San Francisco’s housing market has sparked intense competition among buyers and a surge in appreciation for the last three years, but how did it get this way?
According to research from Paragon Real Estate Group, one answer isn’t enough to explain how the city’s real estate market came to be. Instead, the company considered the main factors at play, some of which reflect general macro-economic trends and some of which are specific to the city itself:
- Population Growth: Every year San Francisco has been adding approximately 10,000 new residents per year and still there is not enough additional housing to meet the increase in demand. There is a lot of new construction in the city but much of it is expensive and would be considered luxury housing. Wealthier residents are “sopping up” much of the added inventory without relieving population pressures.
- Employment Growth: Job numbers continue to grow in San Francisco as new companies start up and existing ones expand. According to the San Francisco Business Times, "The city's tech workforce has more than doubled in the last three years, and Indeed.com, a recruitment site, still lists 8600 unfilled software engineer positions in the city." This city also currently has the highest number of employed residents in its history.
- Surging stock market: The S&P 500 is up over 60% from January 2011 to January 2015. The affluent community has benefitted most from the recent large increase in the value of financial asset. When people feel wealthier they tend to spend more money on homes.
- Brand new wealth: In recent years many millionaires and even billionaires have gotten their start in the Bay Area from stock options, IPOs and company sales. According to Wealth-X, San Francisco ranks 3rd in the nation for number of “ultra-high-net-worth” residents.
- High rents: Many people choose to purchase a home in San Francisco due to the possibility of future appreciation rather than pay an extraordinarily high rent.
- Low interest rates: As of February 2015, the average interest rate on a 30-year fixed loan is well over 4%. From previous years, this reduction makes an enormous difference in affordability and the ongoing cost of housing.
- Renting instead of selling: High rents and low interest rates have caused many owners to rent out their homes instead of selling them. This action depresses the supply of new listings coming on the market, exacerbating the inventory from 2013-2014.
- Work there, live here: Many people who have taken jobs in Silicon Valley for example now insist on living in the city, creating a “reverse commute” effect.
- Magnet effect: San Francisco has become a magnet for smart, creative, ambitious people who are willing to pay a premium to live there. Many post graduates aged 24-39 are moving back into urban areas like San Francisco.
- Limited supply: New housing construction has not fulfilled the city’s needs in over 35 years. Almost two thirds of the city’s housing is in rental units, much under rent control. The number of homes ready for occupancy and ready to purchase is relatively small.
Almost all the factors listed could stall or even go into reverse. A lot of times real estate and financial markets are difficult to predict and typically go into cycles: up, down, fat, up again (repeat), according to Paragon Real Estate.
San Francisco is about three years into its latest recovery and recoveries typically last 5 to 7 years before a significant market adjustment. However, there is never really a guarantee for the future.
No comments:
Post a Comment
If you have questions or a comment about this Blog or our Company please use this section. We will do our best to review and answer within 24 hours.