Bay Area housing trends are easily summarized: As the supply of available homes dries up, prices go up. It’s the law of supply and demand.
But why is the housing supply — insiders use the term “inventory” — so tight to begin with? And what can be done to expand the supply? For answers, we turned to Ralph McLaughlin, chief economist with Trulia, the residential real estate website.
McLaughlin, 36, is a former college professor who brings a conversational ease to subjects that might otherwise seem convoluted. He also has a keen sense of the Bay Area market: Raised in San Jose, he lives in Alameda in the East Bay, and he works in San Francisco, where Trulia is headquartered. For these reasons, we turned to him for the story behind the numbers.
Q: In a nutshell, what was the story of Bay Area real estate in 2017?
A:It was yet another year of price appreciation outpacing income growth and falling inventory that doesn’t seem to be reversing course anytime soon. It’s the same story we’ve been hearing for the last three to four years, but it’s becoming increasingly problematic for homebuyers. They’re likely to be more frustrated than they’ve ever been.
And that keeps me up at night — being from the Bay Area, it’s very tough knowing so many childhood friends who no longer live here because they can’t afford it. Recent data show the average person moving into the Bay Area earns $8,500 more than the average person who leaves: $90,000 for those coming in and $81,500 for those going out. That’s strong evidence that many middle-income Bay Areans are being priced out and replaced by earners with higher paying jobs.
Q: Why does the region’s housing supply keep shrinking? We hear about year-over-year decreases of 30, 40 and even 50 percent or more in some parts of the region.
A:There are two reasons why inventory continues to fall and prices continue to rise, and the unfortunate reality is that the problem is likely to get worse before it gets better.
The first reason is that we just aren’t building enough homes. And building new homes is extremely important for inventory because they create a chain reaction effect: You build a new house, then someone buys that house, and the buyer likely sells their existing house, and the person who buys that house will sell their home. And that continues down the line until an investor or first-time homebuyer buys that house. So one new home may lead to a four-to-five-fold increase in existing inventory.
Second, the Bay Area — and San Jose in particular — has an aging population. Most homeowners are between 40 and 60 years old, and that’s a time in life when they’re less likely to move. This demographic is less likely to move because they have children in the house, or they have no incentive to move because retirement is imminent. So you have a demographic roadblock to expanding inventory.
Q: Let’s look ahead: What impact will the congressional tax overhaul have on the supply of Bay Area housing?
A:The tax plan may actually make the inventory problem worse. That’s because the cap on the mortgage interest deduction has been reduced from $1 million to $750,000. This is likely to slow the market for homes where homebuyers would have to take out a mortgage for more than this amount. In addition, because existing homeowners are grandfathered in at the $1 million level, they’ll be incentivized to stay put and not move.
Q: What are some policy changes that could expand the housing supply?
A: At the national level, we could incentivize investors who snapped up homes in 2012 – at the bottom of the housing market – to sell. Many of these homes, especially single-family ones, would otherwise be available stock for first-time homebuyers. So if we gave investors a one-time free pass on capital gains, they might put those homes on the market.
Q: But maybe they’d wind up being purchased by other investors.
A:Not likely. This isn’t a great time to be an investor in the Bay Area, so we would hope those properties would be bought up and occupied by families.
Q: Why isn’t it a great time to be an investor?
A:If I bought a house in 2012, the rent I would get on that house would have been enough to pay for the mortgage. If I bought a house today, that’s not as likely, even though rents have risen in the interim. This is because prices have risen much more relative to rents, and that makes investing in rental properties less attractive.
Q: Let’s hear a second policy that could help expand inventory.
A:We could do a better job at providing housing for those that need it most. While not a perfect market solution, preserving existing affordable housing, stabilizing rent growth, and otherwise promoting the development of below-market-rate units helps households who might have to otherwise migrate out of the region stay here. We could also do a better job at encouraging the development of market-rate units, and while they don’t directly benefit low-income households, doing so helps keep higher-income households from looking down market for homes.
Q: And what about the bubble? Will it burst?
A:I don’t think there’s a bubble at all because growth in the market is being driven by economic fundamentals: Strong job growth and low supply equals high prices. The best that we can hope for is that price growth moderates to a place that is closer to inflation and that wage growth slowly catches up. But that will take a long time, probably decades if things continue as they are. It’s taken decades to get us into this mess, and if we don’t step up our housing game soon, it could take us decades to get out.
