After a slow start in the first quarter, home sales in Pacific Union’s Sonoma County region picked up significantly in the second quarter as more, higher-priced inventory arrived on the market. After sitting on the fence for years, sellers saw equity levels rise substantially and decided the time was right to get in the game. Buyers, meanwhile, were anxious to take advantage of the expanded supply. Many homes received multiple offers, but typically two or three per property – not the 10 or 12 bids seen over the past year.
The median sales price rose moderately, but less because of appreciation and more because of the changing nature of home sales. A few years ago the Sonoma County market consisted mostly of short sales and foreclosures, whereas today they account for 10 percent or less of sales. Equity sales and higher-priced properties are currently predominant as the housing recovery advances and the market returns to normalcy.
Looking Forward: As long as the inventory of available homes continues to rise, we expect continued growth in the region. Demand for homes will not be as frantic as we’ve seen over the past year, but it still runs deep. We look forward to a strong second half for 2014.
Defining Sonoma County: Our real estate markets in Sonoma County include the cities of Cotati, Healdsburg, Penngrove, Petaluma, Rohnert Park, Santa Rosa, Sebastopol, and Windsor. Sales data in the charts below includes all single-family homes and farms and ranches in Sonoma County.
Median Sales Price
The median sales price represents the midpoint in the range of all prices paid. It indicates that half the prices paid were higher than this number, and half were lower. It is not the same measure as “average” sales price.
The months’ supply of inventory is a measure of how quickly the current supply of homes would be sold at the current sales rate, assuming no more homes came on the market. In general, an MSI below 4 is considered a seller’s market; between 4 and 6 is a balanced market; and above 6 is a buyer’s market.
Average days on the market is a measure that indicates the pace of sales activity. It tracks, on average, the number of days a listing is active until it reaches “pending” status, meaning all contingencies have been removed and both parties are just waiting to close.
Measuring the sales price as a percentage of the final list price, which may include price reductions from the original list price, determines the success of a seller in receiving the hoped-for sales amount. It also indicates the level of sales activity in a region.
Three Reasons Why This Housing Cycle Is Not a Bubble
Bay Area real estate values, fundamentals, and “noise” continue to be hot topics at social gatherings and client meetings. Does this cycle resemble the dot-com era bubble? Can the pace and valuations we are seeing continue?
While supply and demand are very basic and scalable market dynamics, I do believe it is important to separate the pace of sales from valuations. In terms of sales volume, the market’s current pace still displays somewhat of a “slingshot” effect from constrained demand as a result of the 2008 equities-market meltdown. Buyers sought safety on the sidelines for three or four years, but in the last 24 months, demand has been ferocious.
Although we anticipate Bay Area sales volume will experience year-over-year growth of less than 5 percent by 2016 and 2017, slowing demand will not relax pricing.
The following three fundamentals are currently driving Bay Area real estate markets:
Supply constraints: Our region has limited land available for new housing development.
Exceptional job growth: Northern California enjoys the hottest employment market in the U.S., with intellectually challenging, highly sought-after, and lucrative jobs. (See our feature story below for more on our region’s economic outlook.)
Population growth: The chart below illustrates that population growth across our nine-county region has exceeded new housing supply by an average of nearly 200 percent in four years.
Each of the market dynamics listed above generally has very positive impacts on residential real estate. I doubt there is another major U.S. market that is experiencing and enjoying the combination of all three of these factors.
On a global stage, the Bay Area trails New York City, London, Hong Kong, and Beijing on a dollar-per-square-foot valuation perspective. Over the next five years, look for our region’s real estate prices to meet the aforementioned international markets.
A few years ago I attended a Bay Area real estate conference where Leslie Appleton-Young, vice president and chief economist of the California Association of Realtors, spoke. When asked about the best time to invest in California real estate, Leslie replied, “I’ve been answering that question for 30 years, and my answer has always been ;five years ago.’”
If I am not mistaken, Warren Buffet said, “Buy all the real estate you can,” in a 2009 television interview. I suspect we will all feel the same way in 2019 when we look back at today’s market.
Mark A. McLaughlin, CEO, Pacific Union
Bay Area Job, Population Growth Will Continue to Fuel Housing Demand
The Bay Area’s tech-industry-driven economy continues to add extremely desirable and high-paying jobs, attracting talented workers from around the nation and globe. But even though our region’s phenomenal economic growth likely will begin to slow over the next couple of years, intense demand for housing is almost certainly here to stay thanks to a pronounced lack of available homes.
"We’re getting closer to full employment," says Stephen Levy, director and senior economist of Palo Alto-based Center for Continuing Study of the California Economy. "And what that means is that as we near full employment, that’s going to bring in people, which will add to the housing demand."
May statistics from the California Employment Development Department show that each one of our Bay Area counties boasts an unemployment rate lower than the statewide average of 7.6 percent. Job growth remains particularly strong in Marin, Napa, San Francisco, and San Mateo counties, all of which have unemployment rates of less than 5 percent.
Levy believes that the Bay Area’s unemployment rate will never return to dot-com-era lows, when it hovered in the 2 to 3 percent range in San Francisco and Silicon Valley. However, he forecasts that even though job growth will level off over the next two years, the Bay Area will continue to outperform the rest of the country.
Population Growth Outpacing New Housing in Key Markets
Since the U.S. began to emerge from the Great Recession in 2010, the Bay Area’s population rate has jumped sizably, according to California Department of Finance data. Over the past four years, the number of residents in San Francisco and San Mateo counties has grown by nearly 4 percent while increasing by almost 5 percent in Santa Clara County.
But none of those counties has built enough new housing units to keep up with the expanding populace. Since 2010, new housing has grown by just 2 percent in Santa Clara County, 1.3 percent in San Francisco, and 0.9 percent in San Mateo County.
"Peninsula prices and rents will continue to outpace the state and national average unless we see a dramatic increase in supply, and even then it would be snapped up pretty quickly," Levy says.
Economic Climate Much More Stable Than in Dot-Com Days
As was the case in the dot-com boom and subsequent bust, the tech industry remains the primary driver of Bay Area employment growth. However, Levy believes that our current economy is far less frenetic than it was 15 years ago.
"I think it’s quite different," he says. "These are real companies, and they have customers, profits, and burgeoning sales. The dot-com era was more about business plans."
Still, technology companies aren’t the only businesses fueling Bay Area job growth. Other industries, including hospitality, health care, and construction, are seeing employment upticks, Levy says. However, he cautions that tremendous growth in the Internet sector could eventually slow expansion in other industries, including brick-and-mortar retail and financial services.
While the Bay Area’s economic outlook appears solid for the foreseeable future, the housing shortage may eventually impede growth, as workers could become wary of relocating to an area where finding a home is so difficult. Therefore, new construction remains a crucial factor in keeping our region’s economy moving upward and onward.
"I think [our economy] will always grow, but absolutely, housing poses a constraint to our growth over the long term," Levy says. "The lack of housing could take some of the bloom off of the rose and limit some of the growth that might otherwise be there."
Bay Area 10-Year Overview
Here’s a look at home sales in the Bay Area’s real estate markets in the second quarter of 2014, with a glance back at the 10 preceding second quarters.
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