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The U.S. Housing Market: Despite a Demographic Push, Proceed With Caution

 

With California housing markets having decidedly shifted since the summer, the looming question is what comes next. Since 2014, Pacific Union has partnered with John Burns Real Estate Consulting to forecast the market for the upcoming three years. At our November 2017 forecast, we suggested that the John Burns Home Value Index would reach a plateau in 2018 (which we named a “table top”) and maintain that level through about 2020. The major difference between the current peak and the previous peak seen in the mid-2000s is that the current peak resembles a table top, while the last peak was characterized as a “mountain peak” — a peak followed by a large decline.

Source: 2017 Pacific Union Real Estate and Economic Forecast

A lot has happened since our last forecast, but our predictions remain similar.

While our annual forecast event has been postponed to the first quarter of 2019 as a result of the merger with Compass and the wildfires, I recently attended the JBREC annual summit in New York City, and here are the key takeaways.

  • While concerns over the housing market’s strength are rising, the major tailwind is the demographic force. With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next couple of years, thus creating a huge wave of potential homebuyers.
  • Online buyer behavior suggests that sales will remain solid in markets in the South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline over the next six months.
  • Interest-rate hikes following strong price growth over the last year took a large bite out of affordability, making it the biggest concern for California housing markets.
  • While technological advancements have the potential to reduce construction costs, supply constraints outweigh any potential savings in the short term.
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • Average annual price growth in six California metropolitan areas is projected at 6 percent in 2019 and 3 percent in 2020 before declining by 0.3 percent in 2021.

Long-Term View

Demographic Trends Are Propping Up Long-Term Demand

  • With U.S. millennials numbering 44 million, that generation’s largest age bracket (4.7 million people) will turn 32 years old over the next year, which is the median age of first-time buyers in the U.S. Considering a combined total of about 6 million new and existing homes sold annually in the U.S., millennials have the potential to create a huge wave of first-time homebuyers and account for a much larger share of total housing demand. First-time buyers currently comprise about one-third of all homebuyers.
  • These demographic forces suggest that 1.25 million more households per year over the next 10 years will need housing, which means that 1.375 million new units per year need to be built to meet demand through 2025 (including owner-occupied properties, second homes, and replacement of teardowns).
  • However, after 2025, America’s aging society will reduce the need for housing production since seniors create supply when they pass away or move into assisted-living facilities or their children’s homes. Thus, the net growth of new homes will decline to 230,000 units per year.

But Supply Constraints Make Homes Increasingly More Expensive

  • At the same time, meeting current demand has become increasingly more difficult, as builders take a large risk when buying raw land to entitle in their respective regions.
  • Based on a JBREC survey, buying raw land is perceived by builders as twice as risky as buying a few home-builder stocks, leading to fewer builders willing to make purchases in the current housing cycle.
  • In addition, builders face large labor shortages, which will not abate considering the nation’s aging demographics and immigration restrictions, both of which will lead to much higher construction wages.
  • However, technological advancements in the construction industry — such as building information modeling software, 3D printing, robotics, off-site technologies imported from overseas, and smart homes — have the potential to reduce costs dramatically.
  • Still, many costs will continue to increase:
  1. Lot shortages will keep land prices high.
  2. Labor shortages will keep building costs high.
  3. Inflation and potentially tariffs will keep materials costs high.
  4. Regulation-related costs are high in California.
  5. Significant off-site cost reductions for nicer single-family homes are years away.

