San Francisco Bay Area to 2020 Marin, San Francisco, and San Mateo Counties Housing and Economic Outlook
Economic Forecast Summary 2017 Presented 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 ). Macroeconomics and Interest Rate Expectations John Burns Chief 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. Sources: Bloomberg; John Burns Real Estate Consulting, LLC (Data: Oct-17, Pub: Nov-17)
Tax Reform and Market Conditions Selma Hepp Chief 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 Supply and Mortgage Rates Impact Mark A. McLaughlin Chief 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.
San Francisco New Condominiums 2014-2017 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. JBREC Burns Home Value Index Price Projections Through 2020 *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 2018 Projections Burns Home Value Index (Pricing) 4% Total New Home Sales Total Existing Home Sales 1.3K +18% 14.1K -2% 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.