America’s Most Diverse State in 2018

  • A new study names California as the most diverse state in the U.S., scoring a 70.89 on a 100-point scale based on six major criteria.
  • California ranks as the most culturally diverse state in the country.
  • A separate study released in the spring ranked Los Angeles and Long Beach among America’s 10 most diverse cities.

The United States is a nation that was built on embracing diversity, and nowhere exemplifies this most American of principles more than California.

That’s according to a new analysis from WalletHub, which ranks all 50 U.S. states for diversity on a 100-point scale based on six major criteria: socioeconomics, culture, economy, households, religion, and politics. The subcriteria that the company uses to measure diversity include factors such as educational attainment, generational mix, and range of industries and occupations.

By WalletHub’s measures of diversity, California ranks No. 1 in the nation, with a total score of 70.89.  Within the six major criteria, the Golden State is also No. 1 for cultural diversity and No. 3 for socioeconomic factors, which encompass household income and education levels.

California has the highest level of linguistic diversity in the country.  The state ranks second in America for ethnic, religious, household-size, and educational-attainment diversity.

The Golden State’s ranking is also boosted by its economy, which WalletHub call’s the country’s third most diverse. And while California’s powerhouse of an economy is most often associated with the high-tech sector, a recent SmartAsset study found that the state’s fastest-growing industry between 2015 and 2016 was actually transportation and warehousing, particularly tourism transportation.

In a separate analysis released earlier this year, WalletHub ranked four California cities among America’s most diverse: Los Angeles (No. 7), Long Beach (No. 9), San Jose (No 16), and San Diego (No. 19).

So why is diversity beneficial to American society? WalletHub asked a panel of professors, one of whom pointed out that a diverse society theoretically means a wider array of skill sets among employees, which leads to higher levels of entrepreneurship. Also, research has supported the idea that diverse populations tend to be more cohesive than those that are more homogeneous.

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California’s August Job Gains Are Another Win

  • August was another solid month for job additions in California, with employers creating 44,800 positions. In addition, California’s unemployment rate remained at 4.2 percent, maintaining a historic low for the fifth consecutive month, according to the latest numbers from the state Employment Development Department.
  • The August increase was more than two-and-a-half times the gain seen over the last two years, confirming 2018’s strong labor market. In the last year, California has added a total of 348,900 jobs.
  • Considering the robust job increases recorded over the summer, California’s 2.1 percent employment growth is again trending above the national rate of 1.6 percent.
  • While job additions were solid, the state’s unemployment rate was unchanged, as labor-force growth continued to hold back employers. Over the last year, the state’s labor force has shrunk by 0.4 percent. With notable labor shortages, California employers may be pressed to move operations elsewhere in search of more workers.
  • In August, eight sectors added jobs, led by an 18,800 increase in the educational and health services sector, followed by a 7,700 gain in professional and business services and a 6,100 increase in government jobs. The construction industry rebounded from last month’s losses, creating 5,200 jobs. The manufacturing and mining and logging sectors reported declines.
  • Over the past year, nine of California’s 11 major industries have added jobs. The top three gaining industries were educational and health services, with about one-fifth of total jobs added, followed by professional and business services and leisure and hospitality. In total, those three sectors created about 60 percent of all jobs. While the mining industry is back in positive territory on an annual basis, the largest losses were in other services, down by 1,100 jobs from last year.
  • All California metropolitan areas again saw employment rise over the past three months.
  • San Francisco and San Mateo counties added 2,800 jobs from July, and the unemployment rate dropped to 2.3 percent in August. From July, public-educational services saw the largest growth in jobs as schools returned to session. The finance and insurance industries, along with real estate and rental and leasing, were the second-largest contributors to August’s job growth. After many months of employment gains, the leisure and hospitality sector saw significant payroll losses, along with other services. Over the year, the professional and business services sector was the fastest-growing industry, with 10,000 jobs added, though the information sector had another strong month of 4,100 job additions. The other industries that created jobs include educational and health services — particularly jobs in health care and social assistance. The other services and trade, transportation, and utilities industries posted employment losses.
  • Santa Clara and San Benito counties added 3,200 jobs in August, with most coming in public- and private-education services. The professional and business services sector also posted gains — mostly in administrative and support services. The finance and insurance industries reported losses. Over the year, the two counties created 33,500 jobs, with education and health services leading the pack. The manufacturing, professional and business services, and information sectors reported solid annual increases. Other industries with gains of more than 1,000 jobs include construction, government, and financial activities.
  • Alameda and Contra Costa counties added 4,800 jobs, with most coming from the trade, transportation, and utilities sector. The health care and social assistance, other services, financial activities, and professional and business services industries posted gains, while manufacturing and construction reported losses. Over the year, the two job-gain leaders have been professional and business services and trade, transportation, and utilities, though other major industries have posted substantial additions as well.
  • Marin County’s unemployment rate dipped to 2.4 percent in August, with 1,000 jobs added from July and 3,200 new jobs from the same time last year. On an annual basis, most jobs gained in Marin County were in the educational and health services sector, followed by construction and trade, transportation, and utilities.
  • Sonoma County’s unemployment rate declined to 2.7 percent, and the region posted a gain of 2,500 jobs since July and 4,700 year over year. In August, most of the gain was in the government sector, followed by manufacturing. Over the year, the educational and health services industry created twice as many jobs as manufacturing, the second-largest gaining sector. The professional and business services, financial activities, and government industries reported the biggest losses.
  • Napa County’s unemployment rate decreased to 2.8 percent in August, with 300 jobs created from July and 100 additions year over year. Annual gains were driven by the leisure and hospitality sector, while the losses stemmed from manufacturing and trade, transportation, and utilities.
  • Los Angeles County added 23,500 jobs in August, with the unemployment rate unchanged at 4.5 percent. In August, the professional and business services sector led gains in all industries, with administrative and support and waste services accounting for 85 percent of the increase. Health care and social services reported strong growth, but educational services showed losses. The motion-picture and sound-recording industries drove most of the gain in the information sector. The accommodation and food services and arts, entertainment, and recreation industries reported losses. Over the year, Los Angeles County added a total of 62,000 jobs, a 1.4 percent gain, but still lags the Bay Area in employment growth rate and gains in higher-paying industries. The leisure and hospitality industry continues to lead the annual employment gains.
  • The second-largest increase in Los Angeles County was in the health care and social-assistance sector, followed by administrative and support; waste services; and professional, scientific, and technical services. The information industry also posted a solid gain, with more than 70 percent of new jobs coming from the motion-picture and sound-recording sector. The government sector posted losses, with most of the reductions coming from government education.

