Bay Area January Home Sales Slow, Not Because of Financial Volatility but Lack of Supply

EXECUTIVE SUMMARY:
• January Bay Area home sales were down by 12 percent on an annual basis, following the
lowest inventory levels in three years.
• Silicon Valley posted the largest sales decline, though decreases in all areas were driven
by fewer home sales below $1 million.
• Sales of homes priced between $1 million and $3 million were stronger than the year before.
• Homes priced above $3 million slowed again, but not in San Francisco and Marin County.
• Sonoma and Napa counties saw higher year-over-year activity in January, continuing the
post-wildfire pattern.
• Inventory levels continue to trend down, with overall supply down 20 percent from last
January and declines seen across all price ranges.
• Median home prices continue to climb, with overall appreciation in the Bay Area up 12
percent from last January.
• Despite financial market volatility, the U.S. economy remains strong, with projected 2018
growth the best in a decade.
• Further increases in mortgage rates will exacerbate the affordability crisis.

Before examining January housing market activity in the Bay Area, let’s address recent financial market volatility and how it may affect real estate markets. Much of the recent volatility stems from fears of faster-than-anticipated increases in inflation. Faster inflation could prompt higher interest rates than previously expected, which means that borrowing would become more expensive for U.S. companies and consumers.

Nevertheless, we anticipate stronger economic growth in 2018. Thus, the solid U.S. jobs report that was released on Friday, Feb. 2, which prompted the financial market volatility, was in line with expectations. The same day, Janet Yellen, on her last day as the Federal Reserve chair, said in a CBS interview that she believed that the stock market has been high in recent months and was concerned about high asset valuations, particularly in commercial real estate. She went on to say that ‘”If there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”

Link to the full blog: https://blog.pacificunion.com/bay-area-january-homes-sales-slow-not-because-of-financial-volatility-but-lack-of-supply/

Written by Selma Hepp, Cheif Economist of Pacific Union

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Real Estate Roundup: Bay Area Home Price Growth Hits Historic Run

February 5, 2018 by Pacific Union • Posted in Featured Posts, Weekly Real Estate News Roundups

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious.

BAY AREA HOUSING MARKET APPRECIATION ON A NEARLY SIX-YEAR RUN
Double-digit percent home price growth persisted across the Bay Area in the final month of 2017, matching the appreciation streak seen leading up to the last housing boom.

Citing CoreLogic data, The Mercury News reports that the median sales price for a single-family home in the nine-county Bay Area was $765,000 in December, a year-over-year gain of 13.8 percent. December marked the 69th consecutive month of annual Bay Area price gains, which CoreLogic Analyst Andrew LePage says compares with the appreciation recorded between late 2001 and late 2007.

‘We still have an inventory-starved market where demand is outpacing supply,” LePage said. “It’s bad news for first-time buyers and others looking for a foothold.”

According to CoreLogic, home prices in Santa Clara County rose by 35 percent on an annual basis, reaching $1.17 million in December. Although Silicon Valley home prices experienced a similar run-up following the dot-com era, one San Jose real estate broker crystalized the reason that this housing boom is unlikely to end the same way.

“These are real companies, with real numbers behind them,” Gustavo Gonzalez told The Mercury News. “Google isn’t going anywhere.”

ALMOST ALL CALIFORNIA COMMUNITIES FALLING SHORT ON HOUSING GOALS
California’s aforementioned housing inventory crisis did not improve much last year, with nearly 100 percent of cities and counties failing to meet market-rate or affordable mandates.

A new report from the California Department of Housing Development says that almost 98 percent of the state’s jurisdictions are have not met the necessary guidelines for creating adequate housing units to satisfy demand under Senate Bill 35. That legislation, introduced by San Francisco Sen. Scott Wiener, aims to prod cities and counties that do not build enough new housing to streamline the permit process, thus keeping price appreciation in check over time.

Only 13 California and cities met housing goals last years. In the Bay Area, that short list includes Napa and Sonoma counties, as well as the cities of Corte Madera, Foster City, and Hillsborough.

BAY AREA RENT PRICES UNCHANGED OR DOWN FROM JANUARY
While San Francisco remains the nation’s most expensive rental market, prices have at least not worsened thus far in 2018.

Zumper’s latest monthly rent report puts the median February rent for a one-bedroom apartment in San Francisco at $3,400, still the highest in country but unchanged from the previous month. Rents in San Jose, the No. 3 most expensive U.S. rental market, held steady at $2,460 for a one-bedroom unit, also static from January but up by 9.8 percent on an annual basis.

