San Francisco’s housing mania may finally have peaked

City’s median home price has soared 66 per cent in four years

PUBLISHED : Monday, 20 June, 2016, 4:09pm
UPDATED : Monday, 20 June, 2016, 4:09pm

After four years of crammed open houses, heated competition and dizzying price gains that sent the median cost of a home to $1.2 million, San Francisco’s real estate market is starting to lose steam.

The inventory of luxury homes is at a record high. A smaller share of deals have bidding wars. Rent growth for large and upscale apartments is softening.

While demand remains robust, real estate mania is waning in the city, which has become one of the most prohibitively expensive United States housing markets thanks to a hiring boom for well-paid technology workers.

Signs are emerging that prices may have gotten too high as job growth slows, venture-capital investment declines and the stock market stays sluggish.

“It’s not the absolute feeding frenzy that we had for the last three springs before this one,” said Patrick Carlisle, chief market analyst at Paragon Real Estate Group in San Francisco.

“By any definition for the rest of the world, it’s still a very, very strong market. It’s just not as crazy hot as it has been.”

Gains in home prices are levelling out, according to a Paragon report released last week.

In April and May, the median price of a house rose 2 per cent from a year earlier to $1.38 million, compared with a 23 per cent increase in 2015, the data show.

The median condominium price was $1.13 million, unchanged, after a 21 per cent jump the year before.

The cooling is most notable at the high end of the market — similar to a dynamic that’s playing out in Silicon Valley as wealthy buyers and foreign investors pull back.

There were a record 95 San Francisco houses on the market for at least $2.5 million at the end of April, up 42 per cent from the previous year, according to Paragon.

For luxury condos — those $2 million and higher — inventory climbed 44 per cent to a high of 75 units. Sales of all luxury homes declined from January through May for the first time since 2010.

A slowdown isn’t necessarily bad news for a city where the median home price has soared 66 per cent in four years, according to Zillow data, fueling tension between new workers and long-time residents who have become priced out.

Only 13 per cent of homebuyers can afford to buy a median-priced single-family house in San Francisco, the California Association of Realtors said in a report last month.

“It has definitely cooled a bit, which is a healthy thing,” said Gregg Nelson, co-founder of Trumark Cos, a Danville, California-based developer that has eight projects in the Bay Area.

“It’s more reflective of where prices are than a lack of demand.”

San Francisco no longer ranks on a list compiled by brokerage Redfin of the 20 hottest US housing markets. Denver, Seattle and Portland, Oregon, are now taking the lead, according to a June 9 report that tracks listed homes expected to sell within two weeks.

There comes a point even in San Francisco where prices outrun demand. We’re closer to that point than we’ve been in years past.
Nela Richardson, Redfin’s chief economist

The California city surpasses those markets in the share of homes sold above the list price and the average sale-to-list price ratio.

San Francisco homebuyers faced competition on 60 per cent of offers written by Redfin agents last month, down from 81 per cent a year earlier and in line with the national average.

“It’s still a place where homes are snatched off the market pretty quickly,” said Nela Richardson, Redfin’s chief economist.

“At the same time, the median sales price for the whole San Francisco metro is $1.2 million, and there comes a point even in San Francisco where prices outrun demand. We’re closer to that point than we’ve been in years past.”

Carmen Ho, a marketing consultant who began her search about a year ago, in April bought a house in the Mount Davidson Manor neighborhood for $1.5 million, about 18 per cent more than the asking price. That’s still less than the 60 per cent above-asking offer another buyer made on a home she bid on earlier in her search.

“It’s not as hot as a year ago,” said Ho, 42.

“The bids are not coming in as crazy as last year. People are a bit more cautious.”

The tech industry, while still thriving, has seen job growth slow to 3.8 per cent in the 12 months through April, compared with a 10 per cent increase in the same period a year earlier.

Venture-capital investments in Silicon Valley fell almost 20 per cent in the first quarter from a year earlier to $4.9 billion, according to an April report from PricewaterhouseCoopers LLP.

The prospect of more takeovers such as Microsoft Corp’s $26.2 billion purchase of LinkedIn Corp may also hinder housing demand.

While LinkedIn hasn’t announced a reduction in workers, broader tech consolidation could lead to job cuts that will hurt home prices and rents, said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

“You’ll probably see more acquisitions of startups or early-stage companies,” Rosen said.

“We have a lot of companies that do the same type of thing and they won’t all survive, and that’s where the job contraction will come.”

Housing demand should still be propped up by a lack of new supply relative to the area’s robust hiring in recent years, said Trumark’s Nelson.

While job gains are slowing, San Francisco’s unemployment rate was 3.1 per cent in April, the lowest since 2000.

“There’s not an adequate supply for the level of demand,” he said. “The prices are hindering what would otherwise be a lot more sales.”

In the rental market, construction may be having more of an impact.

Equity Residential, the largest publicly traded apartment landlord, lowered its revenue forecast on June 1 for the second time this year.

The company, which mostly owns higher-end buildings, said new lease rates in San Francisco and New York aren’t meeting its projections because of added rental supply.

Rents are still rising across all segments, just not as fast as before, said Mark Uh, a housing data scientist at Trulia, a unit of Zillow Group Inc.

While studios and one-bedrooms are in strong demand, the market is cooling for three-bedroom apartments because of runaway prices and fewer potential renters, Uh said.

The median monthly rent for a one-bedroom is $3,550, while a three-bedroom costs $6,500, Trulia data show.

“I wouldn’t say that rents are cratering,” Uh said. “It’s just a matter of rents being really, really high already.”