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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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Real Estate Roundup: California Claims One-Third of the 20 Fastest-Growing U.S. Luxury Housing Markets

San Mateo and San Francisco counties have the most-expensive luxury home prices in America, while Alameda County’s Fremont has once again earned accolades for its family-friendliness. Get the skinny on what’s going down in the world of California real estate in Pacific Union’s latest Real Estate Roundup.

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Pacific Union’s California Regional Real Estate Forecasts to 2020

On Nov. 15, Pacific Union held its fourth annual Bay Area Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting at the SFJAZZ Center in San Francisco. Two weeks later, we presented our first-ever forecast for Los Angeles at the Skirball Cultural Center.

The downloadable whitepapers below summarize our overall and California metropolitan statistical area (MSA) outlooks for the real estate market and the economy over the next three years. The analyses feature commentary from Pacific Union CEO Mark A. McLaughlin, Pacific Union Chief Economist Selma Hepp, and John Burns Real Estate Consulting CEO John Burns. To watch a video of the full, one-hour Bay Area forecast, click here. To view the Los Angeles area forecast, click here

East Bay (Alameda and Contra Costa counties)

  • The East Bay MSA is currently at 7.6 on the Burns Affordability Index (10 indicates lack of affordability and 5.0 the historical mean) but is projected to further worsen, with continued price appreciation and increased mortgage rates. FHA loan limits will increase in 2018 to $683,000, easing the affordability issue to some extent, though this limit is still below the median resale price in the MSA.
  • Employment growth remains solid. Currently, job growth is at 2 percent for 2017, slightly lower than the 3 percent-plus experienced in 2015 and 2016.
  • The East Bay MSA pulled over 10,700 permits over the last year, 61 percent of which were multifamily homes. Some submarkets within the East Bay have traditionally been known for family-oriented product (single-family homes), though as affordability worsens, we have seen a rise in for-sale attached and apartment construction. Multifamily permits are anticipated to outpace single family permits through 2020.

Click here to read the East Bay forecast to 2020 whitepaper.

Los Angeles (Los Angeles County)

  • Los Angeles currently ranks at 8.5 on the Burns Affordability Index (10 indicates a lack of affordability and 5.0 the historical mean). While incomes have grown, home prices have consistently increased by 7 percent or more per year since 2012.
  • Despite the current lack of affordability, the MSA is projected to add nearly another 13 percent in appreciation by 2020.
  • Employment growth in 2017 has slowed from 2016 (up 109,000 jobs), but the local economy has still added over 50,000 jobs in the last year (or about 1 percent employment growth).

Click here to read the Los Angeles forecast to 2020 whitepaper.

Napa (Napa County)

  • The Napa MSA has solid employment growth, with 2,800 new jobs over the last year.
  • Similar to Sonoma County, Napa has a generally middle-class to upper-middle-class income profile, with a median income of about $80,000. Further, most of the jobs gained are at lower- and middle-income salary positions ($20,0000 to $80,000), and higher-income jobs ($100,000-plus) are actually decreasing.
  • New construction is extremely limited, with less than 100 new home sales in 2017. This is not expected to change markedly in the immediate future. New construction in Napa is typically aimed at the higher-end, second-home market or higher-density product attainable with local incomes.

Click here to read the Napa forecast to 2020 whitepaper.

San Francisco (Marin, San Francisco, and San Mateo counties)

  • Existing home sales are being held back by a lack of supply and more importantly, a lack of affordability.
  • San Francisco currently ranks at 7.9 on the Burns Affordability Index (10 indicates a lack of affordability and 5.0 the historical mean). Though pricing is at an all-time high, the BAI also takes into consideration strong incomes in San Francisco, as well as low mortgage rates.
  • Employment growth has slowed, but the MSA still added over 21,000 jobs over the last 12 months (or about 2 percent employment growth).

Click here to read the San Francisco forecast to 2020 whitepaper.

