2018 San Francisco South Bay Real Estate Prediction


#1
                                          Realty One Group

                                          Campbell, CA 95008 

Since late 2011 the San Francisco Bay Area home prices have been rising year after year following the economic recovery. Conventional wisdom suggests that homes prices will increase exponentially the most during the first one third of a growth cycle. The later growth will be less until price maxed out asymptotically.

Figure 1 is the historical single family home prices in San Mateo, Santa Clara and Alameda Counties combined per MLS.SFBA Home prices

image

       Figure 1 Historical SFBA (San Mateo, Santa Clara and Alameda Co.) avg sold home prices

The average home prices from three counties (SFH 3 br+) bounced +18.7% (2012-2013), +13.7% (2013-2014), +8.8% (2015-2016), and during second half of 2016 value increase was receding resulted in a +2.8% price increase (2015-2016). Stated differently, the growth momentum was losing steam just before the presidential election. In 2017 after the election there were more anxious buyers willing to pay top price for anything that looks like housing. During the first 11 months of 2017 the market is so hot that +24.4% home prices increased. During Thanksgiving, pre-holiday season people are motivated. In a normal year after schools started there was often a temporarily cooling off until spring time. This is not the case this year. Those home seekers lost out on used homes go to builders applying builder’s own mortgage trying to get favorable treatment. Instead, there was lottery on many new home release. People scrambled going from builders to builders finding the same people all competing for fewer new homes. These new homes come up in very small quantity-a dozen or so per release and they are gone quickly. As a realtor, builders also asked me if I know any vacant lots or tear downs they can buy. The entire SFBA land is mostly built up. At open house, one home seeker told me they are willing to give up rental deposit of $5K so they can get an early start as they expect $50-70K price increase when their lease is due a few months later.

While there are some mortgage interest fluctuations and minute adjustment interest rate remains to be historically low. There is ample money supply. Today one can still get a 30-year jumbo mortgage slightly above 4% and slightly less for variable (ARM). By and large the interest rate is relatedly constant. In research article Synposis on Mortgage Interest vs Affordability by Shueh, for every 1% interest rate increase there is 10% increase in mortgage payments.

It was not long ago one has to be in a very special neighborhood to justify a 1 million-dollar home. Home buyers and investors asked me how can these older tract homes that were asking for $500K sold not long ago in Santa Clara blue collar neighborhood can have a $1.3 M price tag. I replied I could not even give one away by Wilcox High School for $375K while people wanted to offer only $309K and felt it was justified during the Great Recession.

The law of supply and demand dictates the equilibrium price of a property. In a particular city and a lack of land to add new properties the price tends to rise. As the available land is depleted, whatever lots the developers can find they tried their best to squeeze more homes out of these tiny lots. Most new development consists of only 10-20 homes. Many do not even come with a yard. They should be called detached town houses. They comprise of three-story “tree houses”. Downstairs has a garage, upstairs is the Great Room with a big slab in kitchen area, and third floor is the living quarter. The total construction permits issued is a very small number. For example, in San Jose each fiscal quarter that issues just a 100-200 SFH and there are restrictions what and where one can built and how many must be low income eligible.

-to be continued-


#2

PART II
Housing Supply
image
Figure 2 Housing sold stats from SFBA 3 county properties (32,287 units, 24,624-3 br sfh)-mls
The total of sold units from Figure 2 may look similar but a few 1,000 units off in sales can create an imbalance of equilibrium of supply and demand affecting prices and time to market. For example, between 2012 and 2107 the 5000 units is significant result in 3.7 months of inventory back in 1912 and it drops to 0.7 month in December 2017. The total annual sales from these tree counties stood at $38.2 billion dollars in 2017 (YTD) vs. $24.8 billions (2012) with way more listings attributed to steep price hike.
2017-ytd sold 2016 sold

  1. Santa Clara County 13,965 14,347
  2. Alameda County 13,218 14,142
  3. San Mateo County 5,108 5,318
    Perhaps only 5% of new homes were added not from mls while the rest are re-sell, and another 10% are private sales only recorded through tax records. From the above for resell, it can be seen that there are actually ~5% less homes (MLS) on the market than 2016. But the smaller inventory causes a hiccups in the equilibrium equation of supply and demand.

image
Figure 3 is inventory available(MLS) in 3 counties over time. That consists of SFH, TH, and condos that have 2 bed rooms or more combined.

