To panic or not to panic? Bay Area Real Estate Market Analysis

  • The 2018 Pacific Union Real Estate Economic Forecast called for market “normalization,” with cumulative home price growth of 10 percent over the next three years. The market is still on track for this appreciation.
  • Stock-market volatility is primarily driven by oversupply of oil in the global markets. Volatility will persist a little longer until markets adjust.
  • China is doing just fine — still growing at over 6 percent, with jobs and incomes increasing steadily.
  • U.S. economic fundamentals are still strong, with exceptional job growth.
  • Consumers are happy, but businesses are concerned about the strong dollar.
  • In the San Francisco Bay Area, Pacific Union’s business is off to a good start, with prices 13 percent higher than last January and units sold up 16 percent
  • We are seeing higher activity in lower price ranges helped by low mortgage rates and job growth. Higher price segments may see some impact later this year if the stock market remains at today’s levels.

What Happened Since Pacific Union’s 2018 Real Estate Economic Forecast Last November

  • At the 2018 Pacific Union Real Estate Economic Forecast in November of last year, we talked about what’s to come in the next couple of years for Bay Area housing markets. One main theme that emerged was “normalization” of the technology growth in the Bay Area and its potential impact on home sales and price appreciation. The conclusion suggested that housing markets are expected to normalize, with home prices and sales continuing to grow at a steady but slower pace. Home prices are expected to grow about 10 percent cumulatively over the next three years.
  • Since the forecast in November 2015, financial-market volatility has sent shivers down our spines, leading to many questions about what’s to come.

What Is Causing the Stock-Market Volatility?

  • Most of the volatility in the financial markets is coming from falling oil prices. During the first three weeks of January, oil-futures prices declined 27 percent. Over the last two years, the price of a barrel fell from over $100 to $27. That’s pretty staggering! The main reason for the drop in oil prices is the oversupply of oil in the global market, as well as an oil-production boom in the U.S. In the chart below, the U.S. (the blue line) is now the largest producer of oil globally. Production of oil has increased to an all-time high, growing by over 1 million barrels of oil between July 2014 and July 2015.

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  • At the same time, the other oil-producing countries have not scaled down their production as a result of the oversupply, which is how they usually control prices. OPEC is in the process of vigorous negotiations over limiting production in an effort to stop oil prices from continuing to stumble. However, competition for influence and market share has grown fierce for OPEC countries, which is keeping their oil production elevated. Hence, the oversupply is expected to continue over the next few years, and markets will have to go through a period of adjustment.
  • However, there is something to be said about fast money and technological advancement, which have allowed investors to move monies instantaneously on any spook. For example, anticipation over higher Federal Reserve rates led those looking for a quick return to move their monies into banks in anticipation of higher rates. However, since the rates have not budged and have actually fallen, the money moved as quickly out of the banks. This is another cause of volatility.
  • As a result of this volatility and fears over poor economic results in emerging markets, demand for U.S. currency denomination (for example, treasuries) keeps growing, causing the dollar to strengthen. A strong dollar is bad for our trading partners and it further perpetuates slower growth abroad, which can in turn have a bad impact on the U.S. economy. The good news is that the U.S. dollar has begun to weaken slightly, which may help dispel some fears.

What’s Going on in China?

  • Some have argued that oil oversupply is due to a slowdown in demand for oil from China. However, Chinese consumption has been on a solid upward trend for several decades. And though the pace of annual increases has slowed in last couple of years, China continues to consume increasing amounts of oil. Keep in mind that China was going through a major industrialization process over that period, and it is natural that consumption would eventually slow as industrialization reaches a certain point. China is still growing strong though, at a staggering rate of 6 to 7 percent. Also, the main reason for the slowing of consumption of oil is that the Chinese economy is moving from mainly relying on construction and industrial growth to relying on service-industries growth. Chinese people are richer than they were before, and their consumer spending is showing positive signs, hence supporting the service-industries growth. Income and job growth are solidly moving upward.

Should We Be Worried?