The first three months of the year tend to be slow for home buyers and sellers. But there’s plenty to do — or at least pay attention to — if you plan to buy or sell a home later in the year. Here are three housing and mortgage trends to heed in the first quarter of 2018:
Peak buying season, traditionally, is later in the year, but the best-prepared buyers are laying the groundwork for success by tidying up their personal finances now
Mortgage rates are predicted to rise, but not by a lot
The new tax law will increase take-home pay for many wage earners, which might invigorate sales of moderately priced homes
1. Prepare now to buy later
More people buy homes in spring and summer than in fall and winter. If you want to join the warm-weather homebuying crowd, start getting ready now because you are likely to face fierce competition during peak homebuying months. As more buyers vie to buy despite a tight supply, the successful bidders will be those who got their financial houses in order while everyone else was perfecting guacamole recipes for Super Bowl parties.
“I think it’s wise to look into your ability to buy a home a good three to six months prior to shopping for that home,” says Michael Becker, branch manager for Sierra Pacific Mortgage in White Marsh, Maryland. This gives you time to correct any errors on your credit report and to improve your credit score so you can get the best possible rate, he says.
Here are four financial steps you should take now to keep your spring or summer homebuying plans intact:
Check your credit report for accuracy.Inaccurate information can causeyour creditscore to drop.
Clear up any problems you find.“If there are errors or some negative items on your credit report, you can spend the next couple months trying to clear them up,” Becker says. Here’s aguide to disputing credit reporting errors.
Get debt under control.At the same time, make sure you have enough in savings. This isn’t easy, especially if you overspent during the holiday season. “You want your credit score to be at its best so you can qualify for the best rates,” says Rick Sharga, chief marketing officer for Ten-X, an online real estate marketplace in Irvine, California. Paying down debts is an important factor in raising your credit score, he says.
Talk with a mortgage professional before working with a real estate agent.A mortgage officer will help you figure outhow much house you can afford, so you can be realistic when you go house hunting over the next few months. “There’s nothing worse than falling in love with a home only to find out you can’t afford it,” Becker says.
2. Watch mortgage rates
Mortgage rates were fairly steady during most of the fourth quarter of 2017, but housing economists expect rates to move upward in the first three months of 2018. Forecasters from Fannie Mae, Freddie Mac, the Mortgage Bankers Association and the National Association of Realtors project a median rise of 0.2% by the end of March. The 30-year fixed began the year averaging 4.09%, so it would be roughly 4.3% at the end of the first quarter, if the forecasts are right.
“Mortgage rates are bound to go up at some point,” Sharga says. “I really believe 2018 is probably the year we’re going to see the numbers start to move back up, and part of that is tied into this tax reform bill that was passed.”
The president and Congressional Republicans have promised that many wage earners will see an increase in their take-home pay as tax cuts are reflected in reduced tax withholding. If they spend the additional money in their pockets, the economy will heat up, stoking inflation, according to basic economic theory.
“Inflation is the real reason bond yields and mortgage rates rise,” Becker says.
Many wage earners will see increases in take-home pay this winter after the IRS updates its tax withholding tables
The standard deduction is almost doubled beginning in tax year 2018, so fewer homeowners will take tax deductions for mortgage interest and state and local taxes
For some homeowners who do itemize deductions, the tax break on property taxes and state and local taxes will be reduced
Outside of high-tax states with expensive homes, “we might actually see some positive effects,” Sharga says. The higher standard deduction might result in taxpayers “with a little more cash to use, and we might actually see more of the low- to mid-priced range properties sell because of that.”
But that’s all theory, Sharga says. We won’t know for sure how the tax law shakes out for another year or more.
Just when it seemed Bay Area home prices couldn’t jump any higher, they soared to dizzying new heights in November — and in the process, set a new record.
The median price for a single-family home in the Bay Area last month was $825,000, up nearly 15 percent from the same time last year, according to new data from property analytics company CoreLogic.
That’s the most expensive since CoreLogic started keeping track in 1988, surpassing the last record of $823,000 set in June. (That data excludes sales of new homes, which make up a small fraction of the region’s housing inventory).
“For the clients that I’m working with that are buyers, it is stressful,” said Sunnyvale-based real estate agent Kevin Swartz. “It is sometimes, I would say, disheartening.”