Short-Term View

2018 Slowdown

  • Nationally, sales of newly built homes have been slowing all year, with a 13 percent year-over-year decline in October, bringing annualized sales to 553,000 new single-family homes, or 40 percent of the projected 1.3 million needed to meet demand.
  • What led to 2018’s slowdown:
    • Mortgage rates rose by 88 basis points this year, from 3.95 percent in January to 4.83 percent in October, resulting in at least an 11 percent increase in payments without accounting for price appreciation.
    • With price appreciation, Californians’ monthly mortgage payments are up by as much as 25 percent year over year:
      • Silicon Valley, up by 25 percent
      • San Francisco, up by 19 percent
      • The East Bay, up by 17 percent
      • Los Angeles, up by 14 percent
      • Nationwide, up by 13 percent
  • Each 100-basis-point increase in mortgage rates reduces borrowers’ purchasing power by about 7 percent.
  • The impact on affordability is vast, as 44 percent of American households earn less than $50,000 per year and the median U.S. income is $63,000.
  • In the Bay Area, the current minimum annual income required to purchase a median-priced home is more than $202,000, up from $90,000 in 2012. The median household income in the Bay Area averages about $100,000 in the eight local counties excluding Solano.
  • In Los Angeles, the current minimum annual income required to purchase a median-priced home is more than $112,000, up from $54,000 in 2012. The median household income is Los Angeles County is currently about $65,000.
  • Newly constructed homes cater to affluent homebuyers, with 60 percent of public builders across the U.S. now constructing homes with average prices higher than $400,000. In Los Angeles, the median new home price is $682,000, while in the Bay Area, it ranges from about $760,000 in Sonoma County to $1 million in Silicon Valley.
  • Only 24 percent of American renters can afford the median-priced new home today, and just 31 percent can afford a resale home.
  • And while there have been more listings on the market in recent months, inventory is still below average across all price tiers, especially for the most-affordable range, which is almost 50 percent below the average.
  • Lastly, the housing market’s performance and the current slowdown is not a nationwide trend — sales of existing home remain strong in the relatively affordable South.

What to Expect in the Months Ahead

  • The economy will remain healthy, boosted by low unemployment, continued hiring, and wage increases, but the rate of growth will slow.
  • Mortgage rates will likely reach 5.5 percent by the middle of 2019, leading to fewer home sales.
  • Historically, increases in mortgage rates when the economy was strong have generally had a small impact on activity, leading to a 7 percent to 10 percent decline in sales.
  • Online buyer behavior suggests that sales will remain solid in the markets in South (such as Charlotte, Houston, Raleigh, and Atlanta) but will decline in West Coast markets and some Northeastern markets, with California home sales expected to post a 2 percent to 7 percent decline.

What to Expect Beyond 2019

  • Rising rates will slow move-up homebuyer activity, with an 11 percent decrease in total home sales.
  • Mortgage availability has improved, though credit scores and proof of employment play a critical role (unlike during the early 2000s).
  • Affordability constraints are likely to drive builders to pivot down in price to smaller, higher-density, lower-specification homes in slightly less desirable locations. Also, builders are more likely to construct single-family rental properties.
  • The risk of a recession increases, with a 48 percent probability of a downturn within two years and a 64 percent chance within four years. Fifty-nine percent of economists forecast a recession in 2020.
  • However, housing risks vary by market:
  1. California housing markets generally rank normal to higher risk, with no market nationally categorized as very high risk.
  2. Affordability is the primary risk.
  3. A huge upside in the current housing market is homeowner equity, currently at $190,000 inflation-adjusted per U.S. owned household.
  • Other risks:
  1. A rapid acceleration in interest and mortgage rates shaking consumer and business confidence
  2. A decline in foreign buyer activity due to immigration policy or emerging market factors (such as currency, trade policy, local stock markets, or economic fluctuations)
  3. Immigration restrictions: There has already been a pull-back in H-1B visa approvals, which are critical for the tech sector in California; holders of these visas are also participants in local housing markets
  4. Excessive debt burdens (government, corporate, and consumer); if interest rates spike, they would have trouble repaying debt
  5. A stock market correction that could rattle consumer confidence and result in in job losses
  6. A “black swan,” or an unforeseen geopolitical event that triggers significant volatility in financial markets and the economy

California Outlook

  • The chart below shows the John Burns Home Value Index four-year outlook for median home price appreciation in six California metropolitan areas and/or divisions. The numbers indicate the average annual rate of growth or decline.
  • Because of affordability pressures, all six markets are projected to see notably slower price growth over the next three years.
  • Four of the six markets are forecast to see negative growth in 2021 of no more than 1.3 percent. However, all markets will see at least a 5 percent additional cumulative increase in 2019 and 2020 before the reversal in 2021.

Source: John Burns Real Estate Consulting

Taken together, with input from JBREC and the nation’s largest home builders, our final takeaway is that buyers and investors should proceed with caution but proceed nevertheless.