Rent prices softened across the board in Oakland, America’s seventh most expensive place for tenants. February’s median $2,100 one-bedroom rent dropped by 2.8 percent from January and inched down 0.5 percent year over year. Prices for a two-bedroom unit were down by exactly 5.0 percent on both a monthly and yearly basis.

Written by Selma Hepp, Chief Economist for Pacific Union

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Marin County 2017 Q4 Report – The Marin County Market at a Glance

While fourth-quarter Marin County home sales increased compared with the same period in 2016, the Wine Country wildfires boosted stronger-than-usual November sales. Fourth-quarter activity increased by 4 percent year over year, with a notable gain in sales of homes priced between $2 million and $5 million. Sales of homes priced above $5 million slowed some toward the end of the quarter.

Marin County inventory consistently declined throughout 2017 and ended the fourth quarter 6 percent lower on an annual basis, with the most severe drop in affordable homes. Heightened demand — along with tighter supply conditions — pushed median homes prices up by double-digit percentage points on an annual basis, especially in the last two months of the year. Buyer competition led to more bidding wars than during the same period last year, and more homes sold over the asking price. While market activity for more expensive homes improved from 2016, affordable homes remained in high demand, especially given the influx of families who were impacted by October’s wildfires.

Looking Forward: Post-fire demand from buyers will continue to drive housing market activity in Marin County in the first quarter of 2018, though falling inventory will restrict any significant pickup in market activity. Affordable homes will likely see more activity than higher-priced homes.

View the full report: http://careycondy.pacificunion.com/market-quarter-insights/2017-q4-marin-county-single-family-homes

Defining Marin County: Our real estate markets in Marin County include the cities of Belvedere, Corte Madera, Fairfax, Greenbrae, Kentfield, Larkspur, Mill Valley, Novato, Ross, San Anselmo, San Rafael, Sausalito, and Tiburon. Sales data in the charts includes single-family homes in these communities.

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Pacific Union CEO Mark A. McLaughlin Earns Top Honors As Nationally Ranked Power Broker

Pacific Union International CEO Mark A. McLaughlin has been recognized as one of the most powerful and influential leaders in the residential real estate brokerage industry according to the 2018 Swanepoel Power 200 (SP200) rankings.

McLaughlin has been named to the SP200 every year since its inception five years ago. In an announcement this week, Swanepoel recognized McLaughlin as the No. 9 most powerful Power Broker in the United States and Canada. On the overall list, his rank has steadily climbed for the last four years, from No. 86 in 2015 to No. 34 in 2018 www.sp200.com. This year, more than 3,000 executives were considered, and only 274 earned acknowledgements.

San Francisco-based Pacific Union International has recently been on the expansion trail, uniting important Southern California firms including John Aaroe Group, Partners Trust, and Gibson International, as well as Northern California’s Empire Realty Associates. On Jan. 3, all brokerages rebranded as Pacific Union, linking more than 1,700 real estate professionals across 51 offices in California. Projecting 2018 sales volume of $18 billion, Pacific Union International is the No. 1 independent real estate brokerage in California.

“As we pursue this unprecedented growth, we are not building corporate infrastructure to manage that growth, rather we are empowering our elite real estate professionals,” McLaughlin says. “Being Independent means making decisions as close to our clients as possible, and at Pacific Union, our clients are our real estate professionals.”

Two examples of this empowerment are the brokerage’s unique Innovation Lab and Pacific Union University. Pacific Union’s Innovation Lab is essentially a “skunk works” operation run by the firm’s real estate professionals to develop a technology vision and produce industry-leading tools, with Silicon Valley-edge. Pacific Union University is formed and fueled by elite real estate professionals to shape education and share best practices through collaborative learning, giving the brokerage’s professionals a clear advantage over its competitors.

About Pacific Union International

Founded in San Francisco in 1975, Pacific Union International, Inc. is the West Coast’s premier luxury real estate brand with 2017 sales volume of $14.1 billion. In 2016, real estate industry leaders RISMedia and REAL Trends ranked Pacific Union as the eighth-largest brokerage in the U.S.

Through its 2015 acquisition of The Mark Company, the nation’s leading sales and marketing firm for new urban luxury developments, Pacific Union expanded its brand to development projects from San Diego to Seattle.

