Is This Real Estate Run Sustainable?

The past months have brought significant attention to the rocketing Bay Area housing market, which inevitably leads to “bubble” commentary and comparisons to the 2007 bust. However, we believe this run is for real, although velocity may start to slow.

We are enjoying an exceptionally healthy job market, driven by both our intellectual capital – from our world-class universities to our thought- and technology-leading corporations – and the geo-demographics of the people who live in the San Francisco Bay Area. May unemployment figures showed our Bay Area counties continuing to drop well below the national average of 7.6 percent. Marin had the lowest rate at 4.5 percent, followed by San Francisco (5.2 percent), Napa (5.3 percent), Sonoma (6.1 percent), Contra Costa (6.7 percent), Alameda (6.8 percent), and our Tahoe/Truckee region at just over 7 percent.

Personal liquidity is on the rise due to stock-market gains, bonuses based on improved company performance, increased valuation of restricted stocks and options, and the 2012 resurgence in IPOs. This new cash in the pockets of would-be homebuyers enabled more of them to compete for limited housing inventory even as prices continued to creep upward.

The combination of our improving Bay Area economy, dropping unemployment rate, and more-flush buyers continues to fuel the housing market’s ferocious recovery.

To be sure, market corrections may be looming, and “cheap money” – short-term interest rates in the 2 to 3 percent range – will soon be gone. But while growth will likely be slower than in the past 12 months, momentum is still positive. We feel that the very strong demand for Bay Area housing will continue for the foreseeable future as a result of the strong job markets and local consumer confidence.

However, two factors will drive us toward more balanced supply and demand in our market: the extraordinary increase in median pricing throughout the Bay Area over the next 12 to 18 months, and the additional listing inventory (especially coming from middle markets and move-up buyers) expected as a result of those price gains. This will also help stabilize price appreciation.

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Other than cyclical trends, we do not expect to see relaxation in housing demand in the short or long run. In fact, our long-term outlook is very optimistic from an investment perspective, as the Bay Area is undersupplied in housing starts to satisfy projected demand in 2020.

Another dynamic that will impact real estate in the coming year is the expansion of employment opportunities in our four western Bay Area counties to Alameda, Contra Costa, Sonoma, and Napa counties. Continued job growth, and desirable jobs at that, will have a positive impact on the Wine Country and Tahoe regions as well.

We continue to weigh the impact of rising interest rates on demand, as borrowers can afford “less home,” versus the benefits of real estate as a hedge for homeowners against inflation. These are variables we have not wrestled with since pre-2007. That said, it’s still an amazing time to be a buyer, and we are more optimistic today than at any time in the past six years.

Finally, we’re happy to announce that our mortgage affiliate is helping enable the new-home dream by creating additional product options. We’ve developed an exciting bridge-financing program for move-up buyers and are working on an equity product that may prove quite strategic in a rising interest rate environment. For more information, please email Sheila O’Neill or call 707-501-8856.