The real estate markets in the SF Bay Area are parts in an overall economic reality that includes a number of financial, demographic and psychological components – all of which are impacting each other in constantly changing ways. Some are local, and others reflect national or even international events or trends. They often run in parallel, but can also diverge or reverse themselves very suddenly, as is well illustrated in many of the charts below. Below are snapshot analyses of what we see as major cogs in this economic machine.
In some charts, we use specific data for San Francisco itself, but the trends seen there – such as home price appreciation, employment and housing affordability – are playing out, to varying degrees, throughout the Bay Area. That is, we believe these economic context illustrations generally pertain to the entire region.
All our Bay Area real estate market analyses can be found here: Paragon Reports
Sudden, Dramatic Population Growth
Population Migration into and out of California
Though this chart below refers specifically to state data, the trends illustrated most probably apply to the Bay Area as well. Of course, foreign immigration numbers in 2017 and later years may change dramatically with the recent changes in national policies. If foreign migration into the state drops, and emigration out to other states continues (or accelerates) on the below trend, it would eventually probably have significant ramifications for the Bay Area. This chart refers to 2016 data.
The issue of migrations into and out of California is more fully explored in this article: Article link: CA Migration Trends
Spectacular Employment Growth
The Bay Area has had the strongest employment trends in the nation, adding approximately 600,000 new jobs in the past 7 years. As illustrated below, San Francisco alone has added about 100,000 in that time period. All these new people need somewhere to live, and many of these new jobs are very well-paid. Note that after dropping in early 2016 (per the economic cooling to be discussed later in this report) and then climbing back up again in the second half of 2016, hiring has basically plateaued in 2017. (Too much should not be made of short-term data.)
New Housing Construction
Though ramping up in recent years, new housing construction has not come close to meeting the needs of a rapidly increasing population, and most of the recent new construction would not be considered “affordable housing,” as developers have concentrated on more expensive condo and apartment construction. So while helping to fill an urgent need for new housing, it has not really helped less affluent, normal-working-class segments of the population. (Affordable housing construction is increasing, but still in very inadequate numbers.)
New Housing Pipeline
A snapshot of what is currently in the pipeline for new construction in the city: Over 60,000 housing units of all kinds (sale, rental, affordable, social-project). 3 huge, long-term projects make up a big percentage of units planned. Note that the pipeline is constantly changing: new plans submitted, and existing plans changed or even abandoned. Just because something is in the pipeline does not mean it will end up being built. Economic downturns typically shut down new development plans very quickly.
San Francisco appears to have a much bigger new-housing construction pipeline than most other Bay Area counties, some of which have very little planned or in the works.
Mortgage Interest Rate Decline
The 35% to 45% decline in interest rates since 2007 has played an enormous role in real estate markets, in effect subsidizing much of the home price increases seen in the past 6-7 years. Since the 2016 election, rates first jumped up 23% and then declined again to, historically, very competitive rates below 4%. The fear that rates might rise again soon may have been one factor behind the feverish spring 2017 markets seen around the Bay Area. It is notoriously difficult to predict interest rate movements with any confidence.
For landlords, the very substantial drop in interest rates coupled with the huge jump in rents, as detailed below, turned apartment buildings into cash machines, especially those purchased prior to the recent surge in investment property prices. Declining interest rates helped real estate owners of all types; unfortunately, renters reap no advantage from the shift.
Short-Term Interest Rate Movements
The monthly fluctuations in consumer confidence reported on in the media are relatively meaningless and without context, but longer-term movements are much more meaningful to overall economic trends. Psychology – confidence, optimism, fear, pessimism – often plays a huge role in financial and real estate markets. And events can sometimes turn consumer confidence one way or another very rapidly, whether such movements are rational or not.
New Wealth Creation: Initial Public Offerings
Besides the effect of increased, well-paid employment, the sudden creation of brand new wealth has been a very, very big factor in Bay Area real estate markets. IPOs can create tens of thousands of residents who suddenly feel much, much wealthier, and that impacts home buying. Local IPO activity increased through mid-2015, pouring hundreds of billions of new dollars into the economy, and then suddenly stopped in its tracks when financial markets suddenly became very volatile in September 2015. This particularly affected the high-end homes segment: Not only were new millionaires not being minted by the dozen, but the affluent are typically most sensitive to financial news and market volatility.
The Bay Area has an astounding pipeline of possible IPOs in the not too distant future – Uber, Airbnb, Palantir and Pinterest, to name a few of the biggest. If and when these companies go public, and how the IPOs are received, are a real wildcard for the region’s real estate markets. There is the potential to unlock tremendous wealth held in relatively non-liquid private equity into billions of spendable dollars. On the other hand, if there was a dotcom-like implosion, the effects would be quite serious. (We don’t expect such an implosion, though a sudden financial crisis could still have significant negative ramifications, especially for currently unprofitable start-ups.)
New Wealth: Stock Market Appreciation
The gigantic surge in the stock market over the past 9 years has also made people feel much wealthier, which, besides making new money available to purchase a home or a bigger home, stimulates consumer (and venture capitalist) confidence, which feeds yet more positive energy into the markets.
As of January 5, 2018, the S&P has increased another 40 points since this chart below was updated on January 2. According to the October 7th Economist magazine, when the index was about 200 points lower, Only at the peak of the two bubbles