Most Bay Area Housing Markets Are Not Overvalued

  • Home prices grew by 7.6 percent in California and 7.9 percent in the San Francisco metropolitan area on an annual basis in October.
  • The San Francisco, San Rafael, Napa, Vallejo, and Oakland metro area housing markets are currently considered within their normal value ranges, while Santa Rosa and San Jose are overvalued.
  • By 2022, all Bay Area housing markets except San Rafael are projected to be overvalued.

Despite the high cost of purchasing a home in the Bay Area, most local markets are still within their normal value ranges, although that is not projected to be the case five years from now.

That’s according to CoreLogic’s latest U.S. Home Price Insights report, which says that U.S. home prices grew by 7 percent year over year in October. Appreciation in California and the San Francisco metro area outstripped the national rate, growing by a respective 7.6 percent and 7.9 percent. In a statement accompanying the report, CoreLogic Chief Economist Frank Nothaft noted that the national home price has grown in excess of 6 percent for four straight months, the longest such streak in more than three years.

“This escalation in home prices reflects both the acute lack of supply and the strengthening economy,” Nothaft said.

Even with continued price appreciation, CoreLogic says that most Bay Area markets are not overvalued. The San Francisco, San Rafael, Napa, Vallejo, and Oakland metro areas remain within normal value ranges, among the 36 percent of U.S. housing markets that fall into that category. Nothaft told that the San Francisco metro area, where the median home sales price is $899,050, has always been an expensive place to buy a home, hence its normal valuation.

Santa Rosa and San Jose are the two Bay Area cities that are among the 50 percent of U.S. real estate markets currently considered overvalued. Still, Nothaft told that he doesn’t project an imminent housing crash but rather a leveling of appreciation rates in 2018 as mortgage rates rise. CoreLogic expects the opposite for California’s housing market, where home prices are forecast to grow by 8.2 percent by October 2018.

Although most Bay Area housing markets are currently within their normal value ranges, the picture looks different five years from now. By 2022, CoreLogic expects that all Bay Area housing markets for which it tracks data will be overvalued except San Rafael.

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U.S. Housing Inventory Crunch to Ease in 2018, Forecast Says

  • More housing supply is expected to hit the market by next fall, though the inventory of starter homes will be slower to improve.
  • The U.S. median home sales price is projected to increase by 3.2 percent in 2018, down from 5.5 percent this year.
  • Home prices in the are projected to increase by a respective 5.14 percent and 4.37 percent in the San Francisco and San Jose metropolitan areas.

U.S. Housing Inventory Crunch to Ease in 2018, Forecast SaysMore homes should hit the market next year, causing appreciation to slow, although price growth in the Bay Area’s two largest metropolitan areas is projected to outstrip the national rate.

In its 2018 housing market forecast, says that inventory should move into positive territory next fall for the first time in three years. The increased supply is projected to initially come at middle and high price points, while entry-level home inventory will take longer to improve.

“Next year will set the stage for a significant inflection point in the housing shortage,” Director of Economic Research Javier Vivas said. “Inventory increases will be felt in higher priced segments after [the] spring home buying season, which we expect to take hold and begin to provide relief for buyers and drive sales growth in 2019 and beyond.”

Despite tighter supply conditions for starter homes, the number of millennial homebuyers is expected to increase due to that generation’s significant size. By the end of next year, millennials are projected to account for 43 percent of homebuyers with a mortgage, up from 40 percent this year. predicts that price growth will moderate as more homes come to market, from 5.5 percent this year to 3.2 percent in 2018. Appreciation in the Bay Area’s two largest metro regions is expected to outpace the nationwide rate, with home prices in the San Francisco-Oakland-Hayward and San Jose-Sunnyvale-Santa Clara metro areas to grow by a respective 5.14 percent and 4.37 percent.

Those projections are similar to ones forecast at Pacific Union’s Nov. 15 San Francisco Bay Area Real Estate and Economic Outlook to 2020. Our forecast calls for 4 percent appreciation in both the San Francisco and San Jose metropolitan areas in 2018. (Note that the Pacific Union and forecasts define the San Jose and San Francisco metropolitan areas in different ways.)