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.

(Promotional photo: iStock/RgStudio)

 

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Bay Area Home Prices Are Growing at More Than Twice the National Rate

  • The median sales price for a U.S. existing single-family home was $266,900 in the most recently completed quarter, a year-over-year increase of 4.8 percent.
  • The San Jose metropolitan area remains the nation’s most expensive real estate market, with the $1,300,000 median sales price up by 11.6 percent from the third quarter of 2017.
  • San Francisco’s $989,000 median sales price increased by 9.9 percent on an annual basis, making it the country’s second most costly place in which to purchase a home.

Although U.S. and Bay Area home price growth moderated from the second quarter to the third quarter, appreciation in the latter region’s two largest cities continued to outpace the national rate.

The most recent quarterly report from the National Association of Realtors puts the median sales price for an existing U.S. single-family home at $266,900 in the third quarter, a year-over-year gain of 4.8 percent. That’s a very slight decline from the second quarter, when NAR recorded annual appreciation of 4.9 percent and American home prices reached a new all-time high.

As in the second quarter, home prices rose in more than 90 percent of the 178 metropolitan areas included in the report. Eighteen housing markets posted double-digit percent annual appreciation, down from 24 in the second quarter.

San Jose was among those markets with the highest home price growth, with the $1,300,000 median sales price up by 11.6 percent from the third quarter of last year. In the second quarter, NAR put year-over-year appreciation in San Jose at 18.7 percent, the most in the nation. The region remains America’s most expensive housing market.

In San Francisco, the nation’s second most expensive place to buy a home, prices grew by 9.9 percent year over year, ending the quarter at $989,000. Like San Jose, San Francisco saw home price growth relax from the second quarter, when it registered 12.6 percent.

Nationwide, inventory conditions improved modestly, with 1.88 million homes on the market, up by 1.1 percent from the third quarter of 2017. The slight supply increase did not translate to higher sales, which were down by 2.6 percent year over year. In a statement accompanying the report, NAR Chief Economist Lawrence Yun noted that while there are an adequate number of homes on the market to satisfy move-up buyer demand, the inventory of entry-level properties remains insufficient.

“A strong economy and consistent job growth should be driving up home sales; however, would-be homebuyers are struggling to find a home they can afford,” he said. “As mortgage rates continue to rise, reaching the decade’s highest rates this quarter, an increase in the supply of affordable homes has become even more important to help temper price growth across the country.”

Affordability challenges are no stranger to Bay Area homebuyers. The latest Housing Affordability Index from the California Association of Realtors says that only about one in five households in the nine-county region earned enough to purchase the median-priced $950,000 home in the third quarter, compared with more than half of U.S. households.

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Silicon Valley Claims the Nation’s Top 5 Neighborhoods for Equity-Rich Homeowners

  • There were 14.5 million equity-rich U.S. homeowners in the third quarter, a new record high.
  • As in previous quarters, the San Jose and San Francisco metropolitan areas had the most equity-rich homeowners.
  • Nearly 90 percent of owners in three Sunnyvale ZIP codes are classified as equity-rich, the most in the country.

The number of U.S. homeowners who are considered equity-rich reached a new high in the third quarter, with Bay Area cities once again leading the pack for that metric.

ATTOM Data Solutions’ latest U.S. Home Equity & Underwater Report says that there were 14.5 million equity-rich properties in the third quarter, defined as those where the owner owes 50 percent or less of a home’s value against the mortgage. That’s a new all-time high since the company began tracking such data and represents 25.7 percent of Americans with a mortgage.

In a statement accompanying the report, ATTOM Data Solutions Senior Vice President Daren Blomquist said that even though price appreciation has recently moderated, more owners are accruing equity because of the length of time that they have lived in their homes. Several weeks ago, the company’s third-quarter report that found owners who sold in the third quarter had been in their homes for an average of 8.23 years, the longest amount of time on record.

As in the second quarter, California boasted the highest share of equity-rich homeowners in the nation, at 42.5 percent. On the flip side on the coin, just 4.1 percent of Golden State properties are categorized as seriously underwater, meaning those where the owner owes 25 percent or more than the home’s estimated market value.

