The Year of the Pig is officially underway, and with it a “...lucky lunar cycle inclined to bring prosperity and wealth.” In this update, we explore the key drivers set to shape housing markets around the Bay in the months ahead. Here's to health, wealth, and good vibes in this Year of the Pig.
A glitch in the matrix?
Bay Area Median List Prices sky-rocketed in 2018, but finished the year flat
The Median List Price for a home in the San Francisco-Oakland-Hayward Metropolitan Area shot up 18% in the first five months of last year, with similar gains seen in the San Jose-Sunnyville-Santa Clara Metro. From June onwards, however, the Median List Price in both Metros began a steady decline that saw these gains erased on a year-on-year basis. In January 2019, we saw the Median List Price in the SF Metro drop by 2% with no month-on-month change in the SJ Metro.
Bay Area Sales Prices were mixed in 2018
The Median Sale Price of a single-family home across the Bay Area dropped by 3.6% in the twelve months through December 2018, according to California Association of Realtors. But this figure doesn't tell the whole story. Contra Costa, Marin, Napa, San Francisco, and Solano Counties saw the Median Sale Price for single-family homes increase year on year.
Single Family Homes
Condos fared better. The Median Sale Price for a Condo across the Bay Area rose by 5.2% in 2018. Again, this varied on a county by county basis.
Overall, Bay Area homes appreciated in 2018
To get a clear view on developments in the housing market, we need to compare apples to apples. Home prices fluctuate over time and according to geography. But in any given month, the homes that are bought and sold may be skewed in terms of type or quality. Median List Price and Median Sales Price data don't help us here. Instead, we look at indices.
Home Values increased in both the San Francisco Metro (+7.6%) and the San Jose Metro (+7.0%) in 2018.
List Price: the price at which a seller advertises a property for sale on the market.
Sale Price: the price at which a seller and a buyer agree to transact. The median sale price for a given data set is the price “in the middle” of all sale prices when arranged in order of value. Referencing the median sale price instead of the mean sale price is useful as it reduces skew from outlying data points.
Home Value: a proxy for the value of a property, or how much it is "worth". Ultimately, the true determination of value can only be established through transacting. Most homes in a particular geography aren’t on the market, so indices are constructed in order to monitor fluctuations in local home values in aggregate.
So while it's true that Median List Prices dropped in the second half of 2018 (and in January 2019), this hardly paints an accurate picture of price action. Bay Area Home Values have trended upwards.
Home sales have declined over the past several months. Armageddon? Hardly. Several factors contributed to the drop in home sales and the drop in Median List Price: seasonality, higher borrowing costs in the second half of 2018, and buyer fatigue.
Traditionally, residential real estate transactions follow a seasonal pattern (see chart below). Activity often peaks around summer and tapers off into December/January. Family considerations, school calendars, holidays, and historical precedent all figure in. Incidentally, as home prices reached new peaks in summer 2018, more sellers came to market in early autumn.
Home prices have increased steadily since their post-recession lows. To compound this, the cost of borrowing shot up. The rate on a 30-year fixed mortgage rose from around 4.5% in July to nearly 5% in November. An increase of 50 basis points increases the total cost of borrowing $400k by more than $43k over the full term of repayment. This means an increase in the monthly repayment of about $120 (excluding taxes, insurance, and incidentals like private mortgage insurance).
The market context has favored sellers for a long time. Last year, some folks grew tired of placing offers on homes only to see their offers rejected time after time (you may have heard about "bidding wars").
This confluence of factors - seasonality, decreasing affordability, and buyer fatigue - put a check on runaway price appreciation.
The Bay Area is experiencing a period of strong economic performance, though much work remains to address homelessness, growing financial disparity, and equitable access to credit.
Homebuying activity is likely to pick up across the Bay over the coming months. We anticipate more listings coming to market, increased demand from buyers, and rising prices (albeit at a slower pace). This view is predicated on the strength of the local economy, seasonality, low(er) mortgage rates, and supply/demand dynamics.
Boomin' local economy
As we touched on in last month's update, the local economy is strong and continues to outperform most jurisdictions and the U.S. as a whole. Robust economic fundamentals contribute towards greater demand for homes.
High-season for home buying is approaching
Early spring through autumn generally marks the high-season in residential real estate. Anecdotally, we are seeing a number of buyers who were sidelined last year return to market early (now). Attractive properties that are priced appropriately are receiving multiple offers. Following recent price action, sellers are likely to place increased emphasis on the structure and negotiation of offers received. Naturally, buyers and sellers with best-in-class professional support will have a relative competitive advantage.
Lower mortgage rates
At the time of writing, mortgage rates are at a ten-month low: the average rate on a 30-year fixed rate mortgage is 4.37%. Freddie Mac's Chief Economist Sam Khater sees this drop in the cost of borrowing as likely to stimulate demand:
"The U.S. economy remains on solid ground, inflation is contained and the threat of higher short-term rates is fading from view, which has allowed mortgage rates to drift down to their lowest level in 10 months. This is great news for consumers who will be looking for homes during the upcoming spring homebuying season. Mortgage rates are essentially similar to a year ago, but today’s buyers have a larger selection of homes and more consumer bargaining power than they did the last few years."
Freddie Mac forecasts the 30-year fixed rate to average 4.7% in 2019.
Too few homes
The lack of housing supply has reached the point of crisis at the local, regional, and national levels. According to the California Department of Transportation, "housing production is not keeping pace with population growth."
Alameda County (2010-2018)
Source: CA Dept. of Finance
Source: CA Dept. of Finance
San Francisco County (2010-2018)
Source: CA Dept. of Finance
Source: CA Dept. of Finance
Property markets are highly-localized, by definition. The difference in a few city blocks can determine school district and proximity to transport, amongst a host of other factors.
Here's a heat map of the "hottest zip codes" around the San Francisco and San Jose Metros right now. We base this on data from realtor.com, which evaluates zip codes within a given metro based on key determinants of supply and demand.
Pooling resources to buy a home can be a great way to get a down payment together and to benefit from economies of scale. Every month, we illustrate the benefits of combined purchasing power with up-to-date market data.
In the example below, we assume:
Source: realtor.com data for SF-Oakland-Hayward Metro as of Feb 2019
Economies of Scale
single buyer / 1 bedroom home
A single buyer would need $81k in cash up front for downpayment and closing costs.
Teaming up to co-buy
3 co-buyers / 3 bedroom home
Three co-buyers would need to each contribute $36k up front for downpayment and closing costs.
Breaking it down...
On a per-bedroom basis, purchasing a three-bedroom home in the SF metro is currently 56% cheaper than purchasing a one-bedroom home. Economies of scale are real! Co-buying can deliver more bang for your buck and provide greater optionality.
Considering co-buying a home?
Context is key. Here are just a few of the things to take into consideration.
It is crucial for the parties involved to get on the same page early on. Alignment around preferences, expectations, and how to deal with any issues that may arise will maximize the likelihood of success - both during the purchase process and for the life of the co-ownership arrangement.