Meanwhile, the number of available home keeps shrinking, intensifying competition and contributing to the vertigo-inducing prices. Homeowners in the Bay Area’s nine counties sold just 5,123 single-family houses in November, down 2 percent from the same time last year, according to CoreLogic.
Santa Clara County saw the most dramatic price increase last month, with the median price for an existing single-family home jumping nearly 26 percent year-over-year to $1.18 million — a record for the county.
Even areas where homes remain comparatively affordable saw major spikes. In Solano County, the median price of a single-family home increased 14.5 percent, to $402,000. In Contra Costa County, the median price spiked nearly 10 percent to $564,500. Alameda County also saw a major jump as the median price there reached $825,000, up nearly 11 percent from last year.
The relentless rise in prices is about more than just price appreciation. It also reflects a shaking up of the market, according to CoreLogic research analyst Andrew LePage. A greater share of Bay Area sales are happening in high-end neighborhoods, which is skewing the calculation of the region’s median prices.
“There just isn’t enough inventory in the lower price ranges,” he said.
In Santa Clara County, almost 77 percent of sales of existing single-family homes closed at $800,000 or more, up from 65 percent the year before, LePage said. At the other end of the spectrum, just 9 percent sold for less than $500,000.
Homes that cheap are a relic of the past, at least in Silicon Valley, Swartz said.
“There is nothing like that anymore,” he said.
Over the past month, Swartz also has noticed homes getting appraised for less — and in some cases, much less — than the price they sold for. That development is disturbing for buyers’ peace of mind, but it also can have a more troubling effect of pushing a property out of reach for a first-time home buyer. If a property appraises for much less than its contract price, a bank often won’t lend enough to make up the difference, leaving the potential buyer without the means to afford the down payment.
“It’s going to probably mean that those fringe buyers who can just barely qualify are going to have to take a step back from the market until it slows down again,” Swartz said.
It’s not clear when that might happen. For now, the years-long upward trajectory shows little indication of slowing.
The median price of new and existing Bay Area houses and condos has increased an average of 11.6 percent year over year for the past six months, according to CoreLogic.
November marks the 68th straight month of year-over-year price increases. But that stretch isn’t unprecedented: The Bay Area saw a 69-month streak in the late 90s that stretched into 2001.
Whether buyers see relief next year will depend on how much housing supply the Bay Area generates, LePage said. Just 723 new homes were sold in the region last month, compared to 5,123 older homes, which make up the bulk of the market. And the number of new homes sold dropped more than 14 percent from last year. In San Francisco, just 13 new homes sold last month, compared to 128 in November of last year.
“There just aren’t a lot of signs,” LePage said, “that it’s going to loosen much.”
California exodus:Buyers in high-tax states such as California willmove elsewhereif federal tax reform takes away deductions for state and local taxes — one of the more controversial aspects of the proposals pending in Congress. Redfin surveyed 900 homebuyers about this question last month; 37 percent of those from California said they would consider leaving the state as a result, compared to 33 percent nationally.
Waiting to sell:Proposed federal tax code changes relating to tax breaks and how long sellers must live in their homes to qualify — if passed — will make some people wait for another few years to list their homes, making the inventory shortage worse.
Urban suburbs: “Wealthier millennials” will drive the development of a new, denser kind of suburb with modest-sized homes built close to transit, complete with walkable neighborhoods, some urban amenities and good schools. But they won’t necessarily be affordable. Mountain View, where the median price for 2-bedroom home isover $1 million, was Redfin’s Bay Area example of an urban suburb. Regardless, Richardson says, far-flung, sprawling homes known to those who don’t live in them as “McMansions” are simply not what this generation wants.
Sellers market:Homes will sell even faster than they did this year, when nearly one in five sold within a week.
Mortgage rateswill climb from below 4 percent to 4.3 percent or higher for a standard, 30-year loan. And because of high demand, home prices are expected to keep climbing, pushing the monthly payments 15 to 20 percent higher.
Housing bubble?Even in impossibly hot markets like the Bay Area, analysts aren’t seeing a bubble. They drew that conclusion partly because people are making larger down payments or paying all cash, and partly because sellers are getting their asking price — and then some. Richardson found that in cities such as Oakland, the average buyer has less debt relative to the value of their home — 80 percent — than they did in 2006, before that infamous bubble burst.