In 2016 Pacific Union merged with Los Angeles-based brokerage John Aaroe Group, followed in 2017 with mergers with Partners Trust and Gibson International also based in Los Angeles, and Empire Realty Associates, extending the Pacific Union brand to become the preeminent leader and ultimate California real estate company. The strategic alliance of these five powerhouses supports 1,700 elite real estate professionals in more than 50 offices throughout the West Coast. Northern California markets include San Francisco, Marin, Contra Costa, Alameda, Napa, and Sonoma counties, Silicon Valley, and the Lake Tahoe region. Greater Los Angeles markets include Beverly Hills, Malibu, Downtown, Northeast LA, the Westside, and the San Fernando and San Gabriel Valleys.

To extend Pacific Union’s international reach, in 2013 the brokerage established an award-winning, Beijing-based China Concierge program that fully supports its Chinese investors on the mainland. Additionally, Pacific Union offers a full range of personal and commercial real estate services, including buying, selling, and relocation in addition to operating joint-venture businesses that provide rental and commercial property management and insurance services. Locally owned, Pacific Union executes with a vision for the future, an entrepreneurial mindset, and an unwavering commitment to deliver exceptional service and expertise. For more information, visit: www.pacificunion.com

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Real Estate Roundup: Bay Area Cities Are Among Top U.S. Spots for Coffee Drinkers

Here’s a look at recent news of interest to homebuyers, home sellers, and the home-curious.

OAKLAND NAMED NO. 3 BEST AMERICAN CITY FOR COFFEE LOVERS
When it comes to getting a daily coffee fix, the West Coast is king, with three Bay Area cities counting among the top 10 American cities for java junkies.

That’s according to a study by SmartAsset, which ranked the best 25 U.S. cities for coffee fanatics on a scale of 100 based on criteria such as the number of coffee shops and roasters and the average price of a cappuccino. By those measures, Oakland ranks as the third best U.S. city for coffee drinkers behind Portland, Oregon, and Seattle, with a score of 91.40. Oakland has a total of 623 coffee shops, 22 of which have exceptional Yelp reviews.

San Francisco takes the No 6. position with a score of 85.95. San Francisco’s 2,427 coffee houses translates to 279 shops for every 100,000 residents, the highest such concentration of any city in the study.

San Jose follows its neighbor to the north in the No. 7 spot, notching a score of 85.12. SmartAsset notes that San Jose residents perform a large number of Google searches for the word “coffee” when trying to decide which one of the city’s 940 cafes to hit next.

WHEN TO CONSIDER RAISING YOUR HOME’S LISTING PRICE
While properly pricing a home is key to a successful sale and a huge advantage to working with a skilled real estate professional, there may be times when the right price is a higher one.

A realtor.com article offers some advice for when sellers should up the price tag on their homes, starting by studying data. If market conditions have changed significantly since a home was placed on the market, it might be prudent to consider raising its price, particularly if inventory conditions are tight (as they are currently). Also, think about whether your home has amenities that other nearby for-sale properties lack, such as a swimming pool.

Other instances in which a price hike might be warranted: if a home has been renovated since being listed, if an appraisal value comes back higher than the list price, or simply to reinvigorate buyer interest.

THE NEWEST COMPANY PERK: DOWN PAYMENT ASSISTANCE
Amassing a down payment is perhaps the largest obstacle that first-time homebuyers face, and a new program seeks to ease that burden by making financial help a company benefit.

According to a CMG Financial press release, a new HomeFundMe program called Affinity Portal allows businesses to match employee contributions to their personal down payment savings, much like a 401(k) plan. The program is specifically geared toward millennials, whose hurdles to homeownership including student loans, high home prices, and escalating rental costs. The program also aims to help employers retain talented younger workers, 78 percent of whom leave a company within five years.

“More than ever, employers are looking for ways to retain and attract the best and brightest talent, and millennials are looking for the lifestyle perks that will help them achieve their goals,” CMG Financial President Chris George said. “The Affinity Portal helps to bridge that gap by giving employers the ability to give their employees the benefits that matter most to them. A typical campaign can cut an employee’s down payment burden in half in many cases.”

TAX REFORM CAUSES AMERICANS HOUSING MARKET CAUTION
Much has been written about the recently enacted tax-reform package, and it was clearly on the minds of U.S. consumers as 2017 ended.

Fannie Mae’s latest Home Purchase Sentiment Index declined to 85.8 in December, down form November but up on an annual basis. The number of Americans who think it is a good time to buy a home dropped from the previous month to 24 percent. And though more than two-thirds of workers are not worried about losing their jobs, that number also declined from November.

“Consumers remained cautious in their housing outlook at the end of 2017, as tax reform discussions continued. In December, mirroring the other major consumer sentiment benchmarks, the HPSI reflected this caution and declined slightly,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan, said. “Entering 2018, housing affordability remains a persistent challenge, particularly in rental markets, where consumer expectations for price increases over the next 12 months reached a new survey high.”

Written by: Pacific Union

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Pacific Union launches in LA with SoCal ‘dream team’

Nick Segal of Partners Trust to run the regional operation as president of Pacific Union LA

Today San Francisco-based luxury independent brokerage Pacific Union International formally introduced its brand into Southern California and announced that Nick Segal, co-founder of Los Angeles boutique Partners Trust, will be named president of Pacific Union L.A.

Over the past 14 months, Pacific Union has been making a series of market share grabs in SoCal through acquisitions, including merging with L.A. indie firms John Aaroe Group and Partners Trust, and upping its investment in Gibson International, another L.A. firm, to a majority stake in December. This week, the three companies will all be re-branded as Pacific Union International.

The Pacific Union SoCal operation, which Segal calls “a dream team” of 900 real estate professionals in 20 offices across greater Los Angeles, will cover the areas of Malibu, Beverly Hills, Downtown, the Westside, Northeast L.A. and the San Fernando and San Gabriel Valleys. In 2017, the Pacific Union SoCal firms had a combined $6.8 billion sales volume, and as such, Pacific Union is claiming it will become the largest independent brokerage in L.A.

Pacific Union, which also merged with Empire Realty Associates in the East San Francisco Bay Area in October, now has 51 offices throughout Northern and Southern California and is projecting sales volume totaling $18 billion for 2018.

With John Aaroe announcing his retirement from the industry in September, Segal was the natural choice for president of Pacific Union L.A., said Pacific Union CEO Mark McLaughlin. In 2009, along with F. Ron Smith, Richard Stearns and Hugh Evans, Segal founded Partners Trust, which booked $2.47 billion in sales volume in 2016.

Segal, who described Pacific Union’s L.A. launch as a “truly historic move,” told Inman that the company is looking at new off-market listing opportunities.

“We’re exploring innovative ways to further market our properties before they go into the MLS. With our network of 900 plus real estate professionals across 20 offices in Los Angeles alone, 1,700 professionals throughout California … we have an opportunity to create an off-market platform that matches buyers and sellers faster,” Segal said.

“We’re already using our private social enterprise network ‘The Loop’ and many of our professionals actively pre-market properties via the company website, but there’s an opportunity to do more and create something that the marketplace hasn’t seen yet.”

To introduce the Pacific Union brand to the L.A. market, the company is also launching a $1 million integrated multimedia campaign titled “Watch What We Do Next,” along with a new website, pacificunionla.com.

PacificUnionLA.com homepage

The company, which has invested heavily in marketing to international clients, just launched a number of websites worldwide translated into 20 languages including Arabic, Russian and Portuguese

By Inman – Read the full article here: https://www.inman.com/2018/01/03/pacific-union-launches-in-la-with-socal-dream-team/#

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U.S. Employment Rises in November, but Wage Growth Remains Weak

Today’s U.S. employment report offered another solid month of job gains, with 228,000 positions added and the unemployment rate holding steady at 4.1 percent. November was the 86th consecutive month of job growth, and the gains were above experts’ expectations. There have been 2.07 million jobs created over the last year.
Continued solid gains in employment coupled with steady consumer spending and improved business investment suggest economic growth of around 3 percent. These positive indicators will probably nudge the Federal Open Market Committee to increase interest rates later this month and again in the first quarter of 2018.
A wide range of industries added jobs, with the professional and business services sector — which generally pays higher wages — manufacturing, and health care leading the gains.
The information sector continued shedding jobs, a trend that started about a year ago. That industry mostly includes jobs in publishing, broadcasting, telecommunications, motion pictures, and sound recording.
While solid job gains continue to confirm the labor market’s strength, experts are increasingly focused on the lack of wage growth, which was anticipated to be higher at this point in the employment cycle. November hourly earnings increased, but the gains were below expectations. However, the average hours worked per week increased again, which is helping overall worker pay. Note that the lower-than-expected wage growth is outpacing inflation growth, suggesting that real earnings are positive. Generally, economists do anticipate acceleration of wage growth over the next year. Sluggish wage growth has been a concern among economists, though many believe that slow inflation and weak productivity are to blame, for which there are no clear explanations.
Looking forward, the Job Openings and Labor Turnover Summary report from the U.S. Bureau of Labor Statistics shows that the number of job openings has remained near record-high levels since June of this year, at 6.1 million. Again, with most openings in the professional and business services sector, that number suggests that there are more jobs than qualified employees.
Tech jobs increased by 8,100 positions in November, according to CompTIA — mostly in computer, electronics, and semiconductor manufacturing. This aligns with continued gains seen in total manufacturing job numbers. The IT and software services and computer-system design industries also saw solid gains. However, IT jobs added, which illustrates demand for such talent by businesses across all sectors of the economy, jumped by 243,000 in November, the largest increase since 2015. New job postings for IT occupations remained flat in November, at about 180,000 positions across the nation. That is about 30,000 more jobs than at the same time last year but down from more than 250,000 in January 2016. Still, while lower than two years ago, the trend has not shown consistent declines but has averaged 200,000 positions over the last year.
Lastly, the Federal Reserve released its latest flow of funds report this week, which showed household and nonprofit net worth increasing to $96.9 trillion during the third quarter of 2017, with the value of household real estate climbing to $24.2 trillion. The value of household real estate is now above the bubble peak in early 2006 — not adjusted for inflation and including new construction.

By Selma Hepp, Chief Economist for Pacific Union

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U.S. Housing Inventory Crunch to Ease in 2018, Forecast Says

• More housing supply is expected to hit the market by next fall, though the inventory of starter homes will be slower to improve.
• The U.S. median home sales price is projected to increase by 3.2 percent in 2018, down from 5.5 percent this year.
• Home prices in the are projected to increase by a respective 5.14 percent and 4.37 percent in the San Francisco and San Jose metropolitan areas.

More homes should hit the market next year, causing appreciation to slow, although price growth in the Bay Area’s two largest metropolitan areas is projected to outstrip the national rate.

In its 2018 housing market forecast, realtor.com says that inventory should move into positive territory next fall for the first time in three years. The increased supply is projected to initially come at middle and high price points, while entry-level home inventory will take longer to improve.

“Next year will set the stage for a significant inflection point in the housing shortage,” realtor.com Director of Economic Research Javier Vivas said. “Inventory increases will be felt in higher priced segments after [the] spring home buying season, which we expect to take hold and begin to provide relief for buyers and drive sales growth in 2019 and beyond.”

Despite tighter supply conditions for starter homes, the number of millennial homebuyers is expected to increase due to that generation’s significant size. By the end of next year, millennials are projected to account for 43 percent of homebuyers with a mortgage, up from 40 percent this year.

Realtor.com predicts that price growth will moderate as more homes come to market, from 5.5 percent this year to 3.2 percent in 2018. Appreciation in the Bay Area’s two largest metro regions is expected to outpace the nationwide rate, with home prices in the San Francisco-Oakland-Hayward and San Jose-Sunnyvale-Santa Clara metro areas to grow by a respective 5.14 percent and 4.37 percent.

Those projections are similar to ones forecast at Pacific Union’s Nov. 15 San Francisco Bay Area Real Estate and Economic Outlook to 2020. Our forecast calls for 4 percent appreciation in both the San Francisco and San Jose metropolitan areas in 2018. (Note that the Pacific Union and realtor.com forecasts define the San Jose and San Francisco metropolitan areas in different ways.)

Both Pacific Union’s outlook and realtor.com’s forecast note the potential impacts of proposed tax changes on the real estate market and how they could negatively affect homebuyers, particularly those in higher-priced areas of the country. For more in-depth context on the implications of the proposed tax changes, read this analysis by Pacific Union Chief Economist Selma Hepp.

To watch the one-hour presentation of Pacific Union’s San Francisco Bay Area Real Estate and Economic Outlook, click here. To watch a presentation of our first-ever forecast for the Los Angeles real estate market, click here.

By Selma Hepp, Chief Economist for Pacific Union

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Key Takeaways From Pacific Union’s Real Estate and Economic Forecast to 2020

Yesterday, Pacific Union held its fourth annual Real Estate and Economic Forecast in partnership with John Burns Real Estate Consulting to project Bay Area activity through 2020. Below are some key, high-level takeaways from the live event. To watch the full one-hour presentation, click here.

Most U.S. housing markets remain at low-to-normal risk levels, both in the short term and the medium term.
Mortgage rates are projected to grow by about 80 basis points by 2020, increasing annually at about a 20 basis-point pace.
Across the Bay Area, housing markets are generally at normal risk, though San Francisco and Silicon Valley show some sings of above-normal risk due to a lack of affordability. While there is no evidence of a tech correction, if one occurs, these two markets would see their risks increase.
Employment growth remains steady, though the increasing share of jobs in lower-income groups does not bode well for affordability in the Bay Area, especially in Sonoma and Napa counties.
Proposed tax changes could significantly reduce future buyers’ deductions, making it more expensive to own a home. Also, the proposed changes could further disincentivize current homeowners from selling, thus exacerbating the region’s inventory shortage.
An analysis of the impact of the wildfires on Sonoma County and Napa County real estate markets suggests:
The rebuilding of homes will occur over several years.
A revised forecast of 1 percent to 3 percent higher home prices than previously expected due to the decline in homes for sale
A revised forecast of 2 percent to 4 percent higher new home construction costs than previously expected in the first year of rebuilding due to the additional demand for labor and materials. This special bump in cost above previous expectations should moderate down in future years.
This year saw more strong home price growth in California. Across the entire Bay Area, the median home price increase averaged 9 percent year to date through September.
An analysis of individual Bay Area communities shows that there is continual variation in home price fluctuation, which is driven by local market conditions and relates to prices in neighboring communities but most importantly is tied to jobs and income growth.
In segmenting the markets by median home price changes, we use four categories: normal, double-digit, slowing, and heated.

Normal (up to 10 percent appreciation): Similar to last year, most Bay Area markets fall into this category, and median prices average about $761,000. These were generally more affordable markets, and no San Mateo County city falls into this category. Among cities with normal appreciation, an average of 56 percent of homes sold for more than asking price for an average 6 percent premium.

Double-Digit (10 percent to 20 percent growth): Unlike last year, double-digit percent median price growth was seen in many San Mateo County and Santa Clara County cities. Median prices averaged about $1.15 million. Many of these markets lost steam last year, but Silicon Valley’s strong job market helped prop them up. Buyer competition also increased, with 67 percent of homes selling for more than asking price for an average 9 percent premium.

Heated (20 percent to 40 percent appreciation): This year, two cities in Marin County — Sausalito and Tiburon — saw median price growth of more than 20 percent, a respective 22 percent and 28 percent. Overall, the median price in ZIP codes with the highest growth rates was $1.16 million, unlike last year, when the median price in heated markets averaged $800,000. Two ZIP codes that were heated last year continued at the same price growth rate: 94610 in Oakland and 94303 in Palo Alto. In Sonoma County, two of the fire-impacted cities, Glen Ellen and Kenwood, have also seen strong price growth in 2017.

Slowing (22 percent depreciation to flat): Although fewer cities saw slowing prices this year than last year, these are again relatively more expensive markets where the median home price averaged $1,900,000. Still, about 43 percent of homes in these areas sold for more than asking price, for an average 8 percent premium.

Affordability and access to transportation and jobs continue to drive differences in home price appreciation. The highest appreciation was seen in markets where job growth with higher-income jobs led the local economy. By contrast, areas where job growth was dominated by lower-paying jobs saw slowing appreciation.
When analyzing how the landscape has changed from last year, the main differentiator is intensified buyer competition in almost all markets. More homes are again selling above asking price in 2017 across the Bay Area — particularly in San Francisco, San Mateo, and Santa Clara counties — and in higher price ranges. Premiums paid this year are also higher in all counties.
Overall, Bay Area inventory has continually dropped in 2017, with year-to-date supply down 14 percent. Santa Clara County has seen the largest inventory decline this year, down by 25 percent, while Alameda County has seen the smallest supply drop, with 5 percent less inventory year to date. Furthermore, while the inventory of homes priced higher than $2 million saw some improvement earlier in 2017, year-over-year changes now show declines.
While condominium prices in San Francisco took a breather in 2017 for newly constructed units, the continued price increase for resale units and the declining inventory of new units are likely to prop up prices going forward. In addition, stronger activity for units priced at less than $1,300 per square foot suggests that higher-end condominiums hitting the market may find more challenging conditions.
Lake Tahoe’s housing market has benefited from wealth creation in the Bay Area, and sales of homes priced above $3 million jumped by 141 percent year over year in the third quarter.
From 2018 to 2020, home prices are projected to grow by 12 percent in Napa County; 12 percent in Sonoma County; 2 percent in Santa Clara County; 2 percent in Marin, San Francisco, and San Mateo counties; and 5 percent in Alameda and Contra Costa counties.
Lastly, the panel agreed that price trajectories are more likely to resemble a tabletop compared with the mountain peak that occurred following the housing bust in 2006, where the tabletop suggests moderating price growth through 2020. Nevertheless, unexpected changes to housing supply and demand or job and income growth would destabilize the housing market and lead to a different outcome.

By Selma Hepp, Chief Economist for Pacific Union

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First-Time and Bay Area Homebuyers Have Much to Lose From Proposed Tax Changes

Executive Summary:

Proposed tax changes that impact individual ownership of real estate include:
Eliminating deductions for state and local income taxes
Lowering the cap on mortgage interest deductions on newly issued loans totaling no more than $500,000, down from the current $1 million
Ending deductions on second homes or vacation homes
A new cap of $10,000 on property tax deductions
Limits to the capital-gains exemption used by homeowners when they sell
The impact would be particularly severe for households with incomes between $100,000 and $200,000 — 30 percent of Bay Area households; though most income groups stand to lose.
Limiting the mortgage interest deduction to $500,000 impacts 70 percent of Bay Area home sales.
Buyers with a new mortgage of $1 million would lose $20,000 in deductible mortgage interest in the first year.
Putting caps on new buyers and placing further limits on capital-gains exemptions would discourage current homeowners from selling, further intensifying the inventory shortages that are plaguing the region.

Last week, the House Republicans released their much-anticipated tax reform proposal. The plan proposes to cut the corporate tax rate to 20 percent from 35 percent and reorganize individual tax rates from seven brackets into four. Taxes are a complicated subject, and with any sweeping change such as the proposed reforms, the devil is in the details. While the proposal promises to save an American family an average of $1,182 per year, some of the proposed changes could be devastating for current and future California homeowners.

To understand the impact of these proposed changes on Californians, let’s examine the distribution of tax filers, as well as what type and the amount of itemized deductions they take. Figure 1 contains 2015 IRS individual income and tax data for California filers.

Since the tax proposal increases the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples, we’ll focus on the filers who itemize their deductions and will consequently be affected by the proposed changes. Thirty-four percent, or about 6.12 million California taxpayers, itemized their deductions in 2015, with average total itemized deductions equaling about $36,800. Thus, for those 34 percent of tax filers, losing some of the proposed deductions would make a notable difference in their adjusted gross incomes.

Figure 1: 2015 IRS individual income and tax data for California filers.

Source: IRS, Statistics of Income Division, Individual Master File System, August 2017.

Admittedly, things are a little more complicated than the numbers suggest. For filers with adjusted gross incomes of less than $75,000, who comprise 35 percent of all itemized returns, averages of total itemized deductions (row f) do not exceed the $24,000 proposed deduction for couples. Nevertheless, those filers are more likely to be single, (row b), in which case the proposed standard deduction of $12,000 would apply. Interestingly, only 35 percent of all California tax filers are joint returns. That share increases to 50 percent and higher among taxpayers with adjusted gross incomes above $75,000.

Thus, even for single filers with adjusted gross incomes below $75,000, their average total itemized deductions exceed $12,000. Hence, they stand to lose some of the deductions from proposed changes. The largest impact stems from losing the state and income deductions, since this group of filers generally does not pay real estate taxes of more than the $10,000 cap. In terms of the mortgage interest deduction, since the proposed cap would apply to newly originated mortgages going forward, current borrowers would not be affected. However, homebuyers with gross adjusted incomes of less than $75,000 could choose to purchase properties priced below $625,000 to maximize on their mortgage interest deduction, although they may not be able to qualify unless they have a substantial down payment.

However, the proposed tax changes could be more disadvantageous for those with incomes over $75,000, who comprise two-thirds of itemized filers and one-third of California returns. In the Bay Area, about 46 percent of households earn more than $100,000 and about 30 percent earn between $100,000 and $200,000. Also, home prices in the Bay Area are well above $625,000, which means that the mortgage interest deduction cap (assuming a $500,000 mortgage loan with 20 percent down) would be more impactful.