San Jose (Santa Clara and San Benito counties)

  • The San Jose MSA ranks at 8.5 on the Burns Affordability Index (10 indicates a lack of affordability and 5.0 the historical norm). Even with regards to the higher price standards of Silicon Valley, San Jose is in a historically unaffordable period. Prices continue to increase to new highs, and more residents are being priced out of the market and pushed to more outlying locales.
  • Employment growth has slowed from 3 percent-plus in 2012 – 2016 to 1 percent in 2017. This is the lowest rate of employment growth since 2010, but job gains remain positive.
  • The San Jose MSA had just over 8,200 permits over the last 12 months. With the recent lower levels of employment growth, this equates to an employment-to-permit ratio of about 1.3, or roughly at equilibrium. This is down significantly from recent years when the employment-to-permit ratio was 4.0-plus. San Jose has historically been a demand exporter, meaning those employed in San Jose often live outside of the MSA (for example, Alameda or Contra Costa counties) due to affordability issues.

Click here to read the San Jose forecast to 2020 whitepaper.

Santa Rosa (Sonoma County)

  • The Santa Rosa MSA has begun to experience job losses for the first time since 2010 and is currently down 1,300 jobs over the last year.
  • Employment in Santa Rosa caters more towards middle-income jobs than most people expect, with a median salary of $71,000. With a large proportion of its workforce in the tourism and service industries, the bulk of jobs in Sonoma County earn $20,000 to $60,000. Further worsening the problem, jobs being lost in Sonoma County are at the higher-income tiers. For example, jobs earning $120,000 to $140,000 have fallen by 7 percent over the past year, while lower-income jobs are stagnant or have experienced minimal growth.
  • New construction is extremely limited, with only 300 new home sales in 2017. While construction activity is expected to increase going forward given the decrease in housing inventory caused by wildfires near the end of 2017, the Santa Rosa MSA will remain a comparatively slow-growth market.

Click here to read the Santa Rosa forecast to 2020 whitepaper.

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Bay Area Housing Inventory Further Tightens in November

  • The median sales price for a single-family home in the nine-county Bay Area increased by 12.5 percent year over year in November to $910,350.
  • Home prices rose from November of last year in all nine Bay Area counties, with six seeing double-digit percentage point appreciation.
  • Seven Bay Area counties have the state’s most severe inventory shortages, with less than two months of supply.

Stubbornly low supply conditions did not improve in California or the Bay Area on an annual basis in November, pushing prices up by double-digit percentage points in six local counties.

The latest home sales report from the California Association of Realtors says that the state median sales price for a single-family home was $546,820, up 8.8 percent from November 2016 for the largest annual gain in nearly two years. Home prices increased in 45 of 51 counties for which CAR tracks data, with double-digit percent gains recorded in 23 counties.

The nine-county Bay Area led the state’s major regions for annual appreciation, with the median sales price climbing by 12.5 percent from November 2016 to reach $910,350. Home prices appreciated year over year in every local county, with six recording double-digit percent gains: Santa Clara (27.0 percent), San Mateo (22.1 percent), Marin (17.1 percent), Sonoma (13.3 percent), San Francisco (10.3 percent), and Alameda (10.0 percent).

Like last November, four of those counties were California’s only seven-digit housing markets. San Francisco was the state’s most expensive county, with a median sales price of $1,500,000, followed by San Mateo ($1,486,000), Santa Clara ($1,282,500), and Marin ($1,230,000) counties.

In what has become an all-too-familiar refrain, a pronounced lack of homes on the market fueled the price growth statewide and locally. California’s months’ supply of inventory dropped to 2.9 in November, down on both a monthly and yearly basis. The nine county Bay Area’s MSI ended the month at 1.5, also down from October and November 2016.

Supply declined year over year in eight of nine counties, with conditions in Solano County unchanged. San Francisco has the state’s most severe inventory shortage, with a 1.1-month supply, while Santa Clara, San Mateo, Alameda, Marin, Contra Costa, and Sonoma counties all have less than two months of supply. Overall, there were 17 percent fewer Bay Area listings than at the same time last year, with Santa Clara County seeing a substantial 36 percent drop.

CAR President Steve White expressed concern about the state’s deteriorating affordability conditions, pointing to particularly slim supply levels at lower price points. Senior Vice President and Chief Economist Leslie Appleton-Young echoed his sentiments, referencing the Federal Reserve’s decision to raise interest rates last week and more expected hikes in 2018.