Roommates:More people will be doubling or tripling up to afford these skyrocketing rents and prices — a la the 1990s TV show “Friends,” Redfin predicts. Finding a compatible roommate of any age will get easier with real-estate startups like Nesterly, which matches younger renters with baby boomers, and CoBuy, which helps people go in on a house together. “We love the innovation,” Richardson quips in her report, “not to mention the new sitcom possibilities.”
Reflecting the chronically tight supply of available homes, Bay Area housing sales fell in October from a year earlier as prices marched up across the nine counties by nearly 11 percent. The region’s median sale price of a single-family home was $800,000 and surpassed $1 million in four of its counties.
In Santa Clara County, where the housing supply is about half of what it was a year ago, the median price reached a new peak: $1,125,000 for a single-family home, up a whopping 19.7 percent from October 2016. Even in Contra Costa County, overall one of the region’s more affordable areas, the median jumped 16.2 percent to $580,000.
“It’s a sign of the times and a sign of the housing affordability problem the Bay Area continues to wrestle with,” said Andrew LePage, research analyst for the CoreLogic real estate information service, which on Wednesday released its latest study of market conditions. They are “brutal for a first-time buyer.”
Between May and October, the region posted an average year-over-year jump in its median sale price of 11.7 percent — up from 5 percent for the same six-month period in 2016. Double-digit gains are again the norm, as they were when the region was rebounding from the Great Recession.
It’s Economics 101: When there are few houses and plenty of potential buyers, prices go up.
“Buyers are lining up like the Apple store,” said Tim Ambrose, president-elect of the Bay East Association of Realtors. “They’re carefully watching what’s coming to the market because they want to get their offers in as soon as they can.”
Describing price trends, he offered this analogy: “It’s like what happens after a hurricane. The price of bottled water goes through the roof. That’s the market we’re in.”
Hilary Yeung understands that market.
She is an accountant. Her husband, Johnny Feng, is a materials manager in tech. With their two young children, they live with Feng’s parents in Santa Clara and have been looking off and on for a house of their own since 2014.
“But every time we started looking at the market, it was up five percent, and the next time 10 percent,” said Yeung. “We were getting pretty frustrated.”
They were typical Silicon Valley buyers, said Mark Wong, their Saratoga-based agent with Alain Pinel: “People are so anxious to get a house. They know that if they wait, they’re out-bidded.”
This fall, Yeung and Feng got serious about their search, determining they had been priced out of the South Bay communities to which they aspired. They moved their hunt to Fremont, found a two-story townhouse that listed for $650,000 — and quickly put in their bid for significantly more than the list price.
Theirs was one of 16 offers and Yeung was “pretty nervous. Because we really liked this house. It’s move-in ready and has a nice backyard for the kids to play. It’s small — 1,200 square feet — but it’s like a start-up home for us. We really wanted it. But what if we didn’t get it? Prices would keep going up, right?”
They got it.
Throughout the Bay Area, only 5,374 single-family homes sold in October, making it the slowest October in four years. Some of that slowdown is attributable to the devastating wild fires in Sonoma and Napa counties, CoreLogic noted, but regionwide it’s the recurring cycle of low inventory and high prices that largely accounts for the sluggish sales activity.
“I’ve got folks who’ve been shopping for something in the $1 million or $1.2 million range in Walnut Creek or Pleasant Hill and there’s nothing for them,” said Keller Williams agent Matt Rubenstein, who is based in Danville. “There’s just really nothing to see.”
At lower price points — $500,000 to $700,000 — prospects improve, he said: “In Martinez, you can get a single-family residence that starts with a 5 or a 6. But it’s still competitive. Folks are writing respectable offers on properties, and a lot are for over asking.”
According to CoreLogic, the share of homes selling in the lower-price ranges keeps shrinking.
Homes selling for $500,000 or less accounted for 37.7 percent of October sales in Contra Costa County — down from 50.2 percent a year ago. Sales of $800,000 or more accounted for 28 percent of Contra Costa sales in October, up from 23.5 percent in October 2016.
Four or five months ago, Chad and Cassidy Gagnon — newlyweds looking for their first house — began to study the market: “You’re looking every day online, putting in the filters and searching,” Chad said. “You see something you like and save it.”
