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Pacific Union’s Real Estate and Economic Forecast to 2020

San Francisco Real Estate

Earlier this month, Pacific Union held its fourth annual Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting to project Bay Area activity through 2020. Below are some key, high-level takeaways from the live event.

demand surged

  •  Across the entire Bay Area, the median home price increase averaged 9% year to date through September.
  • Most U.S. housing markets remain at low-to-normal risk levels, both in the short term and the medium term.
  • Mortgage rates are projected to grow by about 80 basis points by 2020 and increase annually.
  • Bay Area housing markets are generally at normal risk. Lack of affordability signals San Francisco and Silicon Valley for above-normal risk.
  • Employment growth remains steady, though increasing jobs in lower-income groups does not bode well for affordability in the Bay Area, especially in Sonoma and Napa counties.
  • Proposed tax changes could significantly reduce future buyers’ deductions, making it more expensive to own a home.
  • The proposed changes could further dis-incentivize current homeowners from selling.
  • An analysis of the impact of the wildfires on Sonoma County and Napa County real estate markets suggests:
    • The rebuilding of homes will occur over several years.
    • A revised forecast of 1 percent to 3 percent higher home prices than previously expected due to the decline in homes for sale
    • Additional demand for labor and materials brings new home construction costs 2-4% higher, but should moderate down in future years.
  • There is continual variation in home price fluctuation, which is driven by local market conditions and relates to prices in neighboring communities but most importantly is tied to jobs and income growth.

Steady Median

In segmenting the markets by median home price changes, we use four categories: normal, double-digit, slowing, and heated.

Normal (up to 10 percent appreciation): Most Bay Area markets fall into this category. These were generally more affordable markets and median prices average about $761,000.  No San Mateo County city falls into this category. An average of 56% of homes sold for more than asking price for an average 6% premium.

Double-Digit (10 percent to 20 percent growth): Double-digit percent median price growth was seen in many San Mateo County and Santa Clara County cities. Median prices averaged about $1.15 million.  Silicon Valley’s strong job market helped prop them up plus buyer competition also increased:  67% of homes sold for more than asking price for an average 9% premium.

Heated (20 percent to 40 percent appreciation): Sausalito and Tiburon saw median price growth of more than 20%, Overall, the median price in ZIP codes with the highest growth rates was $1.16 million, unlike last year, when the median price in heated markets averaged $800,000.

Two ZIP codes remained since last year: 94610 in Oakland and 94303 in Palo Alto. In Sonoma County, two of the fire-impacted cities, Glen Ellen and Kenwood, have also seen strong price growth in 2017.

Slowing (22 percent depreciation to flat): Although fewer cities saw slowing prices this year than last year, these are again relatively more expensive markets where the median home price averaged $1,900,000. Still, about 43% of homes in these areas sold for more than asking price, for an average 8% premium.

San Francisco Demands

More takeaway points:

  • While condominium prices in San Francisco took a breather in 2017 for newly constructed units, the continued price increase for resale units and the declining inventory of new units are likely to prop up prices going forward. In addition, stronger activity for units priced at less than $1,300 per square foot suggests that higher-end condominiums hitting the market may find more challenging conditions.
  • Affordability and access to transportation and jobs drive differences in home price appreciation. Markets where job growth with higher-income jobs led the local economy by appreciating prices. By contrast, areas where job growth was dominated by lower-paying jobs saw slowing appreciation.
  • More homes are again selling above asking price in 2017 across the Bay Area — particularly in San Francisco, San Mateo, and Santa Clara counties — and in higher price ranges. Premiums paid this year are also higher in all counties.
  • Bay Area inventory has continually dropped in 2017, with year-to-date supply down 14 percent.

bay area appreciation

  • From 2018 to 2020, home prices are projected to grow by 12 percent in Napa County; 12 percent in Sonoma County; 2 percent in Santa Clara County; 2 percent in Marin, San Francisco, and San Mateo counties; and 5 percent in Alameda and Contra Costa counties.
  • Lastly, the panel agreed that price trajectories are more likely to resemble a tabletop compared with the mountain peak that occurred following the housing bust in 2006, where the tabletop suggests moderating price growth through 2020. Nevertheless, unexpected changes to housing supply and demand or job and income growth would destabilize the housing market and lead to a different outcome.
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