  • Despite volatility, recent U.S. economic data points to continued growth ahead. Most importantly, job growth remains strong. The last jobs report showed the unemployment rate falling below 5 percent (considered full employment) and more people participating in the labor force. Also, people are working longer hours and are more likely to quit a job in pursuit of something better. This means that the pressure on wages that John Burns discussed at the November forecast is coming to fruition.
  • California continues to grow employment at one of the fastest paces in the country. With 60,400 jobs added in December, job growth in 2015 reached an amazing 459,400 net new positions. This marks the fourth year in a row that California has added more than 400,000 jobs and also marks the largest job gain of any state. The chart below shows the year-over-year changes in the tech sector, which is still growing at a healthy 5.2 percent.

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  • Business and consumers have different perspectives on the state of the economy, though. Consumer spending, which accounts for 70 percent of GDP, showed impressive numbers in January. Lower oil prices and lack of inflation are helping with retail sales growth and not just with the purchase of new automobiles. There are also signs of income growth, and mortgage rates continue to remain incredibly low. This is all good news for U.S. consumers.
  • Businesses, on the other hand, have been more concerned about the future. A strong dollar has not been helpful for U.S. businesses selling abroad. With less demand coming from overseas and volatility in the market, businesses are showing less confidence and anticipate slowing of job formation. However, it’s hard to draw any conclusions about the entire year ahead based on data that comes in January, and particularly if the winter was harsh in some parts of the country. Generally, many economic indicators are reported at the national level, yet indicators that have been disaggregated by regions of the country have shown the West outperforming other regions for several years now.
  • Housing is still a really bright spot in the economy, both locally and nationally.

Where Do We Stand in February 2016?

  • In the Bay Area, we continue to see some strong numbers for January. The California Association of Realtors’ January report showed single-family home prices for the region continuing to soar at double-digit rates year over year. Pacific Union real estate professionals report similar price increases, with average prices 13 percent higher among properties sold by our firm when compared with the same time last year. Sales of single-family homes have also shown advances, growing by almost 7 percent from last year, according to CAR. Pacific Union professionals have had a better year with sales and sold 15 percent more homes this January than last one. Also, many clients are facing delays related to new Consumer Financial Protection Board regulations, with sales being pushed to spring months.
  • Still, we cannot generalize across all price segments. Preliminary data shows that homes priced below $1.5 million are seeing much more activity than homes priced between $2 million and $5 million. Affordability remains the main concern in the Bay Area, and homes in the lower price range are being buoyed by very favorable mortgage interest rates.
  • In fact, what’s still giving everyone a headache is the lack of inventory. Pacific Union listings are down 9 percent for the first 50 days of this year. We are in the third year of extremely low inventory in the Bay Area, with markets like Santa Rosa showing less than half a month of supply. Pacific Union professionals, however, suggest that spring may open some doors, with more listings in sight. Data on single-family permitting also suggests that we may be seeing more homes available for sale in the East Bay and San Francisco, with both areas showing more than a 23 percent increase in permits in December from last year. New permits in San Jose are much slower to catch up and have only increased 5 percent during the same time.

What Are the Concerns?

  • At the 2015 forecast event, we also talked about “normalization” of IPO valuations and uncertainty of what will happen to increasingly unsubstantiated valuations. It is still very hard to predict where these “unicorns” are going to land. In other words, how much appetite will investors continue to have for “unicorns”?
  • We do know that the stock market is down about 10 percent from last year. While the volatility in the stock market will probably persist a little longer, making it very hard to predict where it will stabilize, some correction has been anticipated for a while. The problem for the Bay Area stems from the fact that the housing market is relatively more sensitive to the stock-market-wealth effects than in other area of the country (previous academic research by Richard Green from University of Southern California has confirmed this).
  • That means that if the stock market stabilizes at a lower level than last year, we may see some softness later this year. The softness will not be uniform across all price tiers, however, and will primarily impact sales in the range between $2 million and $5 million. Lower price ranges will continue to benefit from strong job growth, advantageous mortgage rates, and high demand among younger buyers in search for more affordable housing. Sales of homes priced above $5 million will also see a lesser impact, as the wealth among those buyers is more diversified and less reliant on the stock market’s movements.

