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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U.S. Median Home Price Again Hits New High

• The median sales price for a U.S. home rose to $248,000 in the third quarter, another record high.
• San Jose and San Francisco home sellers reaped the largest profits for the third straight quarter, a respective 80 percent and 71 percent.
• San Jose had the nation’s fewest distressed sales in the third quarter, with such transactions accounting for 3.1 percent of activity.

The national median sales price ascended to another all-time peak in the third quarter, with Bay Area sellers again enjoying the highest profits.

That’s according to a new report from ATTOM Data Solutions, which says that the U.S. median home sales price ended the third quarter at $248,000, a new record high and 3 percent above the prerecession peak set in 2005. Nearly half of all U.S. metropolitan areas saw the median price surpass its previous peak in the third quarter, and two-thirds of markets have now exceeded prerecession price levels.

American home prices reached a new high for the second straight quarter, rising 10 percent from the third quarter of last year. The San Jose metropolitan was one of the country’s five fastest-appreciating housing markets, with prices up 14 percent on an annual basis.

Rapidly rising prices guaranteed Bay Area sellers took home the largest profits in the third quarter, continuing a trend that began last year. In San Jose, home sellers realized average returns of 80 percent since the time of purchase, the most in the nation, followed by San Francisco at 71 percent returns. Nationwide, home sellers brought in returns of 31 percent, the largest profits in more than 10 years.

The report, which also tracks distressed home sales, found that such transactions reached a decade low, dropping by 14.1 percent year over year. Distressed sales accounted for 12.5 percent of activity in the third quarter, and ATTOM Data Solutions Senior Vice President Daren Blomquist said that he expects them to return to prerecession levels within the next year.

Distressed sales in Bay Area real estate markets are even rarer. San Jose had the country’s lowest number of distressed sales, at 3.1 percent. San Francisco also ranked in the top five for the fewest distressed transactions, which accounted for 5.2 percent of sales in the third quarter.

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San Francisco Again Named America’s Greenest City

• For the second straight year, San Francisco ranks as the most environmentally friendly U.S. city.
• Seven of America’s top 10 green cities are located in California.
• San Francisco and Oakland are among the nation’s 10 best cities for green jobs.

California dominates the upper rankings of an annual list of environmentally conscious cities, with San Francisco ranking in the top spot for the second year in a row.

That’s according to WalletHub’s list of 2017’s greenest U.S. cities, which ranks the 100 largest cities on a scale of zero to 100 based on 22 criteria in four main categories: environment, transportation, energy sources, and lifestyle and policy issues. Individual gauges of a city’s greenness include air and water quality, walkability and bicycle-friendliness, the number of commuters who drive, renewable energy sources, amount of farmers’ markets, and green jobs.

As in last year’s analysis, San Francisco ranks as the greenest city in America, with an overall score of 74.24. The City by the Bay comes in No. 1 in the U.S. for environmentally friendly lifestyles and policies and ties Honolulu for the most farmers’ markets per capita. San Francisco is also one of the five American cities with the fewest amount of residents who commute to work by car and one of the five most bicycle-friendly.

San Francisco also shines for its park system, scoring a perfect 100 in a separate study earlier this summer by nonprofit Trust For Public Land. That report found that San Francisco is the only major American city where every resident lives within a 10-minute walk of a green space.

Seven of America’s 10 greenest cities are located in the Golden State: San Diego (No. 2), Fremont (No. 3), San Jose (No. 5), Sacramento (No. 7), Irvine (No. 8), and Oakland (No. 10). Oakland and Fremont tie multiple other cities as No. 1 in the renewable-energy category, while Fremont ties Honolulu and Anchorage, Alaska for the highest percentage of green spaces.

While WalletHub’s analysis does not provide detailed information on cities’ walkability or green jobs, the Bay Area does well on both criteria according to other studies. Walk Score ranks San Francisco as the nation’s second most walkable city in 2017, with Oakland coming in at No. 9. And just last week, an analysis by SmartAsset found that those two cities are among the 10 best in the country for environmentally friendly careers, with green workers in San Francisco and Oakland earning respective annual salaries of $100,717 and $94,393.

By Selma Hepp, Cheif Economist fot Pacific Union

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Rising From the Ashes: How Will the Wine Country Wildfires Affect Its Housing Markets?