Both Pacific Union’s outlook and’s forecast note the potential impacts of proposed tax changes on the real estate market and how they could negatively affect homebuyers, particularly those in higher-priced areas of the country. For more in-depth context on the implications of the proposed tax changes, read this analysis by Pacific Union Chief Economist Selma Hepp.

To watch the one-hour presentation of Pacific Union’s San Francisco Bay Area Real Estate and Economic Outlook, click here. To watch a presentation of our first-ever forecast for the Los Angeles real estate market, click here.

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Key Takeaways From Pacific Union’s Los Angeles Real Estate and Economic Forecast to 2020

Key Takeaways From Pacific Union’s Los Angeles Real Estate and Economic Forecast to 2020On Nov. 29, Pacific Union held its first annual Los Angeles Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting in order to project market activity through 2020. Below are some key, high-level takeaways from the live event. To watch the full one-hour presentation, click here.

  • Both short-term and medium-term, most housing markets across the country remain at low to normal risk.
  • Mortgage rates are projected to grow by about 80 basis points by 2020, increasing annually at about a 20 basis-point pace.
  • The Los Angeles housing market is currently at normal risk, with some potential increase over the next couple of years.
  • The Los Angeles economy continues to grow solidly, with all job sectors except motion picture and sound recording showing positive year-over-year growth. Specific occupations in this sector include actors, audio- and video-equipment technicians, cashiers, motion-picture projectionists, producers, and directors, whose average annual wage is around $96,000.
  • Nevertheless, income groups with higher relative increases in employment over the last year have been those making between $140,000 and $200,000, which has boded well for the local economy and housing market.
  • The Los Angeles economy has also benefited from solid stock-market gains of large, local, publicly traded companies by market cap. For example, Bank of America, Boeing, Activision Blizzard, and CBRE Group have all seen year-over-year increases in stock values of more than 50 percent.
  • Proposed tax changes could significantly reduce future homebuyers’ deductions, making it more expensive to own. Also, the proposed changes could further disincentivize current homeowners from selling, thus exacerbating the region’s inventory shortage. According to an analysis by the Fisher Center for Real Estate & Urban Economics, the elimination of state and local income-tax deductions would cost middle- and high-income Californians an additional $37.9 billion in taxes (at a 35 percent federal tax rate), which translates to a 2 percent to 3 percent decrease in economic activity in California.
  • This year saw more strong home price growth in California. In Los Angeles, the median home price increase averaged 8 percent year to date through September 2017.
  • An analysis of individual Los Angeles communities shows that there is continual variation in home price fluctuations. Changes are driven by local conditions and relationship to prices in neighboring communities, but most importantly by jobs and income growth.
  • In segmenting the markets by median home price changes, we use four categories: normal, double-digit, heated, and slowing.

Normal (up to 10 percent median price growth): While the majority of Los Angeles markets fall into this category, lower single-digit percent median price growth was more evident across South Valley neighborhoods such as Van Nuys, Calabasas, Arcadia, and Sherman Oaks. Higher single-digit percent growth was seen in areas adjacent to central Los Angeles, such as Culver City, Studio City, and Highland Park, but also in more affordable communities on the eastern side of the metro area. Santa Monica, West Hollywood, and Pasadena posted solid 5 percent to 6 percent median price growth. These relatively higher-priced areas saw normalization in appreciation from last year, when median prices increased by 19 percent in Calabasas, 16 percent in Malibu, and 13 percent in West Hollywood. Median homes prices in areas with growth up to 10 percent averaged about $640,000.

Double-Digit (10 percent to 20 percent median growth): Somewhat contrary to expectation, higher appreciation was seen in relatively more expensive neighborhoods, where median prices averaged about $820,000. Many of these markets are again adjacent to central, desirable Los Angeles neighborhoods but offer a slight affordability differential, including Compton, Inglewood, Toluca Lake, North Hollywood, Valley Glen, and East Los Angeles. This range also includes neighborhoods that have solidly benefited from the Silicon Beach tech influx, such as Manhattan Beach and Venice. Pacific Palisades also enjoyed double-digit percent price increases.

Heated (20 percent-plus median price growth): ZIP codes in Playa Vista — also popular with Silicon Beach workers — South Pasadena, and Beverly Hills were among the few in the Los Angeles metro area to see price appreciation of more than 20 percent. Those three cities’ median price averaged about $1.5 million year to date, with Beverly Hills at $2.8 million. A few neighborhoods in South Los Angeles also posted median price gains of more than 20 percent.

