By Jacob Bourne
For the third year running, Pacific Union International has presented a live economic forecast presentation for the region, looking outward to 2019. On November 16, at the San Francisco Jazz Center, Pacific Union CEO Mark McLaughlin presented research findings alongside economists John Burns, Dean Wehrli and Selma Hepp to an audience of 420 people plus hundreds more watching the live stream online in English and Mandarin. The presentation gave an outlook for Bay Area real estate as a whole but also narrowed down a wide range of differences among the many submarkets.
Audience members were largely people buying and selling homes in the Bay Area and much of the information disseminated intended to provide guidance. Before diving deep into details, McLaughlin commented that the market’s return to normalization was necessary, adding, “This frothy market cannot continue — unicorns cannot fly forever.”
Anticipating that when people heard remarks about the slowing of market growth many would automatically think of the Great Recession, he began by stressing the difference between market acceleration, deceleration and decline. Data from John Burns Real Estate Consulting illustrates the steep decline between 2006 and 2008 as well as steep acceleration between 2011 and 2014, with a clear plateauing — or deceleration — that’s occurring presently.[contextly_sidebar id=”co3yZn7yqGz6EM1FttCoSCfiEbUfSBvT”]“The broad brush over the region is that appreciation is up seven-percent year over year,” said McLaughlin. “The market has returned to a normal state. Overvaluation in certain places is now really a returning to normal. Peoples’ minds always go to 2008 but that’s not what we’re seeing. This is just a flattening.”
Between 2015 to 2016 the Bay Area experienced an overall seven-percent appreciation but there were some small pockets of decline. The cities of Palo Alto, Tiburon, Menlo Park, Los Altos, Belmont, Lafayette, Half Moon Bay, Saratoga, Cupertino and Clayton all saw single-digit drops in median sale prices. The region’s highest citywide appreciation occurred in East Palo Alto where median prices are now at $740,000, up by 19 percent; a stark contrast to neighboring Palo Alto where prices dropped from $2.5 million to $2.36 million. Large swaths of Napa and Sonoma counties also saw gains including Petaluma, showing 13-percent appreciation. Many small areas around the region also experienced gains, but much of it occurred in the East Bay, with Oakland, Hayward and surrounding areas showing double-digit appreciation.
The presenters defined normal growth as appreciation less than 10 percent, which marks the vast majority of the region including San Francisco at 3 percent. However, when the numbers were broken down by zip code the rates showed wild variation. For example, certain zip codes in Berkeley and Oakland showed red hot appreciation of well over 20 percent.
“The most common denominator for the depreciation is the median prices in those areas,” said Selma Hepp, chief economist, Pacific Union. “There was a decline in more expensive areas over $1.7 million. We saw a very rapid depreciation in these places. The above 10-percent appreciation was in more affordable areas like the East Bay, south of the City and Sonoma. These areas are more affordable and close to job centers. They’re also areas where there’s still potential for gentrification or close-by already gentrified areas.”
The common thread emphasized by the team is that there has been a cooling off in the market especially in San Francisco, San Mateo County and Silicon Valley — with some exceptions. Many buyers have taken a step back, but not necessarily in parts of the East Bay where potential homeowners have a sense that they can still get a good deal on a property. McLaughlin spoke of the importance of affordability and proximity to jobs and transit as the major drivers of current real estate trends. While this will continue to hold true in the future, the movement of interest rates, which have been low, will heavily impact the home-buying prospects of many demographics.
“If rates go up we may be looking at different market conditions,” offered Hepp. “Some people may feel pressure to enter the market with interest rates still low. I don’t know how many people are sitting on the sidelines waiting or how much rates will go up.”