Matt Holmes

Matt Holmes

Co-founder at CoBuy
Global explorer. Dual US/UK national. Former investment banker. Real estate enthusiast. Rock&roll lover.
Matt Holmes
CoBuy logo in White

Bay Area

Housing Market Update

 

MARCH 2019

Springin’ Forward

As I write this month’s Bay Area housing market update, the sun is shining gloriously across the East Bay. Spring is on its way. Spring is traditionally a busy season for residential real estate, and we are already seeing the signs of increased activity. 

In our update last month, we looked at how market dynamics evolved over the course of 2018 and into this year. Building on that analysis, we expect to see activity heat up around the Bay over the coming months. Buyer fatigue and increased borrowing costs called skyrocketing home prices into check last year. Our view takes into account pent up demand, fresh demand/seasonality, scarce supply, reduced borrowing costs, and a strong local economy.

From conversations with our clients and our network of CoBuy-certified™ Pros, it is clear that many folks (understandably) are looking at how to approach the buy vs. rent decision. We frequently encounter three common misconceptions about what is required to purchase a home:

  1. A down payment of 20% is required
  2. “Perfect” credit is required
  3. Student loan debt has to be (or should always be) paid off before buying a home

None of these is accurate:

  • The average U.S. homebuyer under 40 years old puts down 8.8%, and many buyers qualify for substantially lower down payments.
  • Numerous programs exist for borrowers who have less than “perfect” credit scores.
  • The existence of outstanding student loan debt does not preclude one from buying a home.

As always, there are many factors at play here. We will be covering these and other topics in upcoming posts, but if you are itching for answers we would love to hear from you.

Price action

Home prices and values are measured in different ways. Many factors influence movements in these levels from month to month, and from one locale to the next. Both home prices and home values reflect signs of “buyer fatigue” on one hand, while fundamentals could exert upward pressure. Last year we saw substantial volatility across the Bay (see last month’s update for more).

Bay Area Median List Prices: bounced in February

Let’s start by looking at the median list price for two Metropolitan Areas: the San Francisco-Oakland-Hayward Metropolitan Area and the San Jose-Sunnyvale-Santa Clara Metropolitan Area. In mid-2018, we saw a big spike in the median list price in both jurisdictions.  Median list prices retraced their gains over the course of 2018, but are trending back upward in February.

Bay Area Median Sale Prices: mixed

The last month for which we have median sale price data is January. January is typically one of the least active months in the year for home purchases.

Single Family Homes

Source: data from CAR

Condos/Townhomes

Source: data from CAR

We see a sizable monthly dip in median sale price across most counties, both in single family homes and condos/townhomes. But median sale price performance over a twelve month period tells a different story (for most counties listed). We expect the data for February and March to show month-on-month gains.

Bay Area Home Values: mixed performance

Below, we break out home value performance by city.  It is evident that performance varies by  jurisdiction. Again, note: the latest month for which data is available is January.  January is typically one of the least active months in the year for home purchases.

If we look at changes in home values over a twelve month period (through Jan 2019), we see strong performance in all but Berkeley and Oakland.  This excludes numbers from February, which we would expect to be higher.

Jargon Busting

 

List Price: the price at which a seller advertises a property for sale on the market.

 

Sale Pricethe 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 Valuea 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.

Supply & Demand

Somewhat predictably, there are signs of increases on both the supply side and the demand side. A key factor is seasonality: historically there are fewer homes bought and sold during the December and January months. Furthermore, last year we saw mortgage rates increase into year end. This had a clear impact on the demand side of the equation. Many would-be buyers decided to put their purchases on hold in light of sustained price increases and a higher cost of borrowing. Mortgage rates have since decreased notably, making a home purchase relatively more affordable for anyone taking out a mortgage.

Increase in the number of transactions in February

February saw a jump in the number of homes that went under contract between buyers and sellers (pending listings increased). Pending listings are a forward indicator of home sales: the majority of these mutually accepted purchase and sale agreements will soon close.

Increase in inventory in February

The number of homes for sale increased in February.