Executive Summary:

The Wine Country wildfires are estimated to have destroyed about 2,800 homes so far, or about 5 percent of Santa Rosa’s housing stock.
The current property damage approaches $4 billion.
With rents and home prices already growing robustly, there will be further pressure on prices given the region’s already tight inventory.
City and county building permit processes will be key to the Wine Country’s recovery.
An attitude of optimism anticipates the rebuilding process.

Unfortunately, wildfires are a harsh reality of living in California, especially during the month of October. Thousands of fires burn throughout the state every year, but October seems to be the deadliest. Historically, six of California’s seven most destructive wildfires have happened in October.

According to CAL FIRE data, before the Wine Country fires started last week, there were more than 6,000 fires recorded in California year to date, with almost 480,000 acres burned. On average over the last five years, about 4,400 fires occurred on 201,360 acres of land between January and October.

CAL FIRE estimates that 12 large wildfires have rampaged through California over the past 10 days, killing 41 people, burning more than 245,000 acres, and destroying an estimated 5,700 structures. In Santa Rosa, about 2,800 homes have been destroyed, which amounts to about 5 percent of the city’s housing units.

Even at the current numbers, which are not final, the Wine Country fires are more devastating than the Bay Area’s last big wildfire, which happened in the Oakland Hills in October of 1991. That fire destroyed 2,900 structures on 1,600 acres, killing 25 people and injuring 500 more. The damage was estimated at $1.5 billion in 1991, which in current dollars amounts to $3.4 billion.

While it is difficult to assess how long it took the affected Oakland communities to completely rebuild, the process began about six months after the fires. According to a story in the Los Angeles Times, “the city streamlined the building-permit process for fire victims … and 18 months after the disaster, huge new housing developments were well underway.” The recovery took about four years, but according to U.S. Census Bureau data, not all units were rebuilt. In two ZIP codes that were impacted, 94618 and 94705, there were 86 fewer units in 2000 than there were in 1990.

Nevertheless, while not all residents returned, some of those who did took the opportunity to build larger homes. Before the fire, most homes in the Oakland Hills were built in the 1920s and 1930s and had two or three bedrooms, with a median value of about $300,000 in the early 1990s. When the new homes were rebuilt in the mid-1990s, with five and six bedrooms and three-car garages, the median home value jumped to more than $700,000. Today, the median home price in those neighborhoods exceeds $1 million and ranges up to $4 million. And despite the continuous danger of fires reigniting in the area, it remains a desirable place to live. Those who did not return sold their charred land to investors, who built massive homes that are now selling at multimillion-dollar prices. There are many lessons to learn from the Oakland Hills fire, and many comparable stories will emerge from the disaster in the Wine Country.

Multiple challenges exist in Northern California’s current housing market. Specifically, in Sonoma and Napa counties, for-sale inventory is extremely low and new construction is insufficient to meet buyer demand amid strong economic conditions and an influx of buyers who are looking for relatively more affordable housing than they can find elsewhere in the Bay Area.

In September, the median home price reached $587,000 in Sonoma County and $614,000 in Napa County, according to MLS data. Besides Contra Costa County, which had a September median sales price of $571,000, the two North Bay counties offer homes at half the price of San Francisco, Silicon Valley, and Marin County. Strong demand for affordable units led to an average 15 percent year-over-year decline in for-sale inventory of homes priced below $1 million in both counties. In contrast, higher-priced inventory has been growing, especially in Sonoma County. However, there are definitely more willing buyers than available homes in the Wine Country. In the two counties combined, the months’ supply of lower-priced homes (less than $1 million) is only about 1.5 months, which means that at the current rate of sales, all available homes available would sell in less than two months. A balanced real estate market requires at least six months of supply.

New construction in the region has picked up, and there are about 1,500 total new housing permits projected in 2017 for Sonoma and Napa counties combined. However, with 1,800 households also expected to migrate to the region, supply hardly meets demand. Figure 1 illustrates the year-over-year change in the number of households and the annual number of total building permits issued. In Sonoma County, current construction levels are at half their average of about 2,300 since the 1980s. Also, in the last 10 years, Sonoma County added little more than 10,000 new units for the 18,000 households that moved in during the same period.