Planning to have a family — and hoping to minimize the commute for Cassidy, a pediatrician — they zeroed in on three communities with reputations for good schools: Pleasanton, Dublin and San Ramon. In November, with Ambrose as their agent, the Gagnons bid on a house that listed for $1 million in Pleasanton. They offered $1.1 million. There were eight other offers and it went for $1.2 million.
Chad, who works in security, imagined the kind of house they might have bought back in Rhode Island, where he grew up: “We’d probably be right on the ocean for that kind of money.”
Undaunted, they next set their sights on a 2,040-square-foot home in Dublin: four bedrooms and 2.5 baths in a secluded neighborhood with hiking trails out back. It listed for $990,000 and drew multiple offers including the Gagnons’ own generous bid: “After the first experience, where you’re up against eight other people, it kind of forces you to give a little extra,” Chad said. “We also wrote a letter to the seller, talking about ourselves — why we were looking to buy and how we wanted to start a family. I think we all agree that the letter was probably a determining factor.”
In other words, their offer was accepted: “We lucked out.”
The San Jose metropolitan area posted the nation’s steepest year-over-year plunge in the number of homes for sale in October — falling by a precipitous 51.6 percent.
With buyers competing for so few listings, San Jose also posted the nation’s sharpest year-over-year rise in the median cost of a home: up 19.2 percent to $1,049,000. That’s according to anew analysisby Redfin, which analyzed 74 U.S. housing markets with populations of 750,000 or more. Nationally, the home supply shrank for the 25th consecutive month, down 12.2 percent from a year earlier.
“Buyers are just flocking from one property to the next,” said Kevin Swartz, a Saratoga-based agent for the Sereno Group. “We’re at this point where they’re just making offers on whatever is available, because it’s so limited.”
The Redfin report also ranks the Bay Area’s three main metro areas as the most competitive markets in the U.S. Combining data for single-family homes, condominiums and townhouses, it ranks San Francisco as the nation’s most competitive market, with 78.6 percent of homes selling for above the list price in October. San Jose ranked second, with 76.3 percent of homes going for above list, and Oakland ranked third, with 63.7 percent of homes selling for more than the asking price.
Bay Area markets also figured among the five “fastest” metro areas in the U.S.
The speediest market was Seattle, where homes typically sold in 10 days, according to Redfin. Second speediest was San Jose (12 median days on market) and third was Boston (14 days). Oakland and San Francisco tied for fourth place; homes spent 15 median days on the market in both metros. Nationally, the typical home spent 44 days on the market, down from 49 in October 2016.
Underlying all these trends are the chronically low levels of homes for sale. Thursday in all of Santa Clara County, Swartz pointed out, only 620 single-family homes were on the market. Adding condominiums and townhouses to the mix, the total still only grew to 745 listings.
San Jose’s 51.6 percent year-over-year tumble in the number of homes for sale was unmatched, though San Francisco had the second steepest decline in the U.S., 28.5 percent. Oakland was close behind, with a 25.5 percent year-over-year drop. As the supply of available homes contracts, buyers keep putting pressure on prices. The median price of a home in the San Francisco metro area hit $1,282,200 in October, up 4.7 percent year-over-year. In the Oakland metro area, it climbed 13.1 percent year-over-year to $690,000, according to Redfin.
Only eight of the 74 metros showed year-over-year increases in inventory. Those were mostly in the South and Midwest. Raleigh, N.C., had the largest jump in the number of available homes, up 16.1 percent, followed by Baton Rouge, LA (12.9 percent), Austin, Texas (8.8 percent), New Orleans (7.5 percent) and St. Louis (4.8 percent).
With home supplies chronically low in most U.S. metros, sales “are sputtering,” said Nela Richardson, Redfin’s chief economist. “The last time we saw a substantial increase in the number of homes for sale, Donald Trump was a candidate in a Republican field of 11.”
Also on Thursday, the California Association of Realtors (C.A.R.) issued its October report on the statewide housing market.
Looking at existing, single-family homes, C.A.R. reports that the median price in the nine-county Bay Area is $892,720, up 11.1 percent year-over-year.
County by county, again for single-family homes, here are a few more numbers.
The Contra Costa County median was $615,000, up 6.1 percent, while the Alameda County median was $862,450, up 11.3 percent. In Santa Clara County, the median was $1,242,500, up 18.6 percent. In San Mateo County, the median climbed 12.8 percent to $1,522,500, and in San Francisco County it rose 13.3 percent to $1,594,000.