Biggest Risks Could Be External – Jobs, Stocks, Interest Rates

San Francisco’s formerly red-hot housing market has cooled a bit since the county’s median sale price hit a record $1.3 million this April – one of the highest medians ever for a sizable U.S. county.

Sales of existing San Francisco County homes through August fell about 8 percent from the same period last year, while prices have edged lower since April and in August were essentially flat compared with a year earlier, according to CoreLogic’s Home Price Index (Figure 1). Home purchase loan applications this year through August were also roughly flat compared with the same period last year, and the inventory of homes for sale in August was up about 22 percent from August 2015. Recordings of new-home transactions have surged this year as the county experiences what the San Francisco Chronicle recently called a “condo-building boom” by local standards. But the growth in projects is also boosting the overall inventory and, as of this September, there were 1,200 new units available, up 83 percent year over year, The Mark Co. reported.¹

So far the San Francisco market appears to be gradually self-correcting as more buyers are priced out. Conditions are significantly different today compared with the period leading up to the bursting of the last housing bubble.

One key difference between now and a decade ago is that today’s home prices don’t appear to be as far out of line with incomes, even though prices jumped about 60 percent over the past four and a half years. CoreLogic calculates a long-term sustainable home price level based on the historical relationship between its Home Price Index (HPI) and a region’s per-capita disposable income (Figure 2). In July this year the price level for the San Francisco metro division² was 1.2 percent above the long-term sustainable price level. Near the peak of the last cycle home prices were 20 percent higher than the long-term sustainable level.

There are other indications the San Francisco market hasn’t built up too much of a head of froth. Flipping, a measure of speculative activity that shows the share of homes sold twice within nine months, has trended lower. In the third quarter of this year 2.1 percent of the homes sold in the broader San Francisco-Oakland-Hayward metro area had been flipped, down from 2.3 percent a year earlier and well below the prior cycle’s 5.9 percent peak in first quarter 2005. Today’s homebuyers also tend to be significantly less leveraged than a decade ago (Figure 3) and mortgage performance remains relatively good. In August, 0.45 percent of outstanding San Francisco home loans were at least 90 days past due, down from 0.58 percent a year earlier.

San Francisco’s biggest risks appear to be external, from the broader economy, including the following:

• Slower job or income growth. Employment gains, especially in the high-paying tech sector, helped propel San Francisco prices to eye-popping levels. Growth in non-farm employment has eased this year, with a 2.4 percent year-over-year gain this August in the San Francisco metro area1, down from 5.2 percent in August 2015. Income growth has slowed, too. In first quarter 2016 the average wage in San Francisco County dipped 1.5 percent below first quarter 2015 – the largest contraction since third quarter 2009 (Figure 4), Bureau of Labor Statistics data show.
• A prolonged stock market sell-off. So far the housing market has weathered two brief stock market corrections since mid-summer 2015. A longer, deeper downturn could have a significant impact on many would-be home buyers, especially tech workers relying on a down payment from stocks sales.
• Higher mortgage rates. San Francisco’s median sale price has been around $1.1 million recently. A full percentage point increase in mortgage rates would increase the monthly loan payment on that median-priced home by about $450 (from $3,544 to $3,994), based on a 30 percent down payment, a fixed-rate 30-year loan, and a rate increase from 3.7 to 4.7 percent. 

While San Francisco faces a variety of possible external threats, it doesn’t appear to be beset by the same internal risks seen a decade ago.

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