“As rates rise, the cost of homeownership will go up, and housing affordability will further deteriorate if the trend continues,” she said.

(Photo: iStock/ChuckSchugPhotography)

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Wine Country Home Sales Show Strength in November

 

Executive Summary:

  • Following the Wine Country wildfires, home sales activity increased notably year over year in November, up by 13 percent in Sonoma County and by 24 percent in Marin County but down by 11 percent in Napa County.
  • Also, sales were markedly up from October with 16 percent, 17 percent, and 23 percent increases in Marin, Napa, and Sonoma counties respectively. Typically, sales activity slows between October and November.
  • While overall inventory continued to decline, October and November were characterized by higher levels of expired or withdrawn listings but also by an increase in new listings when compared with previous trends. Higher levels of expired or withdrawn listings dragged overall inventory down.
  • The months’ supply of inventory is now at its lowest level in two years in Sonoma and Marin counties.
  • Median prices grew by 16 percent in Sonoma County, 17 percent in Marin County, and 7 percent in Napa County compared with last November — a pattern that was consistent across the Bay Area.
  • While preliminary trends suggest that demand for homes has increased following the wildfires, overall tight market conditions in the Bay Area make it difficult to fully gauge the impact of the disaster.

It has been about two months since the raging Wine County wildfires, and assessing the impact on its housing markets is still only preliminary. As we noted in our Bay Area Real Estate and Economic Forecast to 2020, it will take couple of years to understand the full impact of the fires. Unfortunately, wildfires have become a reality of living in California.

Home sales activity picked up considerably in parts of the Wine County in November. Year-over-year sales rose by 13 percent in Sonoma County and 24 percent in Marin County, while dropping by 11 percent in Napa County. The annual increases in Marin and Sonoma counties were the largest among all Bay Area regions, while overall sales in the Bay Area declined by 2 percent. Napa County’s decline was a continuation of trends seen throughout 2017.

On the other hand, between October and November, sales were also up by a solid 23 percent in Sonoma County, 17 percent in Napa County, and 16 percent in Marin County. Typically, sales slow from October to November, with an average decline between 6 percent and 14 percent in those three counties over the last 10 years.

Figure 1 illustrates the somewhat atypical pattern of sales over the last couple of months. While Sonoma County saw some fluctuation during the summer, the three North Bay counties all posted monthly November increases, again inconsistent with previous years’ trends. Delving deeper into local Sonoma County markets showed that sales were up by 18 percent in Santa Rosa and 24 percent in Sonoma Valley year over year in November.

Figure 1: Monthly home sales by North Bay county

Source: Terradatum, Inc. from data provided by local MLSes, Dec. 6, 2017.

Nevertheless, while sales have picked up, the inventory of homes on the market has continued to fall, but with some important caveats. While overall inventory declined on an annual basis by 10 percent in Sonoma and Napa counties and by 9 percent in Marin County, there were 22 percent more new listings in Sonoma County, 20 percent more in Napa County, and 6 percent more in Marin County. Relatively higher levels of expired or withdrawn listings dragged overall inventory levels down. By comparison, San Mateo County had the largest year-over-year increase in new listings, up 27 percent, while the overall Bay Area had 7 percent more listings than last year. While it is not clear that the increase in new listings was purely driven by the wildfires, last year’s level of new listings in November in the North Bay was on par with 2015.

Declining inventory appears to be the result of an increase in expired or withdrawn listings, especially in Sonoma County, where they jumped by 37 percent, followed by a 4 percent increase Marin County and a 2 percent increase in Napa County. Those were the only three Bay Area counties that showed an increase in expired or withdrawn listings from last November. Overall, the Bay Area saw a 16 percent decline in such listings.

The increase in expired or withdrawn listings, especially in Sonoma County, is in large part due to the disorder that follows a natural disaster. Some of the homes could have been burned or damaged, some were offered for lease instead of sale, and some sellers may be waiting for the market to calm down. In examining expired or withdrawn listings in October and November that were later relisted, there is no clear trend that they were placed on the market for higher prices. On the contrary, out of the 33 homes that were relisted in November, eight were listed with adjusted prices, six were listed at lower prices, and two were listed at higher prices than they were prior to their expiration or withdrawal.

