First off, what a year in real estate we had in the San Francisco Bay Area in 2014! A few of the highlights were; the continued decline in homes to purchase; the growing of off-market home sales; mortgage interest rates remained at record lows in spite of the Feds ending their purchase of mortgage backed securities; the continued appreciation of home values; the continued lack of new home construction which impacted the lower number of homes to sell. And, given all of these factors the value of the total of homes sold still exceeded 2013 totals! Job growth is the key indicator for any healthy real estate market.
In three Bay Area regions job growth is out performing population growth by more than five to one. San Francisco – 3.3%, San Jose – 3.2% and the East Bay 2.2%. Because of the job growth our region is in a “supply constrained” real estate market and is now ranked as the #1 real estate market in the country, according the John Burns Consulting, the premier “score keeper” our industry. (In fact, our company, Pacific Union, contracted this firm to provide us with a look forward to December 2017. Enjoy the report.)
2015 Bay Area Real Estate Predictions
San Francisco / Marin: A very limited supply of new construction will be available. Because of the affordability factor the number of closed escrows this year will continue to decline. Most of the construction that is seen as you cross the Bay Bridge are rental high rises owned by REITS and hedge funds, both foreign and domestic.
Contra Costa / Alameda: The affordability factor still makes this region of the Bay Area the place where people can afford to purchase a home. However, it is still neighborhood specific with most of the population working in San Francisco or the Peninsula. For example, there are some neighborhoods with $650 per square foot, and some with $300 per square foot.
San Mateo County/Peninsula: There was not the volatility with declining home prices starting in 2007 that was seen in most of the Bay Area. Being so close to the technology centers allowed for the real estate recession to pass it by. This is the high rent district of the Bay Area outside of San Francisco. Job growth, median income and the affordability factor will continue to create a decline in annual closed escrow. And, there are very difficult development requirements for new home builders.
Silicon Valley: Job growth, median income and a big decline in the availability of homes to buy will continue pressing home values higher, which is a similar factor in San Francisco. Any new construction will be attached or townhome type products with high price tags.Again, there was no volatility in home prices during the 2007 recession. High tech jobs kept the recession away.
Summary: Number of closed escrows has been declining the past three years and will continue in 2015. Home value appreciation will be at a 2% or 3% level compared the hyper appreciation we have experienced in the past 24 months. One of the reasons for getting back to a typical appreciation rate is home prices are too expensive for the majority of the Bay Area population. You have incomes growing at 2% to 3% a year, and housing prices have risen 35% to even 40% in some Bay Area regions in the last 36 months.
“Wild Cards” to watch in 2015 that will impact the Bay Area real estate markets.
Luxury Home Market: The hottest segment of the Bay Area real estate markets is actually luxury homes – the top 2% of the market in each of the five regions. This segment of the market grew faster than any other part of the market. It is expected to continue in 2015. Stay tuned.
Rental Markets: With median income either side of $100,000 and home prices racing away from potential buyers we are really serving a small segment of affluent home buyers. Because of this factor, the rental markets are probably the hottest segment in the Bay Area. And the vast majority of the rentals today are owned by publicly traded REITS and hedge funds. With the potential buyers born from 1970 on, rentals are an acceptable option for them.
Baby Boomers: They are changing the landscape of the Bay Area real estate markets. They are in a transition period of downsizing and looking for their retirement home. The generation born in the 1970s and 1980s don’t have a sense of urgency to buy a home as the Baby Boomer did. China: If the money continues to move into the Bay Area from China at the 2014 rate, it may drive prices higher than the predicted home value appreciation. The Bay Area continues to be the main focus of Chinese home buyers. There is no way to predict how this factor will turn out. Stay tuned.
Mortgage Interest Rates: Watch this one. It appears the stars are aligned for this number to be either side of 4% for the remainder of 2015. If it creeps up, watch out for a slowing in the market.
New Home Builders: Until they start delivering product in significant numbers to the Bay Area regions we will continue to have less homes to sell. This niche of the market typically represents at least 10% of home sales. Since new home builders have been out of the market since 2007, it is one of the factors impacting a lower number of homes to sell.
In Conclusion: Two great questions to present to Buyers in 2015 are; 1) Are you wanting to time the market as an investment in real estate?; or, 2) Are you buying a home for your family to enjoy and live in for a very long time?
To address the first question, investors have generally left the Bay Area markets because of home value appreciation. We are now years passed the bottom of Bay Area home values. The vast majority of home buyers will be answering “yes” to the second question. They will be the overwhelming majority of buyers for 2015 of Bay Area real estate. Leslie Appleton Young was asked at a real estate conference, “When is the best time to buy real estate?” Her answer probably is applicable for 2015. “Five years ago.” Until next time… Jim Walberg, The Bay Area Team