At the current rate of new construction of 1,200 new housing units built in Sonoma County per year, it would take about 2.5 years to replace the 2,800 properties that have been destroyed by the wildfires. It will be crucial for the city of Santa Rosa and Sonoma County to streamline the building-permit process for fire victims, as Oakland did following the 1991 fires.

Nevertheless, homes prices in Sonoma County continue to appreciate at a robust rate, despite analysts’ expectations of slowing. According to John Burns Real Estate Consulting, median home prices in Sonoma and Napa counties were expected to increase by about 5 percent in 2017. September median home prices in the two counties showed 8 percent price growth year to date. Granted, the increase in median home prices could be driven by more sales of higher-priced homes than occurred last year, but nevertheless, it represents the available inventory and is representative of the situation that Wine Country homebuyers face.

While it may take more time and additional analyses to fully comprehend the fires’ impacts on the North Bay housing market, heightened demand for homes is already being felt in the region and is pushing up rents at a striking pace. Anecdotally, Pacific Union real estate professionals have already experienced increased demand for rental units — even offers from insurance companies that are willing to pay exorbitant prices for active listings. For example, one Pacific Union listing that previously rented for $4,000 received an offer for $13,000 per month from an insurance firm. Another listing was offered $18,000 per month for a one-year lease. Demand in neighboring Marin County communities has also increased over the last week from displaced Wine Country families.

The question is how sustainable this type of demand is and what most displaced families who cannot afford such prices will do. Sonoma County’s rental market was already tight, with only about a 3.5 percent vacancy rate, and one-bedroom apartment rentals in Santa Rosa averaged $1,636 before the fire. And unlike Houston or Dallas, which were recently affected by hurricanes, California has in general been undersupplied with new housing for decades. According to an analysis by the McKinsey Global Institute, California’s supply gap is already at 2 million units, and that number is projected to increase to 3.5 million by 2025.

What is the longer-term impact on the Wine Country’s economy and housing markets? As the Oakland Hills incident and other California wildfires have shown, it takes communities about a year to return to some level of normalcy. However, all of those housing markets recovered, and some developed into higher-priced neighborhoods with larger homes. Sonoma and Napa counties are some of the most desirable locations to live in the state, and the persistent demand over the years has shown that people are often willing to take a risk to live in a beautiful location, even if the property insurance comes at a higher cost. Existing Sonoma and Napa county residents have already shown incredible resilience and a desire to rebuild their communities.

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September U.S. Jobs Report Offers Continued Optimism Despite Conflicting Numbers

While U.S. employment numbers fell for the first time in seven years, the decline was anticipated due to the notable impacts of Hurricanes Harvey and Irma, which disrupted work and typical hiring trends in much of the South and Southeast. The leisure and hospitality industries the suffered most from the hurricanes’ impacts, losing 111,000 jobs.
The net effects of the two hurricanes are anticipated to reduce the estimate of the total number of jobs added in September, which are expected to be revised upward. At the same time, the storms did not impact the national unemployment rate, which declined to 4.2 percent according to the U.S. Bureau of Labor Statistics. The improvement in the unemployment rate is believed to be driven by more people participating in the labor force.
There were also revisions for the previous two months of employment data, which when combined showed 38,000 fewer jobs for July and August than previously reported. Taken together, September numbers showed an increase of 1.78 million jobs year over year, which is the relatively smallest increase in the last five years.
In evaluating employment growth by sectors, positive trends emerge. While the services sector maintained solid gains, manufacturing and construction jobs have shown consistent growth over past few years, with strengths in the Institute for Supply Manufacturing surveys hitting multiyear highs in September. Following the large drop in leisure and hospitality jobs, information services (mostly media) posted a decline of 9,000 positions. The sectors with the largest gains remained consistent through this year, with transportation and warehousing adding 21,800 jobs; health care adding 13,100 jobs; and professional and business services adding 13,000 jobs.
In addition, September’s U.S. employment report showed welcome average hourly wage growth, with a strong 0.5 percent increase, though the large drop in the lower-paying leisure and hospitality industries may have played a role. Wage growth has failed to take off during this economic expansion, and most experts attribute that to stagnant productivity growth and struggling inflation growth.
A separate report from CompTIA, which tracks technology jobs, showed an encouraging number of IT positions, which grew by about 3,200 jobs in September. Demand was especially strong in the computer and electronic products manufacturing sector, which recorded its best month for employment in 2017, adding 3,000 jobs. In addition, the IT services and custom software development industries also showed strong increases, adding an estimated 4,200 jobs. So far in 2017, these sectors have created 106,600 net new jobs. By contrast, general IT job postings, such as software developers and IT support, were down notably, about 40,000 in September from the month before.
In light of recent digital attacks, CompTIA’s analysis illustrates an interesting trend in strong demand for cybersecurity expertise. A website that specializes in that sector shows 300,000 job postings for cybersecurity positions over roughly the last 12 months.

