A new report from CoreLogic’s Andrew LePage found that San Francisco – a market known for its astronomical home prices – has started to show signs of cooling. This is indicative of a broader housing trend of markets “self-correcting” instead of bubbling.
In a research report conducted by Realtor.com, it was found that the national housing market has significantly recovered post-crisis with home prices growing significantly in recent years. They predicted that the unstainable price increases seen in San Francisco as well as other cities such as San Jose and Austin would naturally taper off due to people choosing to rent over buy, move in with family or roommates, or relocate to a housing market that is more affordable.
This prediction is ringing true when it comes to San Francisco. According to the CoreLogic analysis, the housing market anomaly experienced a decrease in existing home sales through August of 2016 compared to the same period in the year prior. LePage says that this is due to conditions in the market being significantly different from those of pre-crisis.
“One key difference between now and a decade ago is that today’s home prices don’t appear to be as far out of line with incomes, even though prices jumped about 60 percent over the past four and a half years,” says LePage. “CoreLogic calculates a long-term sustainable home price level based on the historical relationship between its Home Price Index (HPI) and a region’s per-capita disposable income. In July, this year the price level for the San Francisco metro division was 1.2 percent above the long-term sustainable price level. Near the peak of the last cycle home prices were 20 percent higher than the long-term sustainable level.”
The San Francisco-Oakland-Hayward metro area’s market condition indicator was rated as normal by the CoreLogic HPI based on the long-term fundamental values, which are a function of real disposable income per capita. This means that despite the increase in home prices, income is holding pace.
Another measure of market “self-correction” is the decreased flipping activity in San Francisco, says the report. Specifically, the third quarter of 2016 had a reported 2.1 percent of the homes flipped in the San Francisco-Oakland-Hayward metro area, which was a decrease from 2.3 percent from the year prior. The report also found that this rate was significantly lower than the 5.9 percent peak in first quarter 2005.
Realtor.com postulates that the decrease in flipping is yet another factor pointing toward the market tapering off instead of bubble because flipping is one of the six factors quintessential to the housing bubble and subsequent housing crisis in the 2000’s.
In addition to these trends marking “self-correction” and health in the housing market, CoreLogic reports that home purchase loan applications through August were stagnant compared the year prior. Further, the home inventory increased approximately 22 percent year-over-year.
LePage says that now the biggest risk factors appear to be external to the market. These include slower job growth, a prolonged stock market sell-off, and higher mortgage rates.
“While San Francisco faces a variety of possible external threats, it doesn’t appear to be beset by the same internal risks seen a decade ago,” says LePage.