The local inventory has been extremely tight following the economic recovery (Refer to Figure 3). Due to a complete stall for several years. There were no new constructions. In Alameda, Santa Clara, and San Mateo counties combined units are just 8% of the peak year (2009). November 2017 is 35% of same time 2016 at 1,385 SFH units, and 2016 Nov had 2,100 homes on the market. Just about anything on the market sellers gets more offers than they know what to do. This is also attributed to the strong demand.

Housing Demand

It is difficult to estimate how many people are actively seeking housing. If 56.5% residents in Santa Clara County, California are home owners, technically the rest 899,760 residents all wish they could fulfill their American dream. With an $101,173 median household income (US Bureau of Census 2016), there are quite a few families eligible for a conventional mortgage approval. Many seem have deep pockets from
high tech stock options and often receives additional gift from relatives.

-to be continued-


#3

image
Figure 4 San Mateo County historical employment vs. unemployment rates

During the worst year recession where 75-80,000 workers were out of work, it is amazing it took just one year to get back on track to be employed. Unemployment rate has been frankly quite low. Largest employers like Google, Apple were actually hiring. In September 2017 San Mateo had 2.7% unemployment, while Santa Clara County saw 3.3% and Alameda County experienced a higher unemployment rate of 3.7% (attributed to Oakland). This is appreciably lower than California State at 4.9% or US as a whole stood at 4.1%.
One needs to know not every city has growth. San Francisco County and North Bay had job loss. In Santa Clara which is also nick named Silicon Valley, there were a total 5,968 reported layoffs from high tech industry. As there are always one or two companies competing for same business. It is fairly common to merge or get bought out where one does not need that many employees. For example, Verizon bought Yahoo which immediate resulted in 2,100 employees forced departure including Marissa Mayer all on the chopping block. There are at least 5 local self-driving technology companies. Six smart phone development companies with heavy presence in Silicon Valley. It always has more players who was not the first get a product out and is out.

REGION Employment Growth Month Month Qtr 6mo 1yr 3yr 5yr
% % % % % %
California 16,860,300 31,700 2.3 1.8 2.2 1.5 2.5 2.7
Bay Area 3,901,414 396 0.1 1.2 1.4 1.2 2.8 3.2
Oakland 1,157,638 395 0.4 0.5 1.3 1 2.8 2.7
San Francisco Co 1,117,724 -1,174 -1.3 0.4 0.8 1.2 3.4 3.9
San Jose 1,093,275 2,236 2.5 2.1 1.9 1.5 2.7 3.4
Santa Rosa 203,618 -710 -4.1 2.1 0.3 0.6 1.9 3.3
Vallejo 138,087 -95 0.08 1 1.4 1 2.5 2.6
San Rafael 117,860 582 6.1 7.2 4.2 2.2 2.1 2

       Table I SFBA Employment growth in Different cities (2016)

Housing Bubble?

Recently I learned a 1,300 sf 50-year old ranch style 3/2 1 story home was sold for $1.02M. The owner expected to receive only $840K. It is facing a busy street in a B- San Jose neighborhood. The owner paid $297K about 10 years ago at a peak price. He thought he overpaid in 2007, but cannot understand the logic behind a $1.02M price. Local market is going crazy but so is the US stock valuation. Stocks are liquid but homes are fixed assets. Both can swing up if there are plenty of momentum to drive the market.
Today the interest rates are still low and the economy and jobs are plentiful. The buyers fear today fear they will shut off from the stellar market forever. I have seen 2018 growth projections for Silicon Valley like +4.8%. Local high technology startups companies given that Lyft, Uber, Twitter, Trulia, Qualcomm, Tesla, Zynga etc. exist based on the illusion they will ultimately make our lives better. Many technology companies while increase their revenue they are not yet profitable. As long as there is strong economy there is ample money that can be thrown at by fund managers. Do people like Fitbit wearable or use Nest thermostat that can do just that much?
We are closer to autonomous automobiles than we think. There are at least 5 autonomous automobile companies in SFBA. In cellular phone people are familiar with iPhone, and Samsung. But there are at least 6 smart phone companies with large R&D presence here. They all develop applications, new features like never before.
Until the economy runs out of steam, with a higher deficit, interest rate hikes to precipitate high inflation it is safe to state 2018 will be another great and active year in housing. I do feel people will be more cautious not to throw money at any opportunities though.
May be the strong economy will justify a $1,000+ per square feet in a C class neighborhood and $2,000 per square in a good school neighborhood here in SFSB neighborhoods! I personally do not see a housing bubble at least not in the immediate future. It appears school rating is not a major factor affecting house prices as before. The assumption is if all expensive home owners are moving in it will improve the quality of schools.