The San Jose metro area continues to lead the country for the number of equity-rich homeowners, at 73.9 percent in the third quarter. San Francisco followed in the No. 2 spot, with 59.8 percent of properties classified as equity-rich, while 47.6 percent of owners in No. 3 Los Angeles have at least 50 percent equity in their homes.

In many Silicon Valley communities, the number of equity-rich homeowners is even higher than in the overall metro area. Sunnyvale claims the nation’s top three ZIP codes with the most equity-rich owners: 94087 (87.1 percent), 94085 (86.7 percent), and 94086 (86.7 percent) Redwood City‘s 94063 ZIP code and San Jose’s 95130 round out the top five, with a respective 85.9 percent and 85.7 percent of properties deemed equity-rich.

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California Housing Affordability Inches Up in the Third Quarter

  • A new report form the California Association of Realtors puts the number of households who can afford a single-family home in the state at 27 percent in the third quarter, a slight increase from the previous quarter.
  • Affordability conditions in the nine-county Bay Area improved from the second quarter, rising to 21 percent, but were down on an annual basis.
  • In Los Angeles County, 22 percent of households can afford to purchase a home, down from the second quarter and identical to one year earlier.

Homes in California and the nine-county Bay Area were slightly more affordable than they were in the second quarter, though less than one-third of households meet the minimum income requirements to qualify for a mortgage. Meanwhile, affordability conditions in Los Angeles County trended in the opposite direction.

The California Association of Realtors’ latest Housing Affordability Index says that 27 percent of state households could afford to purchase the median-priced $588,530 existing single-family home in the third quarter, up from 26 percent in the second quarter but down from 28 percent at the same time last year. California households need to earn a minimum annual income of $125,540 to afford to make the $3,140 monthly housing bill, assuming a 20 percent down payment and a 30-year, fixed rate mortgage at 4.77 percent.

Less than 30 percent of California residents have been able to afford a home for five of the past eight quarters. Affordability peaked in early 2012, when nearly 60 percent of Golden State households met the minimum qualifying income requirements.

In the Bay Area, 21 percent of residents could afford to buy the median priced $950,000 home, up from the second quarter but down from 23 percent in the third quarter of 2017. Bay Area households need minimum qualifying incomes of about $200,000 to make monthly mortgage payments that average $5,070. Across the region, the number of households who can afford a real estate purchase ranges from 14 percent in San Mateo County to 38 percent in Solano County.

As California’s two most expensive counties, with third-quarter median sales prices of $1,600,000, San Mateo and San Francisco homebuyers must make nearly $350,000 per year and can expect to shell out monthly mortgage payments of more than $8,500. Marin and Santa Clara counties followed, with required annual incomes of about $277,000 to make the monthly payments of $6,930 on the median-priced $1,300,000 home.

In Los Angeles County, 22 percent of residents could afford the median-priced $628,940 single-family home, down from 26 percent in the second quarter and unchanged from one year earlier. Homebuyers in Los Angeles must pull in $134,160 each year to pay monthly mortgage bills of $3,350.

California home shoppers will almost certainly continue to grapple with affordability challenges as mortgage rates increase. The latest numbers from Freddie Mac put 30-year, fixed-rate mortgages at 4.83 percent for the week ended Nov. 1, up from 3.94 percent at the same time last year. A recent CAR forecast projects that mortgage rates will reach 5.2 percent by the end of 2019, which would reduce the number of Golden State households who can afford to buy a home to 25 percent.

Source

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Bay Area Households Are the Nation’s Best at Sticking to a Budget

  • San Jose residents ranks as America’s best for living within their means, thanks to having the country’s lowest debt not related to housing and smallest revolving credit usage.
  • San Francisco places No. 2 for budget consciousness, with annual incomes that are more than $30,000 higher than the national median.
  • Homeowners in all six of the California cities included in the analysis have mortgage-debt-to-income balances higher than 100 percent.

A woman in front of a computer calculating her budgetAlthough San Jose and San Francisco were once again the nation’s two most expensive housing markets in the third quarter, residents of those cities have their borrowing habits very much under control.