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.

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Rising Housing Costs Hit the Bay Area’s Most-Affordable Communities the Hardest

Executive Summary:

  • Bay Area home sales decreased by 11 percent year over year in August, the second-largest decline following June’s 10 percent drop, dragging year-to-date sales down by 2 percent.
    • Marin and Napa counties, however, saw increased sales — a positive reversal from previous months.
    • Homes sales slowed notably in Alameda and Contra Costa counties compared with previous months of strong growth.
    • Sales of homes priced between $2 million and $3 million came to a screeching halt in August.
  • Inventory continued to improve, up by 5 percent from August 2017 after 16 consecutive months of year-over-year declines.
    • Eighty percent of the supply increase came from more inventory in Santa Clara County, followed by Sonoma and Alameda counties.
    • Other counties also had slightly more inventory except for San Francisco.
    • Most of the increase in inventory was for homes priced between $1 million and $2 million.
  • The Bay Area’s median home price rose by 12 percent on an annual basis. Santa Clara County continued to post nearly double that rate of appreciation, with prices up by 21 percent year over year.
  • Slowing price growth that started in the spring continued in all Bay Area counties except Napa.
    • Slowing price growth was most notable in Santa Clara County, followed by Marin and Contra Costa counties.
  • Absorption rates continued to decline in Silicon Valley and Marin County, followed by Sonoma County.
  • Overall, Bay Area absorption rates continued to trend lower, falling from 43 percent last August to 37 percent now but in line with August 2016.
  • Santa Clara County posted the largest absorption-rate decline, followed by Alameda and Sonoma counties. Price reductions also rose, from 15 percent last August to 19 percent today.
  • Affordability concerns are impacting budget-constrained buyers, especially in Sonoma County.

August home sales activity in the Bay Area posted another notable decline from a year ago, with sales down by 11 percent and across most counties. With the substantial August decline, year-to-date sales are now 2 percent below last year. Marin and Napa were the only two counties that saw sales increase from last year, which is a positive improvement from declines recorded in previous months. Alameda, Contra Costa, and San Francisco counties, which were faring relatively better this year, also posted sales declines in August, with activity in Alameda down by 13 percent and sales in San Francisco down by 4 percent.

Sales of homes priced above $1 million also posted slower growth than earlier in the year, up by 8 percent from last August. Nevertheless, sales of homes priced between $2 million and $3 million came to a screeching halt in August after 18 consecutive months of year-over-year increases. Almost the entire decline came from the drop of sales in that price range in Santa Clara County. Other counties, particularly San Francisco, continued to post more sales of homes priced between $2 million and $3 million. By contrast, sales of homes priced between $1 million and $2 million and above $3 million continued trending higher than last year.

Figure 1 summarizes August year-over-year home sales changes by county and by price ranges. Contra Costa was the only county where declines in sales spread across all price ranges. In Marin County, the previous two months of declines in sales of homes priced less than $3 million reversed in August and showed improvement over last year. Also, San Francisco and San Mateo counties continued to show strong growth in all price ranges in which inventory was available. Lastly, sales of homes priced higher than $3 million showed slower increases or declines in some areas after three months of solid improvement.

Figure 1: August year-over-year home sales changes by Bay Area County and price range

Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018

Figure 2 illustrates the three-year trend in sales of homes priced $3 million and higher, with activity peaking in May at 255 sales. Even with the slower increase in August, year-to-date sales are 32 percent above last year, with all counties except Marin and Napa seeing strong increases. Marin County has generally had a comparably slower increase in sales activity since the beginning of 2018 than other counties, while Napa is the only county to register an overall decline compared with last year.

Figure 2: Number of $3 million-plus home sales in the Bay Area since January 2015.

Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018

Bay Area inventory conditions continued to improve in August, marking the second straight month of year-over-year increases. Eighty percent of the overall 5 percent supply increase came from Santa Clara County, followed by Sonoma and Alameda counties. In Santa Clara County, inventory rose by 20 percent, while Sonoma and Alameda counties saw supply increase by a respective 15 percent and 7 percent. The other counties either showed a small increase or a decline. San Francisco continued to post a large annual decline in the number of homes for sale. Figure 3 summarizes inventory changes by region and price range. The buildup in inventory was primarily in the $1-million-to-$2 million range in Santa Clara and Alameda counties, though a few other counties saw some gains. Overall inventory was up by 20 percent for $1-million-to-$2 million homes, up by 12 percent for $2-million-to-$3-million homes, and up by 4 percent for homes priced higher than $3 million. The most affordable inventory continued to decline in all regions but Sonoma County, where the supply of homes priced below $1 million increased by 23 percent.

Figure 3:  August annual changes in inventory by Bay Area county and price range

Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018

Figure 4 breaks down inventory changes by ZIP code, with red and orange indicating declines and yellow and green indicating increases from last August. For example, green areas suggest an increase between 26 and 77 units compared with last August. Thus, although Sonoma County posted an overall increase in inventory, much of the gain was in the northern part of the county, while Sonoma Valley continued to see large supply declines. Areas with larger increases in inventory — more than 50 units per ZIP code — include communities around south San Jose, Saratoga, Milpitas, Fremont, parts of Oakland, Danville, Livermore, and Dublin. In Sonoma County, most of the increase was in Santa Rosa, which was largely impacted by last fall’s wildfires.

Figure 4: Year-over-year inventory changes by ZIP code

Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018

Nevertheless, despite slower sales activity and more inventory, home prices continued to increase. In August, the Bay Area’s median prices rose by 12 percent year over year, consistent with the previous month’s increase. Santa Clara County’s median price continued to grow at almost twice the rate of any other region, up by 21 percent from August 2017.

Figure 5 summarizes August median prices by Bay Area county, price changes from last August, and difference in median price growth between March and August.

In March of this year, appreciation hit a two-year high, with the Bay Area’s median price up by 19 percent year over year. Since March, median price growth has slowed to 12 percent annual growth. The only county where price growth has accelerated since March is Napa, where 2018 got off to a slow start but has since picked up. The fourth column in Figure 5 summarizes where changes from March have been the most notable. Despite still showing solid appreciation, Santa Clara County has seen prices slow the most, down from a 35 percent annual increase in March. Marin and Contra Costa counties followed, declining from a respective 15 percent and 10 percent annual growth rate in March. In contrast, Alameda and Sonoma counties have posted the smallest declines in growth since March.

The last column in Figure 5 summarizes year-to-date median price changes by county. Overall Bay Area home prices are up by 15 percent from the same period last year. Year-to-date price increases range from 6 percent in Napa County to 27 percent in Santa Clara County.

Figure 5: Median home prices and changes by Bay Area county

Source: Terradatum, Inc. from data provided by local MLSes, Sept. 7, 2018

Finally, other housing-demand indicators suggest that trends that developed over the summer remained consistent in August. Absorption rates declined on an annual basis, from 43 percent last August to 37 percent now. Nevertheless, as noted in previous analyses, this summer’s market conditions were similar to those recorded in the summer of 2016. It appears that 2017 was the peak of the market demand. Again, absorption rates declined the most in Santa Clara County, down by 16 percentage points, from 55 percent last August to 39 percent today. Alameda and Sonoma followed in absorption-rate declines. On the other hand, San Francisco and Napa counties gained absorption momentum, with respective 6 percentage point and 3 percentage point increases from last year. Buyers of homes priced below $1 million are increasingly hitting their ceilings, with absorption rates dropping by almost twice as much as for higher-priced homes.

Similarly, price reductions are picking up, from 15 percent last August to 19 percent now, with most of the increase coming from Santa Clara County, followed by San Mateo County. However, as anticipated, affordability concerns are impacting budget-constrained buyers the most, with relatively larger reductions occurring for homes priced below $1 million and especially in Sonoma County.

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.

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