In 2017, it was Verizon that merged with Yahoo resulted in plant closing and former employees were dismissed including Yahoo’s CEO who would like to stay but was told otherwise. You have growth and downsize often at same time to justify a realignment in business. Technology companies always favors new things and the first company get into the market place has an edge. Those who are late including most brilliant scientists get booted. If job growth outpaces decline the technology sector will survive. While the business will shrink when inflation, high cost can will wreck the housing industry. 2018 continues to have a strong demand for more housing. Home will continue appreciating because there are still ample high paid jobs. There are, however, already some ingredients suggest it will not stay that way long.
Below is a summary of all jobs including San Francisco, Peninsula and Santa Clara County including most of Silicon Valley:
YEAR SF to SCC employment
2007 2,235,100
2008 2,304,500
2009 2,188,700
2010 2,184,800
2011 2,349,700
2012 2,570,700
2013 2,736,000
2014 2,926,900
2015 3,114,900
2016 3,267,300
2017 2,708,200
Table II SFBA Employment growth through Oct 2017(Bureau of Labor)
At a conference in California earlier this month, Lawrence Yun, chief economist for the National Association of Realtors, also downplayed fears of a high-risk bubble.
“Prices will not fall in the Bay Area,” he said, while speaking in Santa Clara County. “As long as they’re creating jobs, there’s really no reason why” the bubble — or what is starting to look like a bubble — will burst.
The writing is on the wall all over the places. San Jose area has ~1,000 properties on the market for rent. There are few new renters as people have left the SFBA frustrated by the ridiculous housing cost. Most investors follow fools often thinking home prices will double, triple. They are enjoying the upswing ride thinking it is go even higher. Sky is the limit. When the mortgage interest rates go up a few times in 2018 reaching to 5% or higher, gas price go up most home buyers will freak out. They realize they cannot afford a $1M+ mortgage for 30 years. When the economy slows down with disappointing earnings, you will see local companies reducing head count and in one quarter or two the demand for housing diminishes, and home prices will tank.
At this moment there is no large scale hiring and there are same number people leaving SFBA than coming for jobs so unemployment is steady. If high inflation, political instability, oil price increase, local company stock prices erode people will notice changes are coming.


#4

SF to SCC employment really shrank by 500,000 jobs in 2017 vs 2016? That seems like a massive change for 1 year. I struggle with now employment fell to 2013 levels. Is most of the loss retail jobs?


#5

These numbers are hard to believe. Did we have annual job growth of 9%, 6%, 7% etc since 2011? Not sure what the number stand for. We are growing jobs faster than developing countries, it’s too good to be true.


#6

The source is Dept of Labor Bureau of Statistics. I wonder if the data is comprehensive. More jobs were lost in East Bay, In fact there were several news articles hinting the job market there was not rosy for about 6 months.
S.


#7

The SFBA indeed had strong quicker recovery in jobs during the initial recovery. In fact most people who wanted to work took 1 year to get another job. As a realtor while we just learned about short sale etc. We were back to traditional home sales. We were far better than rest of the US. In high tech residential center there were way fewer home foreclosures than local service worker neighborhoods.


#8

Any explanation as to why the price shot up 24.4% instead of maxing out asymptotically? Or are you implying that is due to impending tax reform of Trump? Without which, the increase in 2017 should be less than 2.8%. Did I read you correctly?

Consistent with my experience…

wuqijun,
Experience any weakness in rent?

Same as many in this forum? Thinking aloud: What does it mean?


#9

None whatsoever. In fact, a condo that I just put on market got rented out in 2 days. So effortless to find tenants…

See, why pay a property manager loads of money when you can do it yourself… what an effortless job!!! You can be brain dead and still manage all your rentals with ease after a while. Another reason against buying non-local real estate. Saves time, effort, and money! :wink: