Runway Shortening On Residential Real Estate Heading Into 2017

The residential real estate market in the San Francisco Bay Area has peaked.

Pacific Union International and John Burns Real Estate Consulting came together last week to talk about what this means for residential real estate over the next three years.

The panel (above) included John Burns Real Estate Consulting SVP Dean Wehrli, Pacific Union chief economist Selma Hepp, Pacific Union CEO Mark A. McLaughlin and John Burns Real Estate Consulting CEO John Burns. The panelists offered an overview of Bay Area real estate appreciation and depreciation and how shifting demographics affect the marketplace.

Pacific Union CEO Mark A. McLaughlin said the top of the market was May/June of last year and we’re currently decelerating (not to be confused with declining) and the “runway is getting short.”

He said residential real estate remains a “relatively healthy and balanced market.”

There are over 1,000 condos selling, and almost 1,000 condos and almost 3,000 apartments under construction. Another 3,000 condos and over 3,300 apartments have been approved.

This still may not be enough to satisfy demand. Inventory is expected to fall; if more projects aren’t added to the inventory, it will fall below demand by 2019.

Mark said the biggest unknown is what’s going to happen to interest rates going forward, which will be a big variable in determining how many people in the Bay Area can afford $1M homes.

John Burns Real Estate Consulting SVP Dean Wehrli said the pipeline is thinning out over the next few years in San Francisco. There is an “oversupply of jobs compared to housing coming online.”

Places like Fremont all the way to Hayward are becoming extensions of Silicon Valley and the Peninsula, respectively.

He said not all the jobs produce income that can afford some of the price points in the Bay Area. This has pushed people farther out to places like Dublin and Hollister where houses are more affordable.

Dean said he expects Napa Valley, where no new houses are coming online, to perk up over the next three years, especially with the bulk of the area's income profile being middle class. Dean also expects higher appreciation in Napa and Sonoma over the next three years, eventually having an appreciation of 11% by 2019.

Pacific Union chief economist Selma Hepp said average appreciation year-to-date in the Bay Area is 7%, but there are significant variants within cities and throughout counties, ranging from a decline of 12% to an increase of 40%.

Areas where appreciation heated up include pockets within East Oakland, Central Berkeley and East Palo Alto. Areas with the strongest depreciation included Palo Alto, Menlo Park and Tiberon with mid-single-digit declines.

Selma said among the high-end luxury, the most interesting thing was Alameda/Oakland appeared on the list for the first time with a sale over $10M. There was also an increase in home sales over $10M in San Francisco, San Mateo and Santa Clara counties.

The resort market of Lake Tahoe is incredibly strong with sales increasing 20% year-to-date with the strongest increases last quarter, she said.

Despite the positive activity in many ZIP codes, buyers are becoming less aggressive.

“Buyers are more wary and more cautious coming into the year,” Selma said. Fewer buyers are bidding up this year compared to last year as well.

Despite the variants within the market, John Burns Real Estate Consulting CEO John Burns said there is about another three years left in the current cycle overall. The current environment is “not too hot and not too cold.”

John said shifting demographics in homebuyers will start to play a key role in the coming years.

Within the next 10 to 15 years, Baby Boomers are expected to inherit the $8 trillion of wealth held by their parents. Boomers could use some of that money on down payments on houses for their Millennial children.

Another growing demographic in the Bay Area is the higher percentage of foreign-born buyers (at 32% in the region) than nationally.

Another growing trend is “surban,” where suburbs are revitalizing downtowns and creating housing within these areas, he said.

Suburban cities such as Mountain View and Sunnyvale have already broken ground on projects within their city cores.

Find out more of what to watch for at Bisnow's San Francisco State of the Market event Jan. 18.