By Selma Hepp, Chief Economist for Pacific Union

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Kitchen Renovations Offer Homeowners the Largest Returns

• Nationwide, a complete kitchen renovation nets a return on investment of 62 percent when a home is sold.
• In the San Francisco and San Jose metropolitan areas, kitchen remodels return more than 100 percent of their costs at the time of sale.
• Kitchen overhauls and upgrades are the two home-renovation projects that appeal most to prospective homebuyers.

Homeowners who are tackling a few remodeling jobs before putting their properties on the market would do well to consider completely overhauling or upgrading their kitchens, the projects that offer the biggest returns on investment at the time of sale.

That’s according to the National Association of Realtors’ 2017 Remodeling Impact Report, which says that a complete kitchen overhaul is the remodeling project that nets the biggest return on investment of the 12 home upgrades it tracks. The average U.S. kitchen remodel costs $65,000 and recoups $40,000 at the time of sale, a return on investment of 62 percent. Nearly one in five real estate professionals have recommended that a client completely renovate the kitchen before listing their home, and 14 percent said that doing so directly helped close a sale.

Here in the Bay Area, total kitchen remodels pack even more bang for the buck. Remodeling’s 2017 Cost Vs. Value report puts the average return on investment for a complete kitchen renovation at 106.1 percent in San Francisco and 105.7 percent in San Jose. Totally overhauling a kitchen costs more than $70,000 in both of those metropolitan areas.

NAR’s report says that kitchen upgrades offer the second-largest returns, with the average $35,000 project recovering $20,000 — 57 percent — of its cost. More than half of real estate professionals have advised clients to spruce up their kitchens before putting their homes on the market, and roughly one-quarter said it helped seal the deal.

Overhauling or upgrading a home’s kitchen are also the two remodeling jobs that have the most pull with buyers. But even homeowners who aren’t planning a sale anytime soon can benefit from renovating their kitchens in more than just financial ways.

NAR’s report assigns each project a “JoyScore,” a measure of consumers’ happiness with their latest home-renovation project. A complete kitchen overhaul received a perfect 10, with 91 percent of those surveyed saying that a new kitchen made them want to spend more time at home and increased their enjoyment while they were there. Kitchen upgrades netted a JoyScore of 9.6, and 81 percent of homeowners reported that they stay home more often and that the project fills them with a sense of accomplishment.

Finally, consider the health benefits that a new kitchen brings to the table. Earlier this year, Houzz’s 2017 Kitchen Trends Study found that one-third of homeowners who had remodeled their kitchens were healthier after the job was complete.

September 29, 2017 by Pacific Union

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The Bay Area’s Economy Grew at the Strongest Rate in the Nation in 2016

