It’s a new year, time to dust off our crystal ball and gaze into the future of the East Bay real estate market. Will the new year be a good time to sell a house? Can you finally afford to buy that starter home? Should you invest in a rental property?
The good news: As we head into 2020, we are forecasting a steady course. What a relief, right? We can catch our breath after years of frenzy.
Based on market analysis, predictions by top economists, and our own experiences, it looks like the Bay Area real estate market will stay on its current course: a (very) slight cooling in prices, continued low inventory, and ongoing buyer competition, especially among first-time homebuyers who are buoyed by attractive mortgage rates.
Let’s break it down:
Probably Not Headed Into A Recession
A group of top economists recently forecast a low chance of recession in 2020. The experts participating in recent National Association of Realtors’ first-ever Real Estate Forecast Summit announced they expect a 29% probability of recession, 2% growth in Gross Domestic Product, and a 3.7% annual unemployment rate.
Interest Rates Are Still Low
Mortgage rates fell significantly in 2019 and won’t change much in 2020, which will help fuel home purchases, according to the National Association of Realtors. The average annual 30-year fixed mortgage rate of 3.8% is expected to stick through 2020.
Prices Will Level Off
We aren’t expecting dramatic changes in home prices. Realtor.com forecasts that home prices actually might drop .4% in the SF metro market in 2020.
We’ve been seeing year-over-year median home prices sliding in most Bay Area counties since this past spring (for the first time in seven years!). In September, the data analytics company CoreLogic reported that the median sale price was about $778,000, down from $815,000 last year. We have also seen the list price to sales price gap get smaller.
While it is true that things are getting better for buyers our market is very hyper-local. Some areas may not see much change, and other areas might.
Still a Seller’s Market
Prices might be adjusting, but the inventory levels will remain tight. This means there will be fewer homes for sale compared to the number of buyers shopping. In fact, the housing supply is on the decline; the number of homes for sale in the SF-Oakland-Hayward area plummeted 17% between this November and November 2018, according to a report by Realtor.com.
The latest “Weather Report” by the Bay East Association of Realtors shows just 63 homes were for sale in Hayward this November, a 50% drop from November 2018. About 20% fewer homes sold in Oakland and San Leandro. And Richmond was down 45%.
This decline isn’t limited to the Bay Area. Realtor.com’s 2020 forecast says only four of the nation’s 50 largest metros have seen inventory increase year over year.
Why? In part, Baby Boomers are holding onto their homes longer. Meanwhile, millennials who are hitting their 30s are starting to flood the market in search of their first homes.
While this isn’t an easy outlook for homebuyers, who will have to be aggressive, home sellers can expect to receive multiple offers, as long as their homes are priced right and marketed well.
Meaning: Bidding wars aren’t going away.
Slow Construction Pace for New Homes
Don’t count on new construction to add much to the inventory of single-family homes for sale in 2020.
The lack of available land, cost of building materials, zoning laws, and other regulations will continue to affect the rate of new development.
Granny Flats + ADU’s are all the Rage
East Bay communities will warm up to Accessory Dwelling Units or ADUs (also called in-law units, granny flats, backyard cottages) as a way to add more affordable housing options.
ADUs are typically 600-1,000 square feet and can take many forms, from converted garages to stand-alone prefabs in a backyard.
Most recently, Pleasant Hill, Oakland, Berkeley, and Walnut Creek officials have been exploring ordinances to streamline the permit process, limit size, and address residential parking requirements. And in October, Gov. Gavin Newsom signed three bills to further facilitate the construction of ADUs.
We’ve been learning a lot lately from the Oakland-based architects at Inspired ADUs and the builders at McDunn ADUs. (Shout out to Carrie Shores at Inspired ADUs and Dan McDunn at McDunn ADUs, who also is an advisory member of the Berkeley ADU Task Force!).
We expect more communities to see ADUs as a win-win proposition – providing affordable housing for strapped renters and generating income for homeowners who could use a little help paying down their Bay Area-size mortgages.
Apartments + Condos are Booming
Construction cranes are a sure sign of a surge in new commercial and residential projects, and we’re seeing a lot in East Bay cities like Oakland and Fremont.
The SF Business Journal reported that “Oakland is now adding more homes, mostly apartments, to its housing stock than San Francisco.” Oakland has 9,277 homes under construction and 10,097 units in the pipeline.
Who will live there? People priced out of San Francisco and parts of Silicon Valley. Also, Oakland is booming with new office workers, like the 1,200 Blue Shield of California employees who recently moved into a new 24-story office tower at 601 City Center.
Much of Oakland’s new construction is centered in the BART-convenient downtown core and along the former Auto Row, where the restaurant and arts scene is flourishing.
Among Oakland’s largest construction projects is The Skylyne at Temescal, a 402-unit high-rise tower going up at 3883 Turquoise Way. Another high-rise with 419 units is under construction at 277 27th St. in Auto Row.
Oakland’s Adams Point neighborhood also is experiencing a resurgence. The Faraday, the first new construction of its kind in Adams Point since 1972, opened across from Whole Foods on Vernon Street in October and features luxury units and penthouses.
Good Year for Renters, but not Investors
Despite this construction upswing, the market remains challenging for East Bay investment property buyers.
Because of high prices and the broadening rent control movement, finding an investment that’s cash flow neutral – let alone profitable when fully leveraged – is very difficult, Elisabeth of Abio explained.
The state of California and many municipalities are enacting more restrictive rent and eviction control provisions. For example, Assembly Bill 1482, signed in October, caps rent increases at about 9% per year and prohibits landlords from evicting tenants without an approved reason.
Another rent control measure known as the Rental Affordability Act is likely headed for the state ballot in 2020. It would allow cities and counties to implement and expand rent control policies, a power currently limited by state law. This creates substantial uncertainty, and the prices of investment property haven’t come down sufficiently to reflect the increased risk. More than 41 percent of the 32 buildings with 5 or more units went unsold in Berkeley in 2019 – indicative of mismatched seller expectations.
Tenacious investors who want to take advantage of 2020’s high prices and sell/exchange their own investments should look for motivated sellers who optimized their rent roll and made property improvements (the unicorn of East Bay multi-family real estate?).
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