Figure 2 illustrates the monthly number of new listings and expired or withdrawn listings in Sonoma County, with November figures highlighted. The red lines illustrate the change in activity from last year. As expected, October shows a relatively higher number of expired or withdrawn listings than any other month, but the trend also continued in November.

Figure 2: Monthly expired and new listings in Sonoma County.

Source: Terradatum, Inc. from data provided by local MLSes, Dec. 6, 2017.

The increase in sales activity coupled with lower inventory led to a decline in the months’ supply of inventory in all three North Bay counties. Figure 3 suggests that Sonoma and Marin counties currently have only a one-month supply of homes on the market if the November rate of sales continues. Inventory in Napa County fell to a 2.6-month supply. All three counties, but particularly Sonoma and Marin, have notably less inventory on both a monthly and yearly basis.

Figure 3: Months’ supply of Inventory in Sonoma, Napa, and Marin counties.

Source: Terradatum, Inc. from data provided by local MLSes, Dec. 6, 2017.

Lastly, and probably most importantly for homebuyers and Wine Country residents, Figure 4 illustrates historical median price trends for single-family homes in the three counties. In November, median prices increased by 16 percent in Sonoma County, 17 percent in Marin County, and 7 percent in Napa County year over year. In Marin County, the current median price for single-family homes stood at $1.217 million. In Napa County, the median price was $657,000, while Sonoma County’s median price stood at $656,900. Among all Bay Area counties, only Napa and Contra Costa have not yet surpassed previous peak prices, though all have seen prices grow by about 100 percent-plus since the market bottomed out in 2010.

Taken together, it is still too early to fully understand the impacts of the wildfires. It takes time for people to adjust and make decisions on next steps. Clearly, many households are looking for homes to rent or buy, which is driving the immediate demand. As anticipated, already tight inventories have gotten tighter, and homes have gotten pricier. Nevertheless, with slim inventory levels across the whole region and home prices surging in most parts of the Bay Area in November, it is difficult to separate the impacts of the wildfires from overall market conditions. We will keep a close eye on changing trends in the coming months.

Figure 4: Median single-family home prices in Marin, Napa, and Sonoma counties

Source: California Association of Realtors

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/TraceRouda)

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Bay Area Home Prices Soar in November

 

Executive Summary:

  • The Bay Area’s median home price increased 14 percent year over year in November, driven by strong appreciation in Silicon Valley.
  • Sales of homes priced above $2 million grew by 72 percent in San Mateo and Santa Clara counties, 95 percent in Marin County, and 81 percent in Alameda County. These higher-priced sales were a big driver of the home price surge.
  • General market competition intensified in November, with a 10 percent increase in absorption rates and seven fewer days on the market year over year.
  • Inventory shortages continue dragging down overall sales, which were 2 percent lower than last November.
  • Fears of proposed tax changes and the potential impacts on homebuyer deductions may have fueled some of the November surge in demand.
  • Home prices In San Francisco and Silicon Valley are about 50-plus percent higher from the last peak.

The final month of 2017 appears set to close with strong Bay Area housing-market numbers, at least regarding prices. In November, home sales activity was 2 percent lower than last November, but that comes with important caveats. Wildfires certainly impacted the affected and surrounding areas. Sonoma County home sales were up 13 percent from last November, and in adjacent Marin County, sales jumped by a remarkable 24 percent. Both regions’ November increases reversed October’s year-over-year notable declines, a function of the wildfires. With November’s increase in sales, Sonoma County’s overall year-to-date housing activity is on par with 2016.

Napa County, on the other hand, saw a 12 percent year-over-year decline in sales and is the only Bay Area region where year-to-date sales are lower than they were in 2016. Sales were lower across all price ranges except for homes priced between $1 million and $2 million. Napa County has the lowest level of sales of all Bay Area counties, and overall, 85 fewer units have sold so far in 2017. A detailed analysis of Wine Country real estate activity will be available on our blog later this week.