All in all, we are off to a solid start for the housing market in the Bay Area. Stock-market volatility will persist for a little while longer, but economic fundamentals remain strong for the region. Barring some unexpected market surprises, we anticipate to remain on track for 10 percent cumulative appreciation over the next three years, which certainly aligns with the idea of “normalization” when compared to the past several years.

Source: Pacific Union

Written by: Selma Hepp, Pacific Union Economist

 

 

Bay Area Home Affordability Improves in the Forth Quarter

Housing affordability improved in the Bay Area and across California in the fourth quarter of 2015 — welcome news for homebuyers.

The California Association of Realtors said its fourth-quarter Housing Affordability Index reached 24 percent in the nine-county Bay Area, up two percentage points from the previous quarter and up three points from a year earlier. Statewide,  housing affordability stood at 30 percent — a gain of one percentage point from the third quarter but down one point from the fourth quarter of 2014.

The Housing Affordability Index tracks the percentage of homebuyers who can afford to purchase a median-priced, single-family home, and CAR credits the improved affordability to lower interest rates and level home prices.

Even with the rising numbers, however, homeownership remains out of reach for many more Californians and Bay Area residents than elsewhere in the United States. Nationwide, 58 percent of homebuyers could afford a median-priced home in their community.

In the Bay Area, housing affordability rose from the third to the fourth quarter in seven of nine counties. It stayed the same in one (Napa) and fell two percentage points in another (Marin).

Solano was the Bay Area’s most affordable county in the fourth quarter, with 45 percent of buyers able to afford a home there. It was followed by Contra Costa (37 percent), Sonoma (26 percent), Alameda (22 percent), and Napa (21 percent). The least affordable counties in the state that CAR tracks were San Francisco (11 percent), San Mateo (14 percent), Marin (17 percent), and Santa Clara (20 percent).

Homebuyers in the Bay Area needed to earn a minimum annual income of $147,080 to qualify for the purchase of a $735,170 median-priced, single-family home in the fourth quarter. The monthly payment, including taxes and insurance on a 30-year, fixed-rate loan, would be $3,680, assuming a 20 percent down payment and an effective composite interest rate of 4.07 percent.

(Image: Flickr/Pictures of Money)

Source: Pacific Union

Credit Restrictions to Ease in the New Year/Longer Timeframes for Real Estate Transactions

Mortgage lenders expect to further relax credit standards in the coming year, which could help some first-time buyers who have been shut out of the market finally get a foot in the door.

Fannie Mae’s fourth-quarter 2015 Mortgage Lender Sentiment Survey found that 16 percent of lenders plan to ease credits standards for GSE-eligible loans in the next three months compared with 2 percent that expect to tighten them. In a statement accompanying the report, Fannie Mae Senior Vice President and Chief Economist Doug Duncan noted that loosening standards could spur an uptick in first-timer buyers, who have been hampered by limited inventory, rising mortgage rates, and home prices that are growing faster than incomes.

“Thoughtful easing will help mitigate some of the affordability decline moving into 2016,” he said.

On the other hand, new mortgage regulations implemented by the Consumer Financial Protection Bureau are responsible for longer closing periods and for the substantial November drop in U.S. existing-home sales, which fell to their lowest level in a year and a half.

According to a report from the National Association of Realtors, there were 4.76 million existing-home sales in November, a decline of 10.5 percent from October and the fewest since April 2014. NAR Chief Economist Lawrence Yun explained that because signed sales contract have remained steady over the past few months, the decrease may be more of aberration as the industry adapts to the new mortgage regulations.  Nearly half of all respondents to a NAR survey reported longer closing time frames in November compared with 37 percent in the previous month.

“It’s possible the longer timeframes pushed a latter portion of would-be November transactions into December,” Yun said. “As long as closing timeframes don’t rise even further, it’s likely more sales will register to this month’s total, and November’s large dip will be more of an outlier.”