A few months ago, a survey from CareerBuilder found that nearly 80 percent of Americans are living paycheck to paycheck to meet their expenses. To find out where consumers are the best (and worst) at living within their financial means, LendingTree examined August 2018 credit data from its user base and compared it with household-income numbers, ranking 50 U.S. cities on a 100-point scale.

San Jose tops the list of places where residents have the best control of their finances, notching a total score of 73.6. The city has the lowest amount of non-housing debt in the country, at 23.5 percent of income, as well as the lowest revolving credit usage of 27.3 percent. Additionally, San Jose millennials owe an average of $18,000 in debt not related to housing — $5,000 less than young people nationwide — and have the country’s lowest student-loan balances.

San Francisco ranks No. 2 for budget-conscious residents, scoring a 70.6. The City by the Bay had the country’s second lowest nonhousing debt and credit-usage numbers behind San Jose, a respective 27.7 percent and 27.4 percent.

Of course, when judged by mortgage debt as a percentage of income, Bay Area residents do not fare as well. San Franciscans’ mortgage balances equal 123.9 percent of their earnings, while San Jose homeowners have a housing debt-to-income ratio of 107.0 percent. In fact, homeowners in all California cities included in the list have mortgage balances that are more than 100 percent of their yearly earning: Los Angeles (121.0 percent), Sacramento (126.5 percent), and San Diego and Riverside (both 131.1 percent).

So why are residents of America’s most-expensive places to call home so good at managing their finances? High incomes are partially responsible; as LendingTree points out, the median annual income in San Francisco is about $88,000, compared with the national median income of $55,300. The fact that Bay Area residents tend to have higher education levels helps them earn such large incomes in a region with plentiful, high-paying technology jobs.

LendingTree offers some common-sense tips for prospective homebuyers who are fretting about their spending and budgeting habits, starting with consolidating debt and regular credit-score monitoring. And besides creating a monthly budget and paying bills on time, consider refinancing student, automobile, or mortgage loans to get a more favorable rate.

(Photo: iStock/mapodile)

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Bay Area Cities Rank Among the Nation’s Best Small and Midsize U.S. Places to Live in 2018

  • Santa Clara and Hayward rank among the top 10 most livable medium-sized American cities this year.
  • Hayward’s median home value has shot up by 95 percent over the past five years.
  • A separate analysis ranks Los Altos as the country’s seventh-best small U.S. city to call home.

Despite the Bay Area’s top-dollar cost of living, the region’s rapid home price appreciation and booming economy have helped land a handful of local cities on lists of the best places to live in America.

A new SmartAsset study ranks the top 25 medium-sized U.S. cities — defined here as those with populations higher than 100,000 but excluding the 100 largest — on a 100-point scale based on median home value change, monthly housing costs, unemployment and poverty rates, and median annual household income. By those criteria, Santa Clara is the country’s third most livable U.S. city, notching a near perfect score of 99.46. Santa Clara gets a boost from its five-year median home value change of 66 percent but is hurt by its $2,316 monthly housing expenses, the second highest of any city included on the list.

The Alameda County city of Hayward comes in at No. 10 on the list, with an 89.34. Over the past five years, home values in Hayward have skyrocketed by 95 percent, the highest rate of appreciation recorded in any of the 25 cities included in SmartAsset’s analysis.

Two other Bay Area cities rank among the best midsize communities in the nation: No. 12 Sunnyvale (88.12) and No. 20 Concord (80.30). Sunnyvale households pull in the highest annual incomes on the list — $134,234 — but also are burdened with the largest monthly housing costs of $2,329.

A separate analysis by WalletHub ranks America’s best small cities, also on a 100-point scale and using similar metrics as Smart Asset. Of the more than 1,200 communities include in the report with populations between 25,000 and 100,000, Los Altos comes in at No. 7, with a score of 69.06. While the wealthy Silicon Valley city ranks in the top 10 in the country for overall economic well-being, it is predictably much lower for housing affordability.

WalletHub gives Los Altos a special mention for being among the nation’s top five places where the highest percentage of the population holds at least a high-school degree. And while San Mateo County’s Burlingame does not appear in the upper part of the best-small-cities rankings, it ties five other U.S. cities for the most income growth.