Slowing (median price decline to flat): Neighborhoods where prices lost steam over the last year averaged a median price of about $943,000. Many saw strong appreciation in the year prior and have now experienced a pause in buyer enthusiasm, including Westlake Village, Rolling Hills, and El Segundo, where price growth exceeded 20 percent in 2016. On the other hand, San Marino, where Chinese buyers drove demand in 2016, is now seeing a pause due to China’s amended restrictions on capital outflows.

  • Affordability and access to transportation 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. Overall, homebuyers have experienced heightened competition, with more homes selling over the asking price — 42 percent versus 38 percent last year. Areas where more than six in 10 homes sold for above asking price include South Pasadena, Culver City, and East Los Angeles. Fewer homes sold over the asking price in areas such as Malibu, Calabasas, and Beverly Hills.
  • Condominium prices in Los Angeles for newly constructed units continued to firm up, with October prices up 6 percent year over year to $795 per square foot. Resale pricing was also up solidly by 31 percent to $732 per square foot. Following the influx of new construction over the last couple of years, such inventory was down by 30 percent in October on an annual basis, with about 400 units currently on the market. Absorption has remained steady, averaging 14 units per month over the last year. Going forward, there are about 12,000 units currently under construction; however, the development pipeline is heavily weighted with for-rent projects instead of for-sale condominiums. Slow growth in condominium construction should ensure solid price growth in 2018.
  • From 2018 to 2020, home prices are projected to increase by 13 percent in Los Angeles, with most of the growth occurring in the next year.
  • Lastly, the panel agreed that prices will level off through 2020 rather than decline as they did following the housing crisis a decade ago. 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.

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U.S. Foreclosure Rate Falls to 10-Year Low

  • The U.S. foreclosure rate fell to 0.7 percent of properties with a mortgage as of June, with 4.5 percent of borrowers more than 30 days delinquent on payments.
  • California’s foreclosure rate was 0.2 percent, with 2.8 percent of borrowers more than 30 days delinquent.
  • Foreclosure rates in the Bay Area ranged from 0.2 percent in San Francisco, Santa Rosa, and Napa to 0.4 percent in San Jose.

Home price appreciation and a thriving job market have pushed down foreclosures and mortgage delinquencies across the country, with California and the Bay Area posting lower numbers than the national average.

CoreLogic’s most recent Loan Performance Insight Report, which tracks the health of the mortgage market through June of this year, puts the U.S. foreclosure rate at 0.7 percent, the lowest in a decade. The number of borrowers who were more than 30 days delinquent on their mortgage payments also dropped from one year earlier, to 4.5 percent. CoreLogic Chief Economist Frank Nothaft attributed the declines to home price growth, up 6 percent since June 2016, and an economy that added 2.2 million jobs over the past year.

California’s foreclosure rate was 0.3 percent as of June, down from 0.4 percent one year ago. The 30-plus-day delinquency rate also declined on an annual basis to 2.8 percent of properties with a mortgage.

The San Francisco, Santa Rosa, and Napa core-based statistical areas had slightly lower foreclosure rates than the statewide average, all at 0.2 percent, while San Jose had a 0.4 percent foreclosure rate. A seperate study from ATTOM Data Solutions puts foreclosure rates even lower for the first half of 2017: 0.11 percent in San Jose, 0.15 percent in San Francisco, and 0.17 in Santa Rosa.

The amount of borrowers more than a month delinquent on mortgage payments ranged from 1.7 percent in Santa Rosa to 4.9 percent in San Jose. Both 30- and 90-day delinquency rates dropped from June 2016 in all Bay Area regions for which CoreLogic tracks data.

Nothaft said that he expects mortgage-delinquency rates to further decrease over the next year, driven by continued job growth and projected home price appreciation of 5 percent.

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Oakland Remains America’s Most Difficult Home-Flipping Market

  • Oakland, San Francisco, and San Jose rank among the country’s 10 toughest real estate markets for home flippers.
  • San Francisco has the highest kitchen and bathroom remodeling costs in the country.
  • Fremont, San Jose, and San Francisco count among the 10 U.S. cities with the highest overall quality of life.

