2013 has been the hottest in San Francisco Bay Area real estate since 2006. Inventory bottomed out going into the year and interest rates fell to historically low levels. Record low interest rates and high rents relative to home prices helped to spark the biggest demand for Bay Area real estate since 2006 and home prices have soared to at or beyond 2006 levels for many parts of the Bay Area.
Meanwhile, inventory has gradually been increasing every month since the beginning of the year. This is largely due to a surge of property owners becoming eager to take advantage of the hot seller’s market. Since the beginning of this year, South Bay(including San Jose and the upper South Bay) residential real estate inventory has increased a whopping 160%, Peninsula inventory has increased by 59%, and San Francisco inventory has increased by 60%. The biggest increase in inventory came this past month when San Jose alone saw a 25% month-over-month increase in inventory. Rising inventory and the recent spike in mortgage interest rates (which have risen by more than 1% since the beginning of May) is spurring more owners to sell before their “window of opportunity” closes.
A recent article in the San Jose Mercury news made the public wise to these most recent Bay Area Real Estate market trends. That article talked about how soaring home prices could potentially stoke fears that another housing bubble is forming in the Bay Area. Not many housing experts are convinced of this severe of a notion, but some (including myself) are saying that there are at least “warning signs”. The 3 main things that have sparked the recent run-up (Ultra-Low interest Rates, Ultra-Low Supply, and Ultra-High Investor Buyer levels) are all turning the other way. Interest rates have been going up, Inventory has been going up, and Investor Buyer activity has been going down.
However, Silicon Valley home prices are only about 3% above their “fundamental value” determined by incomes, rents and long-term trends, compared with 59% above the value during the 2005 bubble. In the San Francisco metro area, including San Mateo and Marin counties, prices are just 2% above, compared with 52% in 2005. In the East Bay, home prices are even with fundamental values, compared with 73% above them in 2005.
At $564,250, the median sales price of an existing single-family Bay Area home in May was 23% below its 2007 peak of $738,500 just before the crash. The median price paid for a home in the entire 9-County Bay Area was $519,000 in May, up 29.8% from $400,000 in May 2012. That was the highest median since March 2008, when it was $536,000. The 9-County Bay Area median peaked at $665,000 in June and July 2007, then dropped as low as $290,000 in March 2009 – a decline of 56.4%. In May the median was still 22% below the peak but it had made up about 61% of its peak-to-trough loss. San Francisco, the Peninsula and the South Bay have regained most of their “post-bubble losses”, while Contra Costa and Alameda counties have a long way to go.
The more optimistic experts feel that the market is still looking good and will continue to appreciate for the next couple of years. They point out that investors are still out there and there’s a big difference between today and 2006. Back then, the prices were artificially inflated by a surge of sub-prime borrowers who purchased home with little to “no” money down. With the current market surge, there are almost “No” Zero-Down purchases and there are many cash sales. If someone pays cash for their house or applies a large downpayment (which many have been doing the past couple of years), if/when the market goes down 10%, they won’t feel the need to sell.
Realistically, if current trends continue over the next few months, there is sure to be downward pressure on Bay Area Real Estate prices and a general “turning of the market” towards a “normal” market (from the current Seller’s market). This doesn’t necessarily mean that we’re in the midst of a “bubble”, but there should at least be a cooling down period as Bay Area Home Buyers adjust to the higher interest rates and expanded buying options.