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How Long Will a Home Purchase Impact Californians’ Credit Scores?

  • The average American can expect their credit score to decline by 15 points after buying a home, with the total recovery time taking about 10 months.
  • San Jose and San Francisco homebuyers have exceptionally high credit scores but will need to wait roughly a year before their ratings return to normal.
  • Making on-time mortgage payments will help boost new homebuyers’ credit ratings, as will the diversification of their accounts by owning real estate.

San Francisco homebuyers have some of the best credit scores in the country, but they also face one of the longest roads to recovery after completing their real estate purchase.

A new analysis by LendingTree Chief Economist Tendayi Kapfidze examines how much buying a home affects credit scores in 50 major American metropolitan areas and the length of time that it takes ratings to return to their prepurchase averages. U.S. buyers can expect their credit scores to decline by an average of 15 points after they buy a home over a period of nearly five months. After that, the recovery begins and takes another five months for credit scores to return to the baseline.

Of the six California housing markets included in the report, San Jose fares the best when it comes to credit recovery. Before buying a home, San Jose residents boast credit scores of 725, the highest of any of the cities included in the study. Post-purchase, Silicon Valley credit scores fall to 711 for an average of 149 days before taking 173 days to recover, ranking it solidly in the middle of the country.

San Francisco homebuyers have almost as good of credit as their counterparts to the south, at 724, and they can also expect their scores to dip to 711 over a period of almost exactly six months. Once the 196-day recovery time is factored in, San Franciscans will need to wait one year and 10 days for their ratings to normalize, ranking it near the bottom of the list at No. 47.

The other Golden State cities included in LendingTree’s analysis also appear in the lower half of the rankings when it comes to total credit-recovery time: No. 39 Los Angeles (347 days), No. 40 San Diego (348 days), No. 44 Sacramento (357 days), and No. 48 Riverside (375 days).

As Kapfidze explains, the reason that Americans’ credit scores fall when they purchase a home is fairly logical: As the biggest purchase that most people will ever make, a real estate transaction adds a large amount of debt to one’s balance sheet. Once new homeowners have proven that they can swing the monthly house payments in a timely manner, their credit ratings gradually improve, boosted by the fact that having a mortgage helps diversify a credit portfolio.

Of course, having a good credit score is key to getting a home loan in the first place, and younger homebuyers could stand to improve their ratings to maximize their chances. Another recent LendingTree study reports that millennials have average credit scores of 634, the lowest of all generations. And earlier this year, Experian published an analysis finding that more than 60 percent of millennials lack a prime homebuying credit score.

(Photo: iStock/tolgart)

 

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Bay Area Housing Markets Got Spooked in September

Executive Summary:

  • Bay Area home sales declined by 20 percent year over year in September, with all counties posting drops, led by Sonoma and Contra Costa. In 2018, the region’s housing market activity is trending 4 percent lower year to date.
  • Santa Clara County posted sales declines across all price ranges.
  • Bay Area inventory increased by 14 percent year over year in September — about 2,000 more homes — with Santa Clara County contributing more than 50 percent to the total increase.
  • While appreciation has slowed from its spring peaks, Bay Area home prices are still up by 10 percent on an annual basis. San Mateo County maintained the strongest price growth at 19 percent.
  • Home price reductions were up by 7 percentage points, from 16 percent last year to 23 percent this September. Sonoma and Santa Clara counties posted the largest increases in price reductions.
  • The rebalancing between buyers and sellers is driven by affordability constrains and buyer fatigue, with the biggest change seen in relatively affordable and previously fiercely competitive markets.

September Bay Area home sales slowed markedly from one year earlier, with an overall decline of 20 percent, ranging from a 9 percent decrease in San Francisco to a 27 percent drop in Sonoma County. With September’s decline, year-to-date sales are now 4 percent below 2017.

Figure 1 summarizes changes in sales by Bay Area county from last September and overall year-to-date changes compared with last year. San Francisco is the only region where overall 2018 sales are still above last year despite September’s decline.  By contrast, Santa Clara County posted the region’s largest year-to-date drop of 8 percent. Note that for the purposes of this analysis, all property types have been included.