 

 

Source: Pacific Union Blog

 

Supply-Demand Imbalance and Low Mortgage Rates Drive California Home Price Growth


Image of arrows pointing up

Rising demand for real estate and shrinking supply have caused San Francisco to become one of the most expensive places to live in the U.S. since the beginning of the decade, while falling mortgage rates have boosted purchasing power.

According to an analysis by John Burns Real Estate Consulting, home price growth has outpaced income growth by 70 percent in the San Francisco metro area since 2001, the second highest rate in the country, behind Los Angeles. That figure includes the 44 percent benefit homebuyers have obtained from low mortgage rates, which have dropped from 7.2 percent in June 2001 to 3.97 percent for the week ended Dec. 17.

The analysis points out that California homeowners have benefited the most from the imbalance between supply and demand. Six of the nine U.S. housing markets where JBREC says that “home prices have risen faster than can be explained” are located in the Golden State, including San Jose, where they have outpaced incomes by 53 percent over the past 14 years.

Source: Pacific Union blog

(Image: Flickr/FutUndBeidl)

A Silicon Valley ZIP Code Remains America’s Most Expensive

 

ATHERTON NAMED NATION’S WEALTHIEST TOWN FOR THIRD STRAIGHT YEARatherton_mansion_sm
The prosperous Silicon Valley economy and a slim supply of homes for sale have once again vaulted a Bay Area community to the top of 2015’s list of America’s priciest ZIP codes.

That would be the San Mateo County town of Atherton and its 94027 ZIP code, which Forbes recently named as the nation’s most expensive for the third consecutive year. With a median home price of $10,564,038, homes in Atherton sell in an average of 106 days – fairly quickly given that eight-digit price tags are out of reach for most homebuyers. Forbes notes that Atherton is home to high-rolling, high-tech bigwigs including Facebook COO Sheryl Sandberg and HP CEO Meg Whitman.

Two other San Mateo County ZIP codes landed in the top 10: No 7. Woodside‘s 94062, with a median sales price of $5,533,534, and No. 10 Hillsborough’s 94010, where homes go for $4,951,458. ZIP codes in Santa Clara County’s Los Altos Hills (No. 11) and the Marin County communities of Belvedere (No. 13) and Ross (No. 20) also ranked near the top of the list.

 

Source: pacificunion.com

(Photo: Flickr/Ed Bierman)

Economists think the low interest rates will continue for awhile

A message to homebuyers anxious about rising interest rates on home loans: relax. You’re not going to miss out on today’s superlow mortgage rates if you’re just now starting to search for your dream home in the Bay Area. (Or that getaway ski home in the Lake Tahoe/Truckee region.)

Fed Chairwoman Janet Yellen

Recent analysis and crystal-ball gazing by economists has generally put off a rate increase until mid-December at the earliest, and quite possibly not until March 2016. The next meeting of the Federal Reserve’s Federal Open Markets Committee is scheduled for Dec. 15-16, and Fed Chairwoman Janet Yellen has made it clear she will give the markets plenty of time to adjust to the change. If the global economy doesn’t improve markedly by December, March is a more likely date for a rate hike.

And even when rates do increase, they will crawl higher, not jump.

The Bay Area’s Yellen — remember, she was head of the San Francisco Federal Reserve Bank before taking the top job — has said that future interest-rate increases will be gradual, no more than 1 percentage point a year. And perhaps much less: Jonathan Smoke, chief economist for Realtor.com, told The New York Times that he expects to see a gradual increase in interest rates totaling no more than half a percentage point over a 12-month period.

That means that today’s interest rates will still be a bargain by historical standards. And that will help make homes in the Bay Area and across Northern California much more affordable over the life of a mortgage than their price tags suggest.

Interest rates on a 30-year, fixed-rate mortgage averaged 3.85 percent last week and have been largely unchanged for more than a month, according to Freddie Mac’s weekly rate survey. Fifteen-year mortgages were at 3.07 percent last week, with five-year adjustable-rate mortgages at 2.91 percent and one-year ARMs at 2.53 percent.

