San Francisco Bay Area to 2020 Marin, San Francisco, and...
Transcript of San Francisco Bay Area to 2020 Marin, San Francisco, and...
San Francisco Bay Area to 2020
Marin, San Francisco, and San Mateo Counties Housing and Economic Outlook
Macroeconomics andInterest Rate ExpectationsJohn BurnsChief Executive Officer, John Burns Real Estate Consulting
Economic Hiccup on the Horizon: The current economic recovery is eight years into its cycle and is already one of the
longest expansions in modern U.S. history. However, recent growth has been at relatively conservative rates and was
preceded by one of the worst recessions in the past century. While the Great Recession was provoked by a financial
crisis with highly leveraged lending policies, banks have been far more disciplined recently, decreasing the risk of a
significant downturn. JBREC is projecting a minor recession, or “hiccup,” in 2020, paired with a slight decline in home
sales and pricing.
Interest Rates to Gradually Rise: Mortgage rates are closely tied to the bond market, factoring in a premium. Bond traders
are currently anticipating a modest increase in the 10-Year Treasury note by 2020. This leads to an expected 30-year fixed
mortgage rate increase of 80 basis points, from 4.0 percent to 4.8 percent. While from a historical standpoint this is still
a very desirable rate, it equates to roughly a 15 percent to 20 percent monthly payment increase relative to today, further
worsening an existing affordability issue. This insight conveys the market expectation of a solid economy in the coming
years, with the understanding that rates will not rise significantly if market conditions cannot warrant such an increase.
Economic Forecast Summary 2017Presented by Pacific Union International, Inc. and John Burns Real Estate Consulting, LLC
On Nov. 15th, 2017, Pacific Union CEO Mark A. McLaughlin and esteemed housing experts John Burns and Selma Hepp
teamed up to present the fourth in a series of live economic forecasts, providing proprietary research findings that give
investors, buyers, and sellers the knowledge they’ll need for success in their Bay Area real estate investments. This report
is a summary of their key findings and conclusions, in addition to supplemental market knowledge provided by John
Burns Real Estate Consulting (“JBREC”).
Sources: Bloomberg; John Burns Real Estate Consulting, LLC (Data: Oct-17, Pub: Nov-17)
San Francisco Supply andMortgage Rates ImpactMark A. McLaughlinChief Executive Officer, Pacific Union International
Supply Levels Strengthen for San Francisco Condominiums: Currently, there are about 840 new-construction
condominium units on the market in San Francisco. Only three years ago, there were fewer than 200 units available. With
such a strong increase in supply, prices have trended down since mid-2016. Only 10 percent of this new condominium
inventory, or 75 units, are being absorbed each month, with the vast bulk of these transactions (80 percent) occurring
between $1,000 and $1,200 per square foot.
Tax Reform and Market ConditionsSelma HeppChief Economist, Pacific Union International
The Impact of Tax Reform on High-End Home Purchases: With the purchase of a $1.2 million home (assuming a $1
million loan), the buyer will currently net approximately
$65,000 in deductions between income taxes, mortgage
interest paid, and property-tax deductions in the first
year of owning. As proposed, these deductions would be
reduced by over 50 percent to approximately $30,000
given the new restrictions. The proposed tax reform
will also alter the current capital-gains exemption from
one home every two years to one home every five
years, potentially incentivizing sellers to hold properties
longer. Also, the proposed reform would remove
mortgage-interest deductions of second homes, which is
a large proportion of sales in the Napa County, Sonoma
County, and Lake Tahoe. In summary, the proposed reform will negatively impact higher-end housing markets with lesser
incentives for both buyers and sellers.
Buyer Competition Has Intensified in 2017: Approximately 65 percent of homes sold in the Bay Area sold for more than
asking price, compared with 62 percent last year. And of those homes, the average home garnered a 9 percent premium
over list price, compared with 8 percent in 2016. Submarkets with particularly strong premiums over the listing price
include Half Moon Bay, San Francisco, Oakland, and Calistoga.
Strong Appreciation Continues Throughout the Bay Area: The median home price in the Bay Area has increased by 9
percent year to date. The strongest appreciation has occurred in areas with excellent proximity to transportation and
employment hubs, such as many areas in Silicon Valley. Homes in the city of Santa Clara appreciated by 15 percent over
the last year, while Sunnyvale was up by 11 percent. The areas that lost steam (depreciated) in 2017 include higher-priced
markets (with limited transactions) such as Corte Madera and Healdsburg.
San Francisco New Condominiums 2014-2017
JBREC Burns Home Value IndexPrice Projections Through 2020
Still Modest Appreciation Ahead: The years of rapid price appreciation in the Bay Area are now behind us, though we still
project modest appreciation going forward. The Burns Home Value Index projects pricing appreciation at the MSA level
(shown below). Future pricing trends are likely to resemble a “table top,” with generally stagnant appreciation relative to
the steep incline in pricing trends that the Bay Area has experienced in recent years. Even with the anticipated “hiccup” in
2020, pricing throughout all Bay Area markets is expected to be slightly above current levels. The San Francisco and San
Jose MSAs are expected to have a slightly larger decline in pricing relative to the surrounding areas given the general lack
of affordability in those core markets.
*Note the term Bay Area throughout this report is defined as the aggregate of the five metropolitan statistical areas comprised of the East
Bay, Napa, San Francisco, San Jose, and Santa Rosa.
SUBMARKET HIGHLIGHTS
San Francisco MSA (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).
• Of the additional jobs in San Francisco, higher-income jobs are growing the strongest, with a 5 percent increase in jobs
earning $160,000 to $200,000 and a 7 percent increase in jobs earning $200,000 and higher.
• The San Francisco MSA has had 6,200 permits year over year. With current levels of employment growth, this
translates to over three new jobs for every permit. Since 1.2 to 1.4 is considered an equilibrium for employment to
permits, this is a strong employment-to-permit ratio. Despite this, many San Francisco workers still seek housing
outside of the MSA due to lack of affordability.
• Over 80 percent of condominium sales in San Francisco occur in the $1,000 to $1,200 per square foot price range.
Condominium pricing in San Francisco has begun to decrease over the past year.
2018 Projections
Burns Home Value Index (Pricing)
4%
Total New Home Sales 1.3K
+18%
14.1K-2%
Total Existing Home Sales