Figure 1:Year-over-year and year-to-date change in home sales by Bay Area county

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

Figure 2 illustrates September home sales activity for the last four years. While activity between September 2015 and 2017 trends relatively in line, this year’s drop appears most obvious in all counties. As noted in Figure 1, Sonoma County posted the relatively largest decrease, followed by Contra Costa County.

Figure 2: September home sales activity by Bay Area county, 2015-2018

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

Figure 3 illustrates September’s change in home sales by price range compared with last September. Three counties posted noticeably lower sales: Santa Clara, Contra Costa, and Alameda. In Santa Clara County, all price ranges saw annual sales declines in September. In the East Bay, the decline was dominated by homes priced below $1 million, some of which are now priced above $1 million compared with what they would have been priced last September. Taken together, Santa Clara County and the lowest price range drove most of the decrease.

Figure 3: Annual home sales changes by Bay Area county and price range

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

Declining sales appear to reflect two underlying conditions that are shifting Bay Area housing markets: affordability constraints and buyer fatigue. While affordability has long been a serious concern in the Bay Area, recent median home price hikes coupled with rising mortgage rates have put a 20 percent to 25 percent dent in buyers’ purchasing power. The impact of these forces is causing fewer sales in relatively more affordable parts of the region, such as Sonoma, Contra Costa, and Alameda counties. In Sonoma County, aggressive pricing amid low post-wildfire inventory had a particularly discouraging effect on buyers of homes priced below $1 million.

On the other hand, fierce buyer competition on the Peninsula, which drove home prices up by almost 30 percent year over year in the first half of the 2018, led buyers to step back and put home purchases on hold. Also, a sentiment that the housing market has reached the top has impacted sales activity, with buyers not wanting to purchase at the top of the market and more sellers listing properties in September.

Consequently, inventory increased by 14 percent year over year in September, with Santa Clara County contributing more than 50 percent to the total gain, adding more than 1,000 homes to the market compared with last year. Alameda and Sonoma counties followed in housing-supply gains. Sonoma County’s changing conditions largely reflect post-wildfire activity.

Figure 4: Annual inventory changes by Bay Area county and price range

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

Median home prices, however, maintained healthy momentum, with most regions continuing to grow at rates seen earlier this year. Figure 5 summarizes median year-over-year home price changes in September. The last column shows median price growth in March 2018, when year-over-year changes peaked. Overall price growth slowed from 19 percent in March to 10 percent in September, and most regions saw some cooling except for Napa County, where gains have picked up in the latter part of this year. Santa Clara County saw the largest decline in appreciation, from 34 percent in March to 11 percent in September.

Figure 5: Median home price changes by Bay Area County from September 2017 and March 2018 peak

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

Still, it’s important to note that even with slowing price growth, which was inevitable given the unsustainable rates seen in first half of 2018, the longer-term appreciation trend for the Bay Area (Figure 6) shows gains returning to the trend line of around 8 percent to 10 percent.

Figure 6: Year-over-year change in median home price in the Bay Area, single-family homes

Source: California Association of Realtors

Lastly, shifting market conditions are also reflected in the share of homes that required price reductions. Figure 7 illustrates the change in the share of homes that saw price reductions, with green shades indicating increases in price reductions compared with last September and red shades suggesting fewer reductions. Overall reductions increased by 7 percentage points, from 16 percent last September to 23 percent now. Again, Sonoma and Santa Clara counties posted the largest increases in price reductions, up by 13 percent and 15 percent respectively. Forty-one percent of Sonoma County homes required price reductions in September, followed by Santa Clara County at 24 percent.

Figure 7: Changes in price reductions by Bay Area county and price range

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

All told, September market activity shows a changing dynamic between buyers and sellers. As noted above, both sides may believe that housing price growth has reached its peak and are acting accordingly, with buyers pulling back and sellers rushing to list their homes before the slow winter season kicks in. To some extent, volatility in financial markets and geopolitical developments may be exaggerating consumer fears. However, the underlying macroeconomic environment and California’s continued growth confirms that housing markets may be returning to a more normal balance between buyers and sellers rather than preparing to topple.

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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