September Analytics: Bay Area Update

Welcome to our September newsletter. This month, we’ll help you make informed decisions about buying and selling by examining these key topics: 

  • The Greater Bay Area’s current housing inventory
  • The impact of tax code changes on a typical (potential) homeowner 
  • Strategic positioning for buyers and sellers in a low-inventory environment

This Month’s Local Inventory Market Data

The Greater Bay Area’s housing inventory continues to affect prices. Inventory jumped during the beginning of the year when mortgage rates moved up towards 5%. Since then, however, residential inventory is moving back down fast. This month marks the first in over a year when inventory was lower, not higher, on a year-over-year basis.

We can see the significant decline in inventory since December 2018 when inventory levels were 35% above the previous year.

Housing inventory is impacting Bay Area residents in different ways. In San Francisco, residents are experiencing a steep drop in housing inventory, down over 20% from last year. The North, South, and East Bay areas still have higher inventory levels than last year, but they are all falling quickly. Starting in September, we expect to see inventory levels that are lower than last year. 

Furthermore, sales are up in most areas, pushing inventory down further. Below are the median price and sales data through July 19th, 2019 (the most recent available data from the California Association of Realtors®).

In August, several counties saw double-digit sales growth. In counties like Marin, Napa, San Francisco, and Sonoma, a lack of inventory combined with high demand is driving persistently strong sales growth. However, Alameda, Contra Costa, San Mateo, and Santa Cruz saw sales declines. 

Low supply is helping prop up prices. In our newsletter last month, we discussed how historically low-interest rates should be boosting home prices more than they are. But this far into the longest period of economic expansion in our country’s history, home prices are struggling to push past their record highs. The median price of all residential sales in the Greater Bay Area fell on a year-over-year basis in August by 3% to $950,000.

Median home prices in most counties also dropped.

For homeowners and potential sellers, the low housing inventory may be welcome news. 

At the beginning of last year, analysts (including those at the National Association of Realtors®), suggested that the new tax law signed in late 2017 would have a significant impact on housing inventory. The NAR writes:
 

“As a result of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1-3% in 2019 as low inventories continue to spur price gains.”


Was this projection accurate? Let’s take a closer look at the tax implications to assess the actual impact on California buyers and sellers.

The Impact of Tax Code Changes on Housing Inventory

In December 2017, Congress passed the Tax Cuts and Jobs Act, which took effect on January 1, 2018. The government implemented a standard deduction granting taxpayers a base tax write-off of $12,200 for single households or $24,400 for married households.

The law has little impact on homeowners in areas where home prices are below $750,000 and households with smaller itemized deductions, such as state, local, and property taxes. For homeowners in pricier areas, however, the new tax law is noteworthy—especially for those with homes worth $1 million or more. 

The graphic below shows us what that impact might be. 

Our assessment is that the new tax code burden is not large enough to significantly impact home affordability or buying and selling patterns. To further understand this conclusion, we look at price segments most affected by the inventory change.

The data in the chart above tells us that the homeowners decide to hold onto instead of putting up for sale are the ones least affected by the tax changes. Homes below $1 million are down across the Bay Area compared to last year. Homes valued above $1 million are either down less, as is the case in San Francisco, or are up compared to last year. Active listings of homes above $1 million in the North Bay region are up by 20%.

Since inventory declining in the less expensive segment of the market, we can conclude the tax law has little effect on homeowners’ decisions to hold onto or list their homes. This could pose a problem in the months ahead as buyers look for a home, and inventory continues to drop.

Lawerence Yun, the chief economist for the National Association of Realtors®, says:
“Inventory coming onto the market during this year’s spring buying season… was not even close to being enough to satisfy demand. That is why home prices keep outpacing incomes and listings are going under contract in less than a month – and much faster – in many parts of the country.”

Housing Inventory: The Impact on Buyers and Sellers

Low housing inventory impacts both buyers and sellers.

For buyers, low inventory means less choice, which means finding a home may be difficult.  Buyers need to be prepared to act fast and make an offer above list price. 

For sellers, the tight market might seem like an opportunity to command any price. However, median home prices have failed to push through their current high watermark and are down slightly from their previous highs. 

Homeowners who wind up lowering their prices can be severely penalized because price-reduced homes often take longer to move and usually sell for less in the end. The bottom line? Pricing a home to sell is much more of a science than an art.

Key Takeaways for Buyers and Sellers

In this complex, complicated environment, both buyers and sellers benefit from working with an agent experienced in making offers in highly competitive markets. Interest rates are near their all-time lows, making larger mortgages less costly long-term. Yet pricing a home to sell is more than just a guessing game, as incorrect pricing risks hurting the seller in the long run.  

We hope to see more listings and new inventory hit the market as we move into the fall. For now, however, things are tight.

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