It’s worth noting that mortgage rates in Western states lately have been lower than the national average. Freddie Mac said the average 30-year FRM in the West was 3.80 percent, compared with 3.82 percent in the North-Central U.S., 3.87 percent in the Northeast, 3.89 percent in the Southeast, and 3.90 percent in the Southwest.

The bottom line: Talk to your real estate professional, start scoping out desirable neighborhoods, and get started on a preapproved home loan. But don’t forget to stop and smell the roses in your new backyard.

(Photo: Flickr/International Monetary Fund)

US Homes Prices Surpass Pre-recession Peaks

 


U.S. HOUSING PRICES SURPASS PRERECESSION PEAKS
The nation’s thriving economy has boosted U.S. home prices to an all-time high, while inventory constraints are causing properties to sell at a record pace.

According to a recent blog post from the National Association of Realtors, the median sales price for all existing property types climbed to $236,400 in June, breaking the previous record of $230,400 set in July 2006. Nationwide, home sales were up about 10 percent year over year and reached the highest level since February 2007, which NAR Chief Economist Lawrence Yun attributed in part to rising mortgage rates spurring buyers into action.

Nearly one-half of all U.S. homes sold in less than a month in June, with the average property leaving the market in 34 days, the fewest since the organization began tracking that metric. Limited inventory is not only leading homes to sell quickly, but it’s also creating plenty of bidding wars — particularly in Western states — and lessening affordability.


INVENTORY SHORTAGES HOLD BACK BAY AREA PENDING HOME SALES
Pending home sales rose by double-digit percentages in California for the fifth consecutive month in June, but here in the Bay Area, inventory shortages moved the needle in the opposite direction.

In a new report, the California Association of Realtors says that pending home sales in the state rose by 12.5 percent on an annual basis in June, the seventh straight month of gains. Pending sales grew by 14.2 percent year over year in both Southern California and the Central Valley but dropped by 0.9 percent in the Bay Area, which CAR says is due to a lack of homes for sale.

Five Bay Area counties had the lowest months’ supply of inventory in California last month, which helped the region outpace the state in annual price growth. The median sales price across the nine-county Bay Area was $833,330 in June and more than $1 million in San Francisco, San Mateo, and Marin counties.


AFFORDABILITY NOT IMPROVING IN SILICON VALLEY, SAN FRANCISCO
Even high-paid tech workers don’t earn enough to purchase a home in three Western Bay Area counties, which could have a long-term impact on the region’s quality of life.

Citing a study by San Mateo-based Collaborative Economics, the San Jose Mercury News reports that only 44 percent of households in Santa Clara County can afford to purchase an entry-level home. Affordability issues were even worse in San Mateo and San Francisco counties, where a respective 29 and 27 percent of residents could afford the median-priced entry-level home.

The article puts the median 2014 salary for tech- and science-industry workers at $121,000, which is only enough to make the rent in a region where home prices are hovering in the $1 million range. Collaborative Economics Project Manager Janine Kaiser told the publication that affordability issues were an impediment to the region’s quality of life and could stifle businesses’ ability to recruit talented workers.

(Image: Flickr/Pictures of Money)

Source: Pacific Union

San Francisco Bay Area Happenings July 17-19

 

SAN FRANCISCO EVENTS

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San Francisco Frozen Film Festival 

Friday, Jul 17 – Monday, Jul 20. All Day
For All Ages / Prices Vary

@ Roxie Theater – SF, 94109

www.frozenfilmfestival.com

 

The Renegade Craft Fair

Fri, Jul 17 – Sun, Jul 19. 12:00 to 5:00pm
FREE for All Ages

@ Fort Mason – SF, 94103

http://bit.ly/JSLIxg

 

41st Midsummer Mozart Festival

Fri, Jul 17 – Sun, Jul 19. 8:00 to 10:00pm
For All Ages / Prices Vary
@ Conservatory of Music – SF, 94103

http://bit.ly/1sNHZDi

 