Expensive prices and hefty remodeling costs once again place the Bay Area’s three largest cities among the toughest real estate markets in the U.S. for flipping homes.

WalletHub’s annual list of the best and worst home-flipping markets ranks the 150 largest cities based on 22 criteria in on a scale of zero to 100. The three major categories that the study uses to grade a real estate market’s flip-friendliness are market potential, remodeling costs, and quality-of-life factors.

As in last year’s study, Oakland ranks dead last for home-flipping potential, with an overall score of 31.97. WalletHub places Oakland as one the six U.S. cities with the highest median home purchase price, along with three other Bay Area cities: San Jose, San Francisco, and Fremont. Those four cities are on average 14 times more expensive than the real estate markets with the lowest median purchase price.

San Francisco is the nation’s fourth most difficult real estate market for home flippers, notching a 34.38. Potential home flippers in the city will incur the highest average kitchen and bathroom remodeling costs in the country, four to five times highest than the least expensive markets for renovations.

San Jose also counts among the nation’s 10 least-friendly flip cities, scoring a 37.78. The city tied its neighbor to the north for the highest kitchen remodeling costs and ranked in the top five, along with Fremont, for the highest overall home-renovation costs. San Jose also has one of the lowest flipping returns in the U.S.

While Bay Area cities may not rank high for flipping based on financial considerations, they perform well on the quality-of-life metric, which includes criteria such as the quality of schools, access to parks, family-friendliness, and economic conditions. Three Bay Area cities rank among the 10 best places in America for quality of life: Fremont (No. 3), San Jose (No. 9), and San Francisco (No. 10).

WalletHub names San Francisco the No. 1 city in the country for walkable park access. Earlier this year, the Trust For Public Land gave San Francisco a perfect score of 100 for park access, finding that it is the only major American city where all residents live within a 10-minute walk of one of its 220 parks.

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Bay Area Buyers Make the Nation’s Largest Down Payments

  • Homebuyers in the San Jose and San Francisco metro areas placed the largest down payments in the second quarter, a respective 25.2 percent and 22.3 percent.
  • Nearly one-quarter of U.S. home purchase-loan originations involved a nonmarried co-borrower.
  • More than half of buyers with a mortgage in San Jose had a co-borrower, the largest amount in the country.

The Bay Area’s prolonged inventory drought has created an exceptionally competitive housing market, with the average property receiving anywhere from two to four offers and six in 10 homes selling for more than asking price. To successfully close a sale, local buyers are putting down much larger down payments than the national average, and a substantial number are leveraging co-borrowers to help them qualify for the mortgage.

That’s according to a recent report from ATTOM Data Solutions, which puts the median U.S. down payment at $18,850 as of the second quarter, representing 7.3 percent of the cost of a median-priced home. The median down payment is now at its highest level since the third quarter of 2014, when it was 7.4 percent.

Buyers in the San Jose and San Francisco metro areas put down about three times the U.S. average in the second quarter and the largest percentages in the country. In San Jose, the median down payment was $242,000, accounting for 25.2 percent of the median-priced $962,000 home. Buyers in San Francisco made down payments of $176,000, equaling 22.3 percent on a $790,000 property.

The report also found that co-borrowing is on the rise both nationwide and locally, as hopeful buyers look for a leg up on the competition. For all U.S. single-family homep-purchase loan originations in the second quarter, 22.8 percent involved nonmarried co-borrowers, up on both a quarterly and annual basis.

“Homebuyers are increasingly relying on co-borrowers to help with home purchases, particularly in high-priced markets where sizable down payments are necessary to compete,” ATTOM Data Solutions Senior Vice President Daren Blomquist said in a statement accompanying the report.

That’s certainly true in pricey California, where half of the top six cities for co-borrowing are located. San Jose had the highest share of co-borrowers in the U.S., at 50.9 percent. In Los Angeles and San Diego, the share of multiple borrowers was a respective 31.1 percent and 29.4 percent.

Even with a co-borrower, Bay Area homebuyers will still need significant down-payment savings to stand a decent chance of competing in the current market. Fortunately, as a blog post from the National Association of Realtors points out, there are some relatively simple sacrifices hopeful homeowners can make to save for down payment quicker, including skipping their morning coffee, bringing lunch to work, and cutting the cord on cable TV.

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