2020: What Happened in the Housing Market?
- Renters packed up in droves and headed to other markets to wait out the pandemic (and perhaps stay longer). Rental prices in San Francisco dropped 24% while rental prices in San Jose dropped 15%.
- Transaction volume for single-family homes in Santa Clara County plummeted about 50% at the beginning of the pandemic but quickly recovered with year-over-year increases in sales volume by July. The remaining months of the year continued to see year-over-year gains in sales volume, up about 30% in each of the last four months of the year. The year as a whole had about 100 additional transactions over 2019 for Santa Clara County single-family homes. What we saw was likely 1) sellers delaying their spring sales and pushing them later in the year (with the school calendar mattering less due to remote learning), and 2) some people deciding to leave the Bay Area.
- Significant buyer demand far outweighed any downward pricing pressure from increased supply, and median prices ended the year up 12.2% in Santa Clara County.
- Interest rates dropped to historic lows. The average 30-year fixed rate mortgage was at 3.72% in January 2020, and one year later it had declined to 2.65%.. An individual buying a house at the median price of $1,200,000 with a 20% down payment in January 2020 can now afford a $1,333,000 house with 20% down while keeping the monthly payment unchanged after factoring in taxes. This represents an 11.1% increase in purchasing power. A significant portion of the 12.2% median price increase in Santa Clara County was likely due to increased purchasing power from the decline in interest rates.
- People fundamentally valued “home” more. It became a place not only to store one’s belongings and to sleep but also to serve as an office, school, and place of enjoyment and refuge. Amenities such as backyard space or a study earned a premium. This shift in thinking contributed to price appreciation.
Key Drivers
As we turn to what’s ahead for the housing market, there are a few key factors that will determine the direction of pricing in 2021:
The “Bay Area Exodus”: There is a myriad of news stories discussing this trend. However, recent data suggests that people did not go as far as many initially suspected. An article in the San Francisco Chronicle analyzed USPS Change of Address data to see where people went. For the 53,251 address changes in San Francisco, the top six destinations – which accounted for half of the requests – were the surrounding counties of Alameda, San Mateo, Marin, Contra Costa, Santa Clara, and Sonoma. Much farther down the list, Austin accounted for 239 of the address changes. When considering the broader Bay Area, migration out of the region increased 19% year-over-year from 2019. However, migration into the Bay Area increased 12% year-over-year. So, while the net emigration did increase, the numbers actually do not appear to be a dramatic departure from a longer-term trend of the past several years.
Remote Work: Another often-discussed theme is the impact of remote work on where people choose to live. If people are able to work from anywhere and maintain their current jobs, this would have a major impact on the Bay Area housing market. To better understand how leaders at tech companies are thinking about this idea, I polled a couple dozen of my classmates from Stanford Graduate School of Business who now live and work in the Bay Area. The great majority (85%) work in the tech sector, and of those polled, 10% were at least considering a move from the Bay Area while the remainder had no plans to move out of the region. The most commonly cited reasons to stay in the region included: job opportunities, family, inertia, craving a return to city life, outdoor activities, and diversity. The biggest reasons to leave included relocating to be closer to family and seeking a lower cost of living.
When asked whether a move to full-time remote or part-time remote might impact their career progression, only 13% felt they could maintain their current trajectory while working remote full-time. The answers were mixed on whether remote work 2-3 days per week would impact career progression, and almost everyone believed that the answer really depended upon company policy. For example, if everyone were required to work remotely a couple days per week, then remote work could be here to stay and career progression would be minimally impacted. One individual captured a common sentiment in the group:
“I'm unclear about how a return to hybrid model where some are in-office and some are not will go... right now, with everyone fully remote, we're all on the same playing field, but in the future state, when some are in the office and benefit from the 'drive by' by a boss or colleague, and others are remote and don't get that interaction... I'm not confident that we'll be able to keep the playing field level.”
Also interesting were the responses to the question of whether full-time remote or part-time remote was impacting innovation. 85% of those polled believed that full-time remote work would negatively impact their company’s innovation. Moreover, 70% believed even part-time remote work would have some negative impact on innovation. One individual stated that, “I believe [remote work] would impact our innovation. I think being remote for the last year has already hurt our pace of innovation to some degree.” Another individual stated, “For 1-2 years we can sustain [remote work] but we lose [innovation] as new people join and our connections aren’t as deep.”
These survey responses suggest that leaders in tech companies do not believe that innovation can continue at its pre-Covid pace if people are working remotely full-time, and working remotely part-time can succeed only if teams have coordinated in-office days. Moreover, remote work becomes trickier as time goes on and new members join organizations. Adding to this are concerns about “face time” in the office and the impact on career progression.
Because of these limitations, remote work will not allow a significant number of people to move outside the region where their job is located. People may however tolerate slightly longer commute times because they are making that commute less frequently. In the Bay Area, I believe this will increase demand in secondary and tertiary cities while lessening demand somewhat in areas immediately surrounding major tech offices. Already over the past year, cities such as San Jose and Morgan Hill have outperformed tech hubs such as Palo Alto and Mountain View:
- Demographic Trends: The Millennials are the largest living adult generation, and they are entering their prime home-buying age (with Gen Z right on their heels). This trend is playing out across the country but is even more exaggerated in the Bay Area and will increase demand over the next decade.
- Housing Supply and Prop 19: The Bay Area continues to have a severe housing shortage, and the pandemic has slowed the pace of construction to build new homes. Moreover, with the high cost of land and construction, homebuilders tend to build in the upper price tiers where they make the most profit. Unfortunately, this does not address the greatest need for homes at entry-level price points.
With All of These Dynamics at Play, Where Should One Focus His or Her Attention?
2021 Forecast:
- Secondary and Tertiary Markets Outperform: As mentioned above, less frequent commuting will lead to people tolerating slightly longer drives.
- Small Units Will Underperform but Properties Near Downtown Locations Are Still Desirable: People need more space to work from home and to use their home as a place to socialize. However, people are craving a return to gathering places. In the survey responses and from what I am seeing with clients, people are anticipating that pre-Covid activities (farmers markets, dining out, coffee dates, etc.) will resume sometime in the not-too-distant future. With my clients who desire walk-from-downtown locations, competition for those properties is as fierce as ever (e.g. 20+ offers, 30%+ over asking, no contingencies).
- Spring and Summer Frenzy: As people see interest rates climbing and as the economic outlook continues to improve and suggest that rates have already bottomed out, there will be a push to buy and lock-in a great rate. Around this same time (spring into summer), I anticipate that large tech employers will begin to lay out more concrete return-to-office plans. This will push people – particularly those waiting out the pandemic outside the Bay Area – to sort out their housing situation. We also may see some pent-up demand from people who wanted to buy in 2020 but delayed their plans due to the uncertain outlook. These factors together will result in a surge in demand. Already February has been a very strong month for the market. The median sale price for a single-family home in Santa Clara County looks like it will come in right around $1,470,000 which is an 8.9% increase year-over-year. The average sale price as a percent of list price is 105.3%.
- Moderation Later in the Year: As we move into August and beyond, we start coming up against strong year-over-year gains in 2020. I think we will see the year-over-year gains start to moderate around this time. Rising interest rates and the return of what will hopefully be a normal school year will also lessen demand.
- Less Competition at Upper Price Points: Above $1 million, inventory increases with price point.
- fred.stlouisfed.com
- zumper.com, December 2020 year-over-year median rental prices for San Francisco and San Jose rental markets.
- fred.stlouisfed.org
- sfchronicle.com
