Key Takeaways From Pacific Union's San Francisco Bay Area Forecast to 2019

Economic Straight Talk

Executive Summary: Yesterday, Pacific Union held its third annual Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting in order to project Bay Area activity through 2019. Below are some key, high-level takeaways from the live event. To watch the full, one-hour presentation, click here.

  • Despite being in the seventh year of expansion, we expect the economy to continue growing through 2019 before slowing in 2020.
  • The Bay Area real estate market is one of the few in the U.S. that classifies as overheated.
  • Nevertheless, demographic changes will continue fueling demand for housing, as more millennials approach the age when they start their own households.
  • Bay Area millennials also benefit from the transfer of intergenerational wealth from their parents and grandparents, who help them with down payments for homes.
  • We project that more “surban homes™” — those that offer urbanlike living in a suburban market — will be built.
  • Across the entire Bay Area, home price appreciation has averaged 7 percent so far this year when compared with the same period in 2015.
  • Individual Bay Area communities fall into four categories when measured by year-to-date appreciation: normal, double-digit, heating up, and declining. Markets that fall into each category include:
    • Normal (up to 10 percent appreciation): The majority of markets fall into this category including San Jose, Santa Rosa, and San Francisco. The median home price in these markets averages $940,000.
    • Double-Digit (10 to 20 percent growth): Some of these markets include Oakland, Hayward, and Petaluma. The median home price in these markets averages slightly above $500,000.
    • Heated (20 to 40 percent appreciation): While no city-level price growth exceeded 20 percent, some ZIP codes have seen this levels of appreciation, including those in Oakland, Berkeley, Cotati, Glen Ellen, Larkspur, St. Helena, and East Palo Alto
    • Slowing (6 percent depreciation to flat): Cities in which the median price is lower than last year include Palo Alto, Tiburon, Menlo Park, and Lafayette. The median home price in these markets averages $1,700,000.
  • Differences in home price appreciation were driven by affordability and access to public transit and jobs. The highest appreciation was seen in markets that are still relatively affordable and in close proximity to job centers. For example, seven of the fastest growing ZIP codes are in Oakland and Berkeley. Slowing appreciation and depreciation was seen in relatively more expensive markets and those that lack easy access to jobs.
  • Cooling buyer sentiment is evident in almost all markets. Fewer homes are selling above asking price in 2016 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 smaller in all counties.
  • Overall Bay Area inventory has increased by 5 percent year to date when compared with last year, with San Francisco and San Mateo counties seeing the largest gains. The buildup in inventory is mostly seen for homes priced between $2 million and $3 million.
  • Bay Area job growth will continue to outpace the number of homes built in 2017. The majority of new construction is concentrated in San Francisco, while no new supply is occurring outside the city.
  • Additionally, the new supply is mostly in higher price segments, so even though the ratio of new jobs to new permits may be falling, it does not reflect the true availability of housing for average workers.
  • From 2017 to 2019, we project overall home prices to grow by 11 percent in Napa County; 9 percent in Sonoma County; 8 percent in Santa Clara County; 4 percent in Marin, San Francisco, and San Mateo counties; and 3 percent in Alameda and Contra Costa counties.
  • The number of new San Francisco condominiums for sale has spiked in the second half of 2016 but will begin slowing over the next three years.
  • Lastly, the panel agreed that the current proposal by President-elect Donald Trump will put pressure on mortgage rates, though it is not certain how fast they will increase. Nevertheless, an increase in mortgage rates will significantly reduce the potential pool of buyers who can afford to buy a home in the Bay Area.

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.