November sales also declined year over year in Contra Costa and Santa Clara counties due to a continued rapid decline in inventory of homes priced below $1 million and a consequent lack of sales in that price range. In Santa Clara County, the inventory of homes priced below $1 million was 54 percent lower than last November. While inventory declines are not new, November once again showed falling supply across the region, down 21 percent on an annual basis. Santa Clara County again led the declines, with a staggering 39 percent drop in inventory.

Figure 1 illustrates overall year-over-year inventory changes, inventory changes for homes priced between $1 million and $2 million, absorption rates, and median days on market. Numbers in red show relatively stronger market competition when compared with other regions. For example, Marin and San Francisco counties saw 10-day drops in the median days that homes spent on the market. As noted, Napa County has seen 2017 market conditions slow in comparison with last year. Nevertheless, the second half of last year was relatively stronger in Napa County, thus a year-over-year comparison may just reflect normalizing trends.

In addition to the 21 percent year-over-year decline in inventory, Figure 1 also illustrates annual supply changes for homes priced between $1 million and $2 million, which dropped by 11 percent from last year. Again, while falling affordable inventory is unfortunately a continued and alarming trend for the Bay Area, the region also faces a declining supply of higher-priced homes, which are in demand for buyers in half of local counties. Finally, Figure 1 illustrates absorption rates for listed inventory and the change from last year. Again, numbers in red suggest relatively more competitive markets, with higher increases in the rate of inventory absorption. Silicon Valley saw the largest increase in absorption, followed by Marin County and San Francisco. All Bay Area regions showed higher absorption rates averaging 50 percent, a 10 percent increase from last November. These market indicators point to strong demand, which would have pushed transaction activity much higher this year if more inventory was available.

Figure 1: Select Bay Area November market statistics

Source: Terradatum, Inc. from data provided by local MLSes, Dec. 6, 2017.

Figure 2 summarizes changes in absorption rates, as well as changes in the share of listings that expired when compared with last November. Napa County and Sonoma County trends deviate from other Bay Area counties, a reflection of the October wildfires.

Figure 2: Annual changes in absorption rates and expired listings by Bay Area county.

Source: Terradatum, Inc. from data provided by local MLSes, Dec. 6, 2017.

One of the most striking insights from November data is the increase in median prices seen across the region, a trend not anticipated at this point in the Bay Area housing cycle or at this time of year. In November, prices were 14 percent higher on an annual basis, with Silicon Valley median prices jumping as much as 26 percent. The gain is partially driving the increase in sales of higher-priced homes — $2 million-plus — which increased by 50 percent in November and by 72 percent in San Mateo County. Again, the strong market for homes priced above $2 million characterized most of 2017 across the entire Bay Area. Overall year to date, the median home price has grown by 10 percent in the Bay Area. Figure 3 illustrates historical changes in median prices for the Bay Area’s regions, excluding Napa and Sonoma counties.

The table in Figure 3 summarizes changes in median prices by region from the last peak and the subsequent trough. The percent changes show how much prices have increased since the trough for single-family homes. All regions, except for Contra Costa County, have current median prices well above their previous peaks, with San Francisco’s median price now 64 percent higher.

Figure 3: Changes in Bay Area home prices from peak to trough to current

Source: California Association of Realtors

The increase in prices, along with stronger market competition, inevitably leads to the question of what factors drive demand and if there are signs of a bubble forming.

First, the Bay Area’s incredible job growth over the last few years, along with accompanying income growth, has definitely been the biggest stimulus for housing demand. Unlike the last housing surge of the mid-2000s, buyers today are well invested in their homes, with only 10 percent placing less than 20 percent down payments, according to Pacific Union data. The rest of the buyers have either purchased with 20 percent-plus down payments or with all cash.