At 5.2 percent, the Bay Area’s¹ gross domestic product (GDP) grew at the fastest rate in the nation and among California metropolitan areas in 2016, according to the U.S. Bureau of Economic Analysis Gross Domestic Product by Metropolitan Area 2017. The Bay Area’s GDP grew three times faster than the national rate of 1.5 percent and twice as fast as the state rate of 2.9 percent. Real GDP growth in the San Francisco-Oakland-Hayward metropolitan area was led by gains in the in finance, insurance, real estate, rental, and leasing industries.
The Austin-Round Rock, Texas metro area was the second fastest-growing economy, with GDP growth of 4.9 percent. Growth there was led by the professional and business services sector.
Within the Bay Area, San Jose outperformed all other California metro areas, with a GDP increase of 5.9 percent, followed by San Francisco-Oakland, with a gain of 5.4 percent. Both regions benefited from gains in the tech sector, while San Francisco’s financial sector posted growth.
The Los Angeles Basin’s² GDP also grew faster than the national rate at 2 percent, fueled by gains in the information sector, which encompasses motion picture and Internet services.
In fact, the economies of the Los Angeles Basin ($1.2 trillion) and the Bay Area ($781 billion) are so large that they would rank a respective fourth and sixth among the top 10 U.S. states.
According to a report from Palo Alto-based Center for Continuing Study of the California Economy, when compared with other world economies, the Los Angeles Basin ranks 15th after Australia and before Mexico, up from 16th place last year. The Bay Area ranks 18th behind Turkey and ahead of the Netherlands.
Following a strong 2016, California has reached full employment this year — especially in the Bay Area, where unemployment rates hover around and below 3 percent. Nevertheless, as Federal Reserve Chair Janet Yellen said in her speech this week at the National Association of Business Economics, further employment is still possible, since current assumptions of a sustainable unemployment rate are based on past experiences and different measures of the economy than currently exist. In other words, the low unemployment rate may not mean that the economy is now at maximum employment because demographic and structural changes may have lowered the sustainable unemployment rate from levels recorded in the past.
According to a National Federation of Independent Businesses survey of small businesses, 35 percent said they were having trouble filling positions in July. Finding qualified employees was the second biggest challenge for small businesses behind taxes. Among businesses that rejected job applicants, 26 percent noted a lack of specific skills, 14 percent complained about a lack of social skills, and 10 percent said that drug issues were a problem.
As we have noted in previous job-market analyses, stronger wage growth was anticipated at this point in the employment cycle, and it has come in below expectations. Nevertheless many economic indicators and aggregate measures at the state or national level may be masking wage growth at the metropolitan level. And as recent U.S. Census Bureau data showed, the median income for the San Francisco-Oakland-Hayward metropolitan area is now highest in the country, jumping by 9 percent from 2015 to 2016 to surpass the Washington, D.C. metropolitan area, which held the No. 1 spot last year.
What does this all mean for California’s economy going forward? Future employment and economic growth are tied to the availability of skilled workers, who will choose to live in California if the economics make sense. Put differently, housing affordability will be the major factor in ensuring that qualified workers remain here.

1 The Bay Area includes Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano, and Sonoma counties.

2 The Los Angeles Basin includes Los Angeles, Orange, Riverside, San Bernardino, and Ventura counties.

by Selma Hepp, Pacific Union’s Chief Economist

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August Was a Mixed Month for Job Creation in California