Spartan Race
Sat, Jul 18. 7:30am to 6:00pm
For All Ages / Prices Vary
@ AT&T Park – SF, 94107

http://sprtn.im/1Sgdkud

 

19th Annual Urban Youth Arts Festival

Sat, Jul 18. 12:00 to 6:00pm
FREE for All Ages

@ Precita Park – SF, 94123

http://on.fb.me/1I6XsqT

 

AIDS Walk SF 

Sun, Jul 19. 9:30am to 12:30pm
For All Ages / Prices Vary

@ Golden Gate Park – SF, 94122

https://sf.aidswalk.net

 

MARIN, SONOMA AND NAPA EVENTS

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29th Annual Healdsburg Harvest Century Bicycle Tour  

Sat, Jul 18. 6:30am to 2:00pm
For All Ages / Prices Vary

@ Healdsburg Community Church – Healdsburg, 95448

www.healdsburg.com/biketour/

 

Kevin Spacey

Sat, Jul 18. 7:30pm Start

For All Ages / Prices Vary

@ Weill Hall at Sonoma State University – Rohnert Park, 94928

http://bit.ly/1GPGFnf

 

20+80 A California Summer Music Celebration!  

Sun, Jul 19. 3:00 to 4:30pm
FREE for All Ages

@ Green Music Center – Rohnert Park, 95448

http://bit.ly/1RBUUqX

 

The Great American Blues &
Barbecue Festival

Sun, Jul 19. 11:00am to 6:00pm

For All Ages / Price: $10

@ Downtown – San Rafael, 94903

www.teamproevent.com/

 

PENINSULA/SOUTH BAY EVENTS

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Chitty Chitty Bang Bang

Friday, Jul 17 – Sunday, Jul 19. Various Showtimes / For All Ages / Prices Vary

@ Bus Barn Theater – Los Altos, 94022

http://on.fb.me/1HxTWnJ

 

Stephen Marley 

Fri, Jul 17. 8:30pm Start
For All Ages / Prices Vary

@ Hedley Club – San Jose, 95113

http://bit.ly/1CGhqsi

 

Swing Dance and Concert 

Sat, Jul 18. 7:30 to 8:45pm

FREE for All Ages

@ Oshman Family Jewish Community Center – Palo Alto, 94303

http://bit.ly/1f93rzW

 

Connoisseurs’ Marketplace
Sat, Jul 18 – Sun, Jul 19.
10:00am to 6:00pm / FREE for All Ages     @ Downtown – Menlo Park, 94025

http://bit.ly/1KbpF1Y

 

The Art of Rap Festival 

Sun, Jul 19. 3:30pm Start

For All Ages / Prices Vary
@ Shoreline Amphitheatre – Mountain Viwe, 94043

www.artofrapfest.com/

 

EAST BAY EVENTS

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Bay Area Reggaefest 

Friday, Jul 17 – Monday, Jul 20. 3:00pm to 1:00am / For All Ages / Prices Vary
@ The Craneway Pavilion – Richmond, 94804

http://bayareareggaefest.net/

 

Berkeley Spark 3.0 Arts + Innovation Festival 

Sat, Jul 18. 10:00am to 9:00pm
FREE for All Ages

@ Martin Luther King, Jr. Civic Center Park – Berkeley, 94710

http://on.fb.me/1HBwZ0L

 

Oakland Wine Festival 

Sat, Jul 18. 10:00am to 9:00pm

Ages: 21+ / Prices Vary

@ Mills College – Oakland, 94612

http://bit.ly/1IPZ9d0

 

Family Sundown Safari 

Sat, Jul 18. 6:00pm to 10:00am

For All Ages / Prices Vary

@ The Oakland Zoo – Oakland, 94605

http://bit.ly/1I6MLEL

 

Shakespeare in the Park 

Sun, Jul 19. 4:00pm Start

FREE for All Ages

@ John Hinkel Park – Berkeley, 94707

www.thefreetheater.com/