What happens when too much of a good thing becomes something bad? If you are a buyer or a seller in the San Francisco Bay area, you are experiencing the price of super success. For buyers, these markets are the most expensive in the nation. A recent California Association of Realtors study found that fewer than one in five Bay Area residents can afford to buy a home where they live.
Sellers have enjoyed extraordinary conditions. In Oakland, prices have risen 132 percent since 2011. Low inventories pushed prices to record levels last year, and listings were selling in 20 days by the end of the summer. Bidding was so competitive that San Francisco sales prices were 15 percent higher than list prices.
Statistics alone don’t convey what it is like to live through these conditions:
- By the end of last summer, the median price of a home in San Francisco exceeded $1 million. A household income of about $220,000 is needed to buy a home at that price, but the typical San Francisco household makes about $97,000 per year;
- Habitat for Humanity homes in San Francisco appraised at levels that would qualify them as luxury listings in most markets in America;
- Forty-six percent of Bay Area residents said they had considered leaving the area. The housing crisis was cited as the primary reason; and
- Schoolteachers in San Francisco earn $67,153 a year, on average. To live in a one-bedroom in the city, they would have to spend over 60 percent of their annual income on rent.
Housing markets comply with the laws of supply and demand, though for some time it seemed as though Bay Area prices weren’t cooperating. Tight inventories have been driving up prices for years, and the momentum didn’t stop when the median price far outstripped the ability of residents to buy a home. This dynamic echoed the inventory shortage that has plagued the nation for the past four years. The length and extent of the Bay Area boom reflected the strength of the housing demand in the region. Booming tech companies, a surfeit of educational institutions and the attraction of the Bay Area to millennials kept demand at a high level. It was a surprise when the measured sales decline affecting heartland markets hit San Francisco with a bang.
Beginning in the second quarter last year, demand finally started to wane because there weren’t many affordable houses to buy. The first sign was a constant and unexpected softening of sales just as the traditional sales season got underway. By August, sales of newly built homes (detached houses and condos combined) were 40.7 percent below the month’s historical average and existing home sales were down 15.2 percent from 2017.
San Francisco Home Prices are Cooling Off This Year
“Bay Area home sales have fallen year over year for the last three consecutive months, and this summer’s activity was the slowest for the June-through-August period in seven years,” wrote CoreLogic analyst Andrew LePage. “The nearly 7 percent annual decline in sales this summer was the largest since sales fell 12.4 percent in the summer of 2010. Much of the recent slowdown can be attributed to the lack of affordable inventory on the market. Unlike the frenzied market of the mid-2000s, many struggling to buy today don’t have the option to stretch financially with the sort of subprime and another risky financing that fueled a lot of homebuying late in the last cycle.”
By November, Bay Area home sales were down more than 15 percent from 2017. Sales across the nine-county Bay Area region was 6,147 houses and condos. “Total November 2018 home sales in the San Francisco Bay Area were the lowest for that month since November 2014,” reported CoreLogic.
By January, prices were slowing even more. Across the Bay Area, 3,857 new and existing houses and condos sold in January 2019, down 14.9 percent year over year. January’s median sale price was $730,000, up only 2.2 percent year over year. San Francisco’s 2018 decline in price appreciation was the third largest in the nation and prices have been flat over the first quarter.
Are we witnessing a long overdue market correction or are we on the cusp of a sustained devaluation? Demand will respond to a flattening, and with even a slight decline in home prices, sales will respond. This year, Bay Area buyers will see some relief from the area’s relentless appreciation, but it won’t last long.