Following incredible job growth in July, which was revised upward to 84,500 positions, the August data release from the California Employment Development Department was a mixed bag, showing a decline of 8,200 jobs. However, the overall state number carries some discrepancies with California’s combined metropolitan area numbers, which showed an increase of about 15,800 jobs in August.
Over the last 12 months, California has added about 265,000 jobs, which is a 1.8 percent increase and still outpaces the national growth rate of 1.4 percent. Nevertheless, as this year’s numbers have indicated so far, job growth has slowed from previous years.
California’s unemployment rate increased slightly to 5.1 percent in August, which is largely due to a sizable addition to the labor force of 31,600 new workers. This is the largest monthly increase in the labor force since the spring of 2010. Despite the 0.2 percent year-over-year increase in the labor force, California’s job markets remain tight.
Sectors that gained jobs in August include services, which encompasses personal-care services and equipment and machinery care. The manufacturing, retail, trade, and health care sectors also added jobs. What is interesting to note is that some industries are reversing previous trends. For example, data shows strong performance for manufacturing and retail jobs, which have been trending down so far this year.
Sectors that lost jobs in August included leisure and hospitality, another reversal of previous positive increases. But despite the one-month dip, year-over-year growth levels for the leisure and hospitality industry remain positive, showing an increase of 39,500 positions. Other notable declines were in professional, scientific, and technical services; government; and educational services. The professional, scientific, and technical services sector now shows a 0.4 percent jobs decline for the year, which could be concerning as it is the higher-wage segment of the labor market. The government and educational services sectors are still in the positive and show strong year-over-year increases.
In the Bay Area, San Francisco and San Mateo counties added 3,600 jobs in August. Government added a substantial 2,000 jobs net, which is double its average between July and August over the previous 10 years. The construction sector added 1,600 jobs, a change from its usual downward trend at this time of year. Leisure and hospitality gained 1,400 jobs seasonally, primarily within food services and drinking establishments. By contrast, the private educational and health services industries, with 1,500 fewer jobs, experienced a larger-than-typical cutback over the month. The professional and business services and information sectors both lost jobs, which countered the usual upward trends.
Alameda and Contra Costa counties lost 500 jobs from July, mostly in private education services; specialty trade contractors; trade, transportation, and utilities; government; leisure and hospitality; financial activities; and other services. Note that these sectors have actually posted year-over-year gains so far in 2017.
In Santa Clara and San Benito counties, the seasonal gain in local public schools dominated the monthly job growth, with a net increase of 3,800 positions, outpacing the combined prior 10-year average gain of 2,300 jobs between July and August. Statewide, public schools lost 200 jobs. Other sectors that showed gains include trade, transportation, and utilities; manufacturing; and electronic computer manufacturing. The information sector countered this year’s downward trend and added 900 jobs in August. By contrast, the leisure and hospitality industry lost 2,900 jobs from July.
Los Angeles County added 8,300 jobs, with the largest increase in the government sector. Most of the growth was in local government, while state and federal government jobs declined. The professional and business services sector saw notable gains, as well as job additions in the trade, transportation, and utilities; construction (up 1,300); and other services sectors. The information sector also posted a strong increase. Similar to other metros areas, Los Angeles’ leisure and hospitality industry posted the largest month-over-decline, with 67 percent of the decrease in accommodations and food services.

September 19, 2017 by Selma Hepp • Posted in Economic Straight Talk, Featured Posts, Industry Surveys & Studies, Pacific Union Insights

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Annual Home Price Growth Recorded in 9 of 10 U.S. Metro Areas

• Nationwide, the median single-family home price grew by 6.2 percent year over year in the second quarter to reach a new peak of more than $250,000.
• Annual appreciation in the Bay Area’s two largest metropolitan areas outstripped the U.S. rate — San Jose (9.1 percent) and San Francisco (8.6 percent).
• San Jose and San Francisco remain the two most expensive U.S. housing markets, with respective median sales prices of $1.2 million and $950,000.

A limited supply of homes isn’t just a challenge here in California and the Bay Area; it’s a nationwide issue, and it helped push the national median sales price to another new high in the second quarter.

The latest quarterly report from the National Association of Realtors says that the median price for an existing single-family home was $255,600 in the second quarter, a year-over-year gain of 6.2 percent. That marks a new peak, surpassing the third quarter of last year, with 87 percent of U.S. markets experiencing annual home price gains.

“The 2.2 million net new jobs created over the past year generated significant interest in purchasing a home in what was an extremely competitive spring buying season,” NAR Chief Economist Lawrence Yun said. “With new supply not even coming close to keeping pace, price appreciation remained swift in most markets.”

Bay Area housing market count among those, with price growth in the region’s two largest cities outstripping the national rate. Home prices in the San Jose metropolitan area grew by 9.1 percent from the second quarter of last year to $1,184,300, continuing its run as the nation’s most expensive major housing market. San Francisco-Oakland-Hayward followed in the No. 2 spot, with a median sales price of $950,000, an annual gain of 8.6 percent.

The nationwide U.S. household income increased to $71,529, but higher mortgage rates than a year earlier and rising home prices are canceling out bigger paychecks, and affordability continues to erode. Assuming a 20 percent down payment, the average U.S. household needs to earn an annual income of $47,300 to afford a median-priced home.

In the Bay Area, yearly qualifying income requirements with a 20 percent down are four to five times higher than the national average — $175,804 in the San Francisco metro area and $218,996 in San Jose. When broken down by individual counties, that can be even more, according to the California Association of Realtors’ second-quarter Housing Affordability Index: almost $300,00 in San Francisco and San Mateo counties.

Yun noted more new construction as key to solving the nation’s affordability challenges, saying “An increasing share of would-be buyers are being priced out of the market and are unable to experience the wealth-building benefits of homeownership.”

August 24, 2017 by Pacific Union

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