Figure 1, row f shows the average of total itemized deductions, which average between about $23,000 and $53,000 for gross adjusted incomes between $75,000 and $500,000. Simply eliminating state and income taxes may be most arduous for filers earning between $100,000 and $200,000 and $200,000 and $500,000. As row g suggests, 28 percent to 42 percent of their total deductions come from state and local income taxes. Among all returns, the value of state and local deductions comprises 43 percent of the total value of itemized deductions. If those are removed for the $200,000-to-$500,000 adjusted gross income group, the remaining deductions come close to standard deductions (assuming joint returns, which most of them are, according to row b). For the $100,000-to-$200,000 bracket, which is a large percentage of Bay Area households, losing the state and local income tax deductions removes the need to itemize deductions, since the remaining deductions fall below the standard $24,000 limit. All in all, removing the ability to deduct state and local income taxes markedly increases bills for most Bay Area residents.

Further, while the mortgage interest deduction averages $12,283, and 24 percent of all returns deduct the mortgage, the proposed changes are more impactful on the future homebuyers and the housing market in general since the proposed changes would apply to newly originated mortgages.

Over the last year, 70 percent of Bay Area homes sold were priced above $625,000, and 30 percent were priced higher than $1.2 million. Those two price benchmarks represent mortgages between $500,000 and $1,000,000, with an assumed 20 percent down payment. Thus, 70 percent of home sales are at a potential loss from changes to the mortgage interest deduction. Granted, about 26 percent of transactions below $1 million were all cash in the Bay Area , according to our recent analysis; however, that share was smaller in markets such as San Francisco, Silicon Valley, and the East Bay. All-cash buyers are more likely to purchase homes priced above $2 million, and only 13 percent of cash buyers were first-time buyers.

Nevertheless, the lower cap on the mortgage interest deduction would be particularly detrimental to first-time buyers in in the Bay Area. For example, a buyer of a $1.2 million home with a $1 million mortgage would pay almost $40,000 in amortized interest in the first year. However, at the $500,000 mortgage interest deduction cap, the buyer would be able to deduct only half of that interest, thus losing about $20,000 in deductions. Again, if this is a first-time buyer and likely to fall in the income range of between $100,000 and $200,000 in the Bay Area, the loss of a $20,000 mortgage interest deduction would make a notable difference, not only in the resulting tax bill but also on the decision to purchase a home. Also, note that while the proposed tax plan reduces the number of brackets, not everyone’s tax rate will decrease, and these deductions will play a big role in where a household falls along the income spectrum.

Furthermore, a $10,000 cap on real estate property taxes would also impact those buying a home priced above $1 million since California property taxes generally average about 1 percent. Again, in the Bay Area, 36 percent of home sales year to date were priced higher than $1 million. For example, a buyer of a $3 million home would lose $20,000 in property-tax deductions. Six percent of San Francisco sales and 7 percent of San Mateo County sales are priced above $3 million.

Figure 2: Home sales by price point in Bay Area counties

Source: Pacific Union transaction questionnaire. Results based on 4,266 responses collected between Jan. 1, 2016 and May 31, 2017. Updated Aug. 7, 2017.

Moreover, with proposed changes impacting future homebuyers, current homeowners are less incentivized to sell, which would further intensify the severe inventory shortage in the Bay Area — especially for more affordable homes.

In addition, the proposed change that limits the capital-gains exemption used by homeowners when they sell would be another major blow for supply conditions. Under the new proposal, homeowners must have owned and lived in the home for at least five of the last eight years to qualify for the exemption. Currently, the rule is two of the last five years. The exclusion would also be limited to one sale every five years rather than one sale every two years. In addition, households with incomes over $500,000 if married or $250,000 if single lose the exclusion. With the current capital-gains exemption limit at $500,000, it already poses a constraint on many current owners whose homes have appreciated significantly since they purchased them and who consequently choose not to sell. Further limiting the use of the capital-gains exemption will slow housing turnover even more. At the end of the day, while severely undersupplied inventory may help push prices higher, the proposed changes would lead to fewer home sales and an even more difficult environment for first-time buyers.

Taken together, the proposed tax reforms are a serious concern for Bay Area homebuyers and the future of the housing market. Again, the proposal is still under revision, and Republicans have started making changes.

Ultimately, we may or may not see some form of tax reform pass. Admittedly, the changes discussed here are somewhat simplified, and not all proposed changes have been evaluated. Also, this analysis does not include the potential impacts on corporate taxes, charitable deductions, or pass-through organizations. Overall, we would urge caution moving forward with the proposal as it currently stands.

By Selma Hepp, Chief Economist for Pacific Union

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