That sound you hear may be some air finally escaping from the inflated San Francisco real estate market.
Home prices in the San Francisco Bay Area fell by 1.8% year-over-year in March, the first such drop in four years, according to Redfin , a Seattle-based real estate brokerage. “For years, San Francisco has been one of — if not the most — competitive markets in the country,” said Redfin chief economist Nela Richardson. “Now we are seeing this white-hot market start to cool and contract,” she said. Richardson noted that the share of Redfin properties facing multiple offers by buyers dropped to 77% in March from 94% compared to a year ago, Richardson added. “This suggests that the price drop is not about inventory, it’s about buyers fed up with high Bay Area prices and crazy competition,” she said.
In the city of San Francisco, the median value of homes has skyrocketed, from $670,000 at the beginning of 2012 to $1.12 million in April , a gain of more than 67%, according to Zillow.com, which puts the gain in the past year alone at 11%, though down from its year-over-year estimate of 14% in February. Last fall, a derelict two-bedroom, one-bath earthquake shack, built in the aftermath of the 1906 earthquake, sold for more than $400,000, 17% above its asking price. In addition, a similar fixer-upper along San Francisco’s famed Great Highway overlooking the Pacific Ocean, within walking distance of the city zoo and Golden Gate Park, sold for $1.2 million.
Brian Tran, a realtor in San Francisco with Vanguard Properties (who represented the seller for the 1906 earthquake shack) said he’s noticed a bit of a slowdown, but only in condominiums. “We are selling a little less when it comes to condos,” he said. “There are a number of large projects that have come on the market recently that have increased the supply and lessened the competition.” Single family homes though “are hotter than ever,” Tran said, especially in the East Bay, as buyers flock to less expensive homes in Oakland and Berkeley.
Zillow isn’t the only company predicting a slowdown in San Francisco’s real estate market. Just two months ago, John Burns Real Estate Consulting of Irvine, Calif., and Pacific Union, a San Francisco real-estate brokerage, said that the Bay Area’s rapid property-value and rental-cost appreciation could suffer a repeat of the dot-com bust of 2000.
“The San Francisco Bay Area is on our watch list for a correction,” Burns said in February, noting what he said was a correlation between declining venture capital awards and real estate prices in the Bay Area, where many tech workers are paid in bonuses and stock options, and suffered greatly during the collapse of the tech industry just over 15 years ago.
In a separate report in February, Fitch Ratings’ managing director, Grant Bailey, said that home prices in the Bay Area had climbed to an all-time high in the third quarter of 2015 and were 10% above their prior peak in 2005 and 62% above their post-recession low of early 2012. “(H)ome prices are roughly 16% overvalued relative to the underlying supporting economic fundamentals,” Bailey said.
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And it’s not just San Francisco. Redfin says pressure has been mounting in markets across the country with month-after-month of price growth, high competition and chronically low inventory. Nationwide, prices were up 4.7 % year-over-year in March, but sales grew only 1%, the smallest increase in 16 months. Despite 6.8% growth in new listings, overall inventory fell 3.2%, an indication that inventory is not keeping up with buyer demand, Redfin said.
Nationally, demand has outpaced supply since early 2015, when inventory began to drop sharply in many metro areas and home sales rose even faster. In hot markets like Seattle, Minneapolis and Portland, Ore., which saw double-digit year-over-year sales growth in 2015, sales are now falling as a result of steep inventory declines.
“In 2015, sales grew 7% nationally, but there simply aren’t enough homes for sale to maintain such a torrid pace again this year,” said Richardson. “No matter how high home buyer demand is, it takes two to tango, and many sellers are sitting this year out,” she said.