A consideration of the main factors at play behind the current San Francisco real estate market, some of which reflect general macro-economic trends and some of which are specific to the city itself. As we’ve seen in 1989, 2001 and 2008, many of these factors can stall or go into reverse very quickly in the event of a large, negative, economic, political or even ecological event.
In 2016, the market in San Francisco started to cool off somewhat after 4 years of a ferociously high-demand/low-supply dynamic. By any national standard, it is still a strong market, especially in the more affordable price segments, but it has distinctly changed with listing inventory increasing and buyer demand softening. The influx of newly constructed condos have affected the condo market most of all, especially the luxury condo market.
- Population growth vs. New Construction: San Francisco has recently been adding approximately 10,000 – 12,000 new residents per year. New construction is booming again in the city, and tens of thousands of new housing units are now somewhere in the planning and construction pipeline. Thousands of new condos and apartments (mostly at the high end of prices) hitting the market have been affecting the supply and demand dynamic, with both condo prices and apartment rents ticking down from 2015 highs – especially in those districts where new construction is concentrated. It will be interesting to see how influx continues to affect the market as more inventory arrives. There is no question that the city continues to suffer from a grievous lack of more affordable housing.
- Employment growth: San Francisco has recently hit new highs in the number of employed residents and its unemployment rate is as low as it has ever been. Many of these new jobs – in high tech, bio tech and professional occupations – are very well paid. Approximately 14,000 units of housing have been built in San Francisco since 2010. Over the same 6 years, the number of employed residents has increased by about 100,000. In light of the mismatch between supply and demand, the pressure on housing prices is not surprising. Employment actually dropped in the first 6 months of 2016 and then surged again in mid-summer to its highest point ever.
- Stock market upswing: Though there was some major volatility in the period from autumn 2015 through autumn 2016, adding in the recent surge after the election, the S&P 500 is way, way up from 2011. The affluent have benefited most from this large increase in the value of financial assets, and San Francisco has one of the most affluent populations in the country. When people feel wealthier, they spend more on homes, second homes and real estate investment properties. However, we believe much of the local affluent population has become somewhat more cautious with all the extreme volatility – China stock market, oil price crash, Brexit, the 2016 election – that has occurred in the stock market over the past 20 months.
- Brand new wealth: Thousands of newly affluent residents, including significant numbers of millionaires and even billionaires, have been created in the Bay Area in recent years from stock options, IPOs and company sales. This super-charged the “wealth effect” on the real estate market from 2011 through mid-2015. According to Wealth-X, San Francisco ranks 3rd in the nation for number of “ultra-high-net-worth” residents. However, since mid-2015, there have been very few new IPOs, so the dynamic creation of huge amounts of brand new wealth has slowed. On the other hand, the Bay Area is still full of large start-ups like Uber, Airbnb and Palantir, which certainly have the potential to go public in the not too distant future, and start minting, once again, new millionaires by the dozens or even hundreds. It’s also interesting to note that: “San Francisco ranks first among U.S. cities in income mobility, i.e. the opportunity to rise upward on the income scale thanks to its schools, its growing economy and its compact physical size that doesn’t produce walled-off divisions.” (San Francisco: a city pushed to new limits and opportunities)
- High rents: Purchasing a home in San Francisco, with the attendant multiple tax benefits, being able to take advantage of low interest rates, and equity accrual (as well as the possibility of future appreciation), often makes compelling financial sense if the alternative is to pay an extraordinarily high rent (with none of those benefits). SF rents started to plateau in mid-2015 and have dropped a little in 2016 and early 2017, but they are still the highest in the country.
- Low interest rates: from 1996 to 2006, the average interest rate on a 30-year fixed rate loan was approximately 6.3%. By late July 2016, it was running under 3.5%, and as of late-March 2017, it was running about 4.2%. Even after the relatively big post-election jump, the large reduction, 2007 to present, in the cost of financing has made an enormous difference in affordability and the ongoing cost of housing. To a significant degree, declines in interest rates to these near-historic lows have subsidized increases in home prices. It is extremely difficult to predict interest rate movements, but if rates continue to rise appreciably, it will certainly affect housing affordability.
- Renting instead of selling: Very high rents and very low interest rates have convinced some owners who would have sold their homes to rent them out instead, and the Airbnb rent-to-tourists option is probably adding to this (even if in many instances, it violates city statutes.) As an adjunct to the financial calculation for renting instead of selling, we are also hearing from some owners that they are afraid that if they sell now, they or their children will never be able to afford to move back. All this further depresses the supply of new listings coming on market, exacerbating the inventory shortage. This is particularly true of houses in San Francisco, of which virtually no new ones are being built. (Condo construction is booming, and condo owners have a tendency to move much more often.) Not selling as frequently: According to a November 2016 report by ATTOM Data Solutions, “homeowners who sold in the third quarter