Inventory still remains rather lean by traditional standards.  Months of inventory, a proxy for how long it would take for all existing homes on the market to be sold, is low in both the SF Metro (1.7 months of inventory) and the SJ Metro (1.5 months of inventory). Traditionally, a balanced market is characterized by months of inventory between 5 and 6 months. Still, the Bay Area housing markets can hardly be characterized as traditional. Between the third quarter of 2014 and the third quarter of 2018, months of inventory clocked in at even tighter levels versus today (but…for most of that period, prices were increasing.)

Homes sold at a faster pace in February

The number of days it takes for the average home to sell nearly halved from January to February of this year in both the San Francisco Metro Area (29 days in February) and the San Jose Metro Area (27 days in February). This compares to a national average of 83 days. This is supportive of strong demand for homes from buyers across the Bay Area.

Local Economy

The Bay Area continues to experience a period of strong economic performance, though much work remains to address homelessness, growing financial disparity, and equitable access to credit.



2.5%

Low Unemployment

Virtual full employment. The majority of those who are able and want to work can secure employment.

Source: BLS, DoT

2.2%

Steady Job Creation

Many firms are actually challenged to find folks to hire in the current climate, according to California Dept. of Transport.

Source: BLS, DoT

3.7%

Strong Wage & Salary Growth

Real per capital income is expected to surpass $135k by 2023.

Source: BLS, DoT

4.5%

Inflation

Above the national average and in excess of the national target of 2%, led by sky-rocketing energy prices.

Source: BLS

Looking ahead…

(No change from our view last month. Our conviction here has already seen support.)

Buying 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.

Clearly, the macro-economic bull run cannot persist indefinitely and risks to the demand side remain. A recession, a shock to the local economy, or a meaningful increase to the cost of borrowing could all negatively impact buyer demand.

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 4.41%. 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) 

+9.9%

Population

Source: CA Dept. of Finance

+3.6%

Housing units

Source: CA Dept. of Finance

San Francisco County (2010-2018) 

+9.8%

Population

Source: CA Dept. of Finance

+5.6%

Housing units

Source: CA Dept. of Finance

Highly-qualified buyers 

Wages and salaries in the Bay are higher than the state average – and expected to rise. By 2023, real per capita income in San Francisco County will exceed $135,000. Furthermore, homebuyers in San Francisco have amongst the strongest credit scores of any city in the nation.

“IPO Effect”

A raft of upcoming initial public offerings is slated for 2019. The wealth generated is likely to “heat up the housing market” over time, as has been observed in the recent past. Recent press reports claim that IPOs are likely to result in the creation of “thousands of millionaires” across the Bay.

Hottest local markets 

Supply & demand by Zip Code

Property markets are highly-localized, by definition. The difference in a few city blocks can determine school district and proximity to transport, amongst many other factors.

 

Here’s a heat map of the “hottest zip codes” around the San Francisco and San Jose Metro Areas right now. Note: we have ranked zip codes on a relative value basis within the given Metro Area. This mapping is based on data from realtor.com, which evaluates key determinants of supply and demand for a given zip code.

Co-buying gets you more bang for your buck

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:

 

  • 10% down payment (not a hard requirement, many borrowers qualify with less)
  • closing costs (buy-side) amount to 2.5% of the purchase price
  • median list price for a 1-bed = $599k
  • median list price for a 2-bed = $694k
  • median list price for a 3-bed = $849k
  • median list price for a 4-bed = $1,155k

Source: realtor.com data for SF-Oakland-Hayward Metro as of March 2019

Economies of Scale

Flying solo

single buyer / 1 bedroom home

 

A single buyer would need $75k 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 $35k up front for downpayment and closing costs.

Breaking it down…

On a per-bedroom basis, purchasing a three-bedroom home in the SF-Oakland-Hayward metro is currently 53% 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.

Motivations

Goals

Timeline

Personal finances

Eligibility for financing

Interest rates

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.

Get in touch.

Considering buying a home with friends, family, or a loved one? CoBuy makes it easy to buy & own a home together, intelligently. Log on to CoBuy or drop us a note below.

(206) 651-5551