Bay Area Housing Markets Got Spooked in September
Executive Summary:
- Bay Area home sales declined by 20 percent year over year in September, with all counties posting drops, led by Sonoma and Contra Costa. In 2018, the region’s housing market activity is trending 4 percent lower year to date.
- Santa Clara County posted sales declines across all price ranges.
- Bay Area inventory increased by 14 percent year over year in September — about 2,000 more homes — with Santa Clara County contributing more than 50 percent to the total increase.
- While appreciation has slowed from its spring peaks, Bay Area home prices are still up by 10 percent on an annual basis. San Mateo County maintained the strongest price growth at 19 percent.
- Home price reductions were up by 7 percentage points, from 16 percent last year to 23 percent this September. Sonoma and Santa Clara counties posted the largest increases in price reductions.
- The rebalancing between buyers and sellers is driven by affordability constrains and buyer fatigue, with the biggest change seen in relatively affordable and previously fiercely competitive markets.
September Bay Area home sales slowed markedly from one year earlier, with an overall decline of 20 percent, ranging from a 9 percent decrease in San Francisco to a 27 percent drop in Sonoma County. With September’s decline, year-to-date sales are now 4 percent below 2017.
Figure 1 summarizes changes in sales by Bay Area county from last September and overall year-to-date changes compared with last year. San Francisco is the only region where overall 2018 sales are still above last year despite September’s decline. By contrast, Santa Clara County posted the region’s largest year-to-date drop of 8 percent. Note that for the purposes of this analysis, all property types have been included.
Figure 1:Year-over-year and year-to-date change in home sales by Bay Area county
Source: Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
Figure 2 illustrates September home sales activity for the last four years. While activity between September 2015 and 2017 trends relatively in line, this year’s drop appears most obvious in all counties. As noted in Figure 1, Sonoma County posted the relatively largest decrease, followed by Contra Costa County.
Figure 2: September home sales activity by Bay Area county, 2015-2018
Source: Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
Figure 3 illustrates September’s change in home sales by price range compared with last September. Three counties posted noticeably lower sales: Santa Clara, Contra Costa, and Alameda. In Santa Clara County, all price ranges saw annual sales declines in September. In the East Bay, the decline was dominated by homes priced below $1 million, some of which are now priced above $1 million compared with what they would have been priced last September. Taken together, Santa Clara County and the lowest price range drove most of the decrease.
Figure 3: Annual home sales changes by Bay Area county and price range
Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
Declining sales appear to reflect two underlying conditions that are shifting Bay Area housing markets: affordability constraints and buyer fatigue. While affordability has long been a serious concern in the Bay Area, recent median home price hikes coupled with rising mortgage rates have put a 20 percent to 25 percent dent in buyers’ purchasing power. The impact of these forces is causing fewer sales in relatively more affordable parts of the region, such as Sonoma, Contra Costa, and Alameda counties. In Sonoma County, aggressive pricing amid low post-wildfire inventory had a particularly discouraging effect on buyers of homes priced below $1 million.
On the other hand, fierce buyer competition on the Peninsula, which drove home prices up by almost 30 percent year over year in the first half of the 2018, led buyers to step back and put home purchases on hold. Also, a sentiment that the housing market has reached the top has impacted sales activity, with buyers not wanting to purchase at the top of the market and more sellers listing properties in September.
Consequently, inventory increased by 14 percent year over year in September, with Santa Clara County contributing more than 50 percent to the total gain, adding more than 1,000 homes to the market compared with last year. Alameda and Sonoma counties followed in housing-supply gains. Sonoma County’s changing conditions largely reflect post-wildfire activity.
Figure 4: Annual inventory changes by Bay Area county and price range
Source: Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
Median home prices, however, maintained healthy momentum, with most regions continuing to grow at rates seen earlier this year. Figure 5 summarizes median year-over-year home price changes in September. The last column shows median price growth in March 2018, when year-over-year changes peaked. Overall price growth slowed from 19 percent in March to 10 percent in September, and most regions saw some cooling except for Napa County, where gains have picked up in the latter part of this year. Santa Clara County saw the largest decline in appreciation, from 34 percent in March to 11 percent in September.
Figure 5: Median home price changes by Bay Area County from September 2017 and March 2018 peak
Source: Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
Still, it’s important to note that even with slowing price growth, which was inevitable given the unsustainable rates seen in first half of 2018, the longer-term appreciation trend for the Bay Area (Figure 6) shows gains returning to the trend line of around 8 percent to 10 percent.
Figure 6: Year-over-year change in median home price in the Bay Area, single-family homes
Source: California Association of Realtors
Lastly, shifting market conditions are also reflected in the share of homes that required price reductions. Figure 7 illustrates the change in the share of homes that saw price reductions, with green shades indicating increases in price reductions compared with last September and red shades suggesting fewer reductions. Overall reductions increased by 7 percentage points, from 16 percent last September to 23 percent now. Again, Sonoma and Santa Clara counties posted the largest increases in price reductions, up by 13 percent and 15 percent respectively. Forty-one percent of Sonoma County homes required price reductions in September, followed by Santa Clara County at 24 percent.
Figure 7: Changes in price reductions by Bay Area county and price range
Source: Source: Terradatum, Inc. from data provided by local MLSes, Oct. 7, 2018
All told, September market activity shows a changing dynamic between buyers and sellers. As noted above, both sides may believe that housing price growth has reached its peak and are acting accordingly, with buyers pulling back and sellers rushing to list their homes before the slow winter season kicks in. To some extent, volatility in financial markets and geopolitical developments may be exaggerating consumer fears. However, the underlying macroeconomic environment and California’s continued growth confirms that housing markets may be returning to a more normal balance between buyers and sellers rather than preparing to topple.
Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.
(Promotional photo: iStock/Rawpixel)