Also, unlike during the last bubble, current demand far outpaces the supply of homes for sale, or homes available in general for the increase in population that the Bay Area has experienced. Next, unlike the proliferation of adjustable-rate and other exotic mortgages seen during the previous boom, homebuyers today are locking in fixed-rate mortgages at historically low rates. Finally, despite the Bay Area’s affordability crisis and home prices that exceed previous peaks, buyers are generally spending a lower share of their incomes on mortgage payments than they were during the previous cycle because of lower interest rates. This is not to say that the Bay Area’s affordability crisis is not severe, and the outcome will be loss of hardworking households that can no longer afford to live here. For more on this subject, the California Association of Realtors recently published a report examining if the state’s housing market is again in a bubble.

Lastly, with concerns around proposed tax changes and the impacts on new homebuyers, there is a potential pickup in demand stemming from those trying to take advantage of the more favorable existing tax laws, which would grandfather them in if the looming proposals come to fruition.

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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Shared with permission from the Pacific Union Blog

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Pacific Union’s November 2017 Real Estate Update

Northern California’s inventory woes continued in November, with the number of homes for sale dropping on an annual basis in all Bay Area regions in which Pacific Union operates. Supply fell to a one-year low in Contra Costa County, Marin County, San Francisco, Silicon Valley, Sonoma County, and Sonoma Valley.

Click on the image accompanying each of our regions below for an expanded look at local real estate activity in November.

CONTRA COSTA COUNTY

The median sales price in Contra Costa County ended November at $1,250,000, tying the high set three times earlier this year. The months’ supply of inventory was 1.0, down on both a monthly and yearly basis.

Homes sold in a brisk 21 days and for 99.1 percent of original prices.

Defining Contra Costa County: Our real estate markets in Contra Costa County include the cities of Alamo, Blackhawk, Danville, Diablo, Lafayette, Moraga, Orinda, Pleasant Hill, San Ramon, and Walnut Creek. Sales data in the adjoining chart includes single-family homes in these communities.

EAST BAY

For the 10th consecutive month, the median sales price in our East Bay region was in the seven-digit range in November, at $1,100,000. With a  0.7-month supply of inventory, the East Bay remained one of the Bay Area’s tightest real estate markets.

As in October, homes took an average of 18 days to find a buyer. Continuing a trend that has persisted for the past few years, homes again sold for substantial premiums, commanding 114.5 percent of asking prices.

Defining the East Bay: Our real estate markets in the East Bay region include Oakland ZIP codes 94602, 94609, 94610, 94611, 94618, 94619, and 94705; Alameda; Albany; Berkeley; El Cerrito; Kensington; and Piedmont. Sales data in the adjoining chart includes single-family homes in these communities.

MARIN COUNTY

The number of homes for sale in Marin County fell to a one-year low in November, with the months’ supply of inventory at 0.9. The median sales price was $1,227,500, up 15 percent year over year.

Homes left the market in an average of 44 days, selling for 98.1 percent of original prices.

Defining Marin County: Our real estate markets in Marin County include the cities of Belvedere, Corte Madera, Fairfax, Greenbrae, Kentfield, Larkspur, Mill Valley, Novato, Ross, San Anselmo, San Rafael, Sausalito, and Tiburon. Sales data in the adjoining chart includes single-family homes in these communities.

NAPA COUNTY

At $637,500, Napa County‘s median sales price ended November in the same general range as it has been all year. The months’ supply of inventory was 2.8, the lowest since the summer.

Homes sold for an average of 94.1 percent of asking prices, nearly identical to last November, and took 85 days to find a buyer.

Defining Napa County: Our real estate markets in Napa County include the cities of American Canyon, Angwin, Calistoga, Napa, Oakville, Rutherford, St. Helena, and Yountville. Sales data in the adjoining chart includes all single-family homes in Napa County.

SAN FRANCISCO – SINGLE-FAMILY HOMES

The median sales price for a single-family home in San Francisco was $1,500,000 in November, nearly matching the one-year high set in October. The number of homes on the market continued to dwindle, with the months’ supply of inventory at 0.9.

Sellers received an average of 110.2 percent of asking prices, nearly identical to premiums recorded in October. Single-family homes in San Francisco sold in an average of 27 days.

SAN FRANCISCO – CONDOMINIUMS

At $1,254,825, the median sales price for a San Francisco condominium climbed to a one-year high in November. Inventory moved in the opposite direction, falling on both a monthly and yearly basis to a 1.3-months’ supply.

