Bay Area housing market shifting in anticipation of IPO demand
Executive Summary:
- IPO expectations are already showing up in home
sales activity, particularly in San Francisco and San Mateo - Sales of homes in San Francisco, San Mateo and
Alameda have solidly exceeded last year – up 7 percent, 4 percent and 2 percent
respectively year-over-year in April - Santa Clara, Wine Country and Contra Costa remain
slower compared to last year - Homes priced between $1 million and $2 million
continue to struggle, except in San Francisco and San Mateo, likely a result of
tax reform changes and reduced state and local tax (SALT) and mortgage interest
deductions - Nevertheless, sales of homes priced above $3
million have surged again, posting a 5 percent year-over-year increase, matching
last year’s peaks - While growth in inventory of homes for sales is
broad based, availability of homes priced above $3 million accelerated again to
a 26 percent annual growth in April - While price growth remains flat in most regions,
San Francisco median prices up 2 percent year-over-year in April - A 9 percent annual increase in homes under
contract suggests buyers are back in droves, especially for homes priced over
$3 million, up 44 percent year-over-year
While overall Bay Area housing market activity continued to
post a year-over-year decline in April, the 4 percent decline was the smallest
since July of last year. The decline was driven by fewer sales in Santa Clara
County and Contra Costa, with a smaller contribution from the wine country. San
Francisco, San Mateo and Alameda, in contrast, posted solid year-over-year
increases, putting their April sales at the highest levels in three years. Table
1 shows year-over-year April changes in the number of homes sold by price
range, further highlighting some interesting trends.
First, while sales of homes priced below $1 million trend
slightly below last year, most regions are seeing an increased activity
compared to last year, particularly South Bay, Marin and Alameda. Contra Costa
is actually the driver behind the decline of 1 percent, given the relative size
of the county and the number of homes sold compared to the entire Bay
Area.
Second, the segment of the market that continues to struggle
are homes priced between $1 million and $2 million, except in San Francisco and
San Mateo, which is not surprising in lieu of IPO expectations. Weakness in
this price segment is likely a result of tax reform changes and reduced SALT
and mortgage interest deductions, which are potentially a big concern for
would-be buyers in this price range.
Third, the higher priced market, above $3 million, bounced
back to a 5 percent annual increase after significant declines in the previous six
months. The jump is mostly due to the tri-region of San Francisco, San Mateo
and Marin, where sales accelerated compared to last year. As noted in previous
analyses, sales of homes priced above $2 million were growing at a rate of 50
percent in early 2018, thus April’s flat change for homes in the $2 to $3
million range, and a 5 percent increase for homes $3M+ put higher-end sales
back on track with 2018 highs.
Table 1
For-sale inventory continues to offer more options for
potential buyers across the Bay Area and at different price ranges, except in
San Francisco where inventory continues to decline at double digit rates. Table
2 summarizes changes in inventory by price range and region. Overall, there are
about 2,500 more homes on the market compared to last April, an 18 percent
increase. While all price ranges are posting a relatively similar percent
increase, growth in inventory of homes priced above $3 million has accelerated
in recent months, from low single digits over the last year, to a 26 percent
annual growth in April. As Table 2 depicts, most of the increase comes from
Santa Clara and San Mateo, but is also impacted by Sonoma which continues to
see more inventory after the initial post-wildfire shortage. While recent
increases in Santa Clara seem large and draw attention, the area suffered the lowest
inventories in a decade in 2018, so recent jumps put inventories only slightly
above 2017 levels.
Table 2
Furthermore, anticipation of the impact of recent and
upcoming IPOs is influencing Bay Area housing market, particularly in San
Francisco where absorption rates of available inventory jumped to 40 percent in
April, up 9 percentage points from 31 percent last April – now at the highest rates since late 2016. The
other regions continued to see lessened absorption rates with inventory priced
between $1 million and $2 million generally seeing the largest declines in
absorptions, though this price range saw large increases in available inventory
in recent months. Again, the impact of tax reform is having an impact on demand
of homes priced between $1 and $2 million. In contrast, absorption of inventory
priced below $1 million has picked up in San Mateo as well as San Francisco,
and San Mateo saw a 10 percentage point jump in absorption to 44 percent — now the
highest absorption rate of the lower price ranges in the region. Note, though,
that absorption rates are relative to increased inventories across the region.
In addition, while overall median price growth continues to
trend sideways in the Bay Area, not showing any growth on a year-over-year
basis in 2019, San Francisco median prices were up 2 percent year-over-year in
April. Santa Clara and Sonoma, which led the region with relatively higher
annual declines in prices so far in 2019, showed some improvement in April with
slowing declines compared to previous months. However, as shown in Figure 1,
even without the price growth, Bay Area median prices are only slightly below
March 2018 when the run-up in prices accelerated, and well above median prices
prior to the run-up.
Figure 1
Median Home Prices in the Bay Area and San Francisco
Lastly, while the Bay Area housing market has started picking up in bits and spurs, April’s look into the increase in number of homes under contract suggests strong home-buying months ahead. Table 3 summarizes April year-over-year changes by region and price range. Overall, number of homes under contract in April increased 9 percent compared to last April with most all regions seeing the annual jump. The increase is particularly notable among homes priced above $3 million, which are 44 percent ahead of last year. In other words, there were 239 homes in contract in April, up from 166 last April. Again, it is reassuring that the increase in buyer activity is spreading throughout the whole Bay Area and across price ranges. Not unexpectedly though, buyers have been encouraged by favorable mortgage interest rates, more choices, and an influx of IPO.
Table 3