Units sold in an average of 38 days and for 102.9 percent of original prices.

SILICON VALLEY

Silicon Valley‘s median sales price was $3,050,000 in November, unchanged from the previous month. The number of homes for sale declined to a one-year low, with the months’ supply of inventory at 1.0.

Homes sold for an average of 101 percent of asking prices, finding a buyer in 26 days.

Defining Silicon Valley: Our real estate markets in Silicon Valley include the cities and towns of Atherton, Los Altos (excluding county area), Los Altos Hills, Menlo Park (excluding east of U.S. 101), Palo Alto, Portola Valley, and Woodside. Sales data in the adjoining chart includes all single-family homes in these communities.

Mid-Peninsula Subregion

The median sales price in our Mid-Peninsula subregion reached a yearly peak in November, finishing the month at $1,885,000. Along with the East Bay, the Mid-Peninsula had the region’s most pronounced inventory drought, with a 0.7-month supply of homes for sale.

Sellers received an average of 102.9 percent of asking prices, similar to last November, with homes leaving the market in 19 days.

Defining the Mid-Peninsula: Our real estate markets in the Mid-Peninsula subregion include the cities of Burlingame (excluding Ingold Millsdale Industrial Center), Hillsborough, and San Mateo (excluding the North Shoreview/Dore Cavanaugh area). Sales data in the adjoining chart includes all single-family homes in these communities.

SONOMA COUNTY

The number of homes for sale in Sonoma County fell to a one-year low in November, with a 1.1-months’ supply of inventory. As a result, the median sales price increased to $659,000, a yearly high.

The pace of sales was identical to November 2016, with homes leaving the market in an average of 67 days. Buyers paid 96.7 percent of original prices, similar to numbers recorded over the past year.

Defining Sonoma County: Sales data in the adjoining chart includes all single-family homes and farms and ranches in Sonoma County.

SONOMA VALLEY

Inventory levels in Sonoma Valley were more than cut in half from October to November, with a 2.0-months’ supply for sale. Properties lasted on the market an average of 75 days, almost a month longer than in October.

The median sales price was $730,000, and buyers paid an average of 93.9 percent of asking prices.

Defining Sonoma Valley: Our real estate markets in Sonoma Valley include the cities of Glen Ellen, Kenwood, and Sonoma. Sales data in the adjoining chart refers to all residential properties – including single-family homes, condominiums, and farms and ranches – in these communities.

LAKE TAHOE/TRUCKEE – SINGLE-FAMILY HOMES

The median sales price for a single-family home in the Lake Tahoe/Truckee region ended November at $699,000, just a few thousand dollars lower than in October. Homes sold for an average of 92.6 percent of asking prices, nearly identical to the previous two months.

The Lake Tahoe region had a 2.7-months’ supply of single-family homes for sale, with buyers taking an average of 83 days to close a sale.

Defining Tahoe/Truckee: Our real estate markets in the Lake Tahoe/Truckee region include the communities of Alpine Meadows, Donner Lake, Donner Summit, Lahontan, Martis Valley, North Shore Lake Tahoe, Northstar, Squaw Valley, Tahoe City, Tahoe Donner, Truckee, and the West Shore of Lake Tahoe. Sales data in the adjoining chart includes single-family homes in these communities.

LAKE TAHOE/TRUCKEE – CONDOMINIUMS

The number of condominiums on the market in the Lake Tahoe/Truckee region sunk to a yearly low, with a 2.8-months’ supply of units for sale. The median sales price was $477,500, a 27 percent annual increase.

Condominiums sold in an average of 122 days, nearly identical to October’s pace, and for 96.4 percent of original prices.

Defining Tahoe/Truckee: Our real estate markets in the Lake Tahoe/Truckee region include the communities of Alpine Meadows, Donner Lake, Donner Summit, Lahontan, Martis Valley, North Shore Lake Tahoe, Northstar, Squaw Valley, Tahoe City, Tahoe Donner, Truckee, and the West Shore of Lake Tahoe. Sales data in the adjoining chart includes condominiums in these communities.

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Shared with permission from the Pacific Union Blog

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