August 12th, 2020 Market Update

This month’s Bay Area Housing Market Update is brought to you by Helen Chong along with the 11th Bay Area Housing Town Hall Webinar guests Marty Lefton and Dr. Lawrence Souza. Watch the video recording here! We will show you the housing market trend through various statistics as well as some thoughts and opinions from our guests. Let’s get started!

Helen Chong: These are some statistics I just pulled today, and the chart shows May, June, and July’s numbers. As you see, of course, we are recovering from May. In May we had a really rough month, and in June, you could tell that we started recovering, and July, even for our team, we had worked with so many buyers. The competition out there is real, it’s pretty fierce. People just came back and then made a lot of offers, so you could tell that there are a lot more listings coming out, there are a lot more offers being written, and there are a lot more offers being closed.

Here, you can see the change to pending 2019 versus 2020 for May, June, and July. In July 2020, we have 20 more pendings, meaning contracts signed compared to July of last year. The number had gone up quite a bit, and again we had mentioned before that summer typically is a slower month, but this year our spring has started in June instead of in February and March.

I am including these two charts to let you compare between June and July. In June, Santa Clara County Association had put up this infographic showing that closed sales were 857 for single-family, but last month in July, it was 1004, which had gone up 17% compared to a month ago, and up 11.8% from one year ago. The same thing for condos, it had gone up quite a bit. What’s interesting about this chart is actually that, if you see the counter prices, last month it is showing that it has dropped 11%, but this month in July, it has shown that it has gone up 3.3%. We do notice that a lot of condos have been on the market a little bit longer, and they tend to not get as many multiple offers compared to single-family residents. And single-family residents, you could tell right away that if homes are in a good location with good school districts, it still has a lot of multiple offers. The number of days right now has gone up slightly, but in general, it’s still a lot of places that have been on the market for about two weeks. We see a lot in less than two weeks, and they have multiple offers.

Earlier I showed you data from Santa Clara County, and I want to show you a little bit from San Mateo as well, the same situation. 1.72 million is the median sales price and 30 average days on the market, and also they have 434 closed sales out of 500 listed, this is for single-family. Then it’s very similar for condos, it seems like the market really had picked up in July for San Mateo County as well.

This one is East Bay, and you see that the median sales price in most of the cities around the 880 corridor have gone up as well, besides Berkeley and Albany. We do notice that like Union City has gone up 9%, San Leandro 9%, so a lot of this East Bay Area, their pricing actually had gone up. From my personal experience, we have talked to a lot of buyers, and some of the buyers truly indeed are moving out of San Francisco, going to East Bay, or going south to the peninsula, or even South Bay Area.

We talked so much about this before — April survey, July survey, from our own survey with our own clients too, we hear over and over again they need more interior space because of work from home. They need more outdoor space. Even if they’re looking for a townhouse, they need a little bit of backyard space. They want to move from the city to the suburbs. They want to have the space that is their own instead of having any shared space with other people. It is really a trend that we started to see, especially during the past couple of months. Most of the organizations they’re still projecting that the future home price is still going up slightly. Zillow hasn’t given their opinion about their future home price projections, but two organizations, CoreLogic and Haus, are projecting a slight decrease in the home prices. But again, Zillow CEO had talked about the real estate market — we’re getting “great reshuffling” as people seek more space right now.

Here are some reports I pulled from Marcus & Millichap Research Center. It has shown that the employment market right now. They have talked about the employment percentage change in Oakland, San Francisco, Orange County, Los Angeles, they’re all double digits, in a way, I was glad to see that San Jose is in single digit, not double digits. No matter what it is, it has quite an impact in terms of the employment percentage, but then the temporal layoffs here, what is interesting is that we do see a lot of temporary layoff being rehired, compared to the permanent layoffs, which is good news. I think that’s a little bit positive to look at the economy in general.

If we look at the residential loan side, we do see that mortgage credit availability has gone down. We have heard like a lot of banks with the jumbo loans that don’t allow any less than 20% down payment, some of them require a little bit higher FICO score, and then some of them actually don’t take certain income anymore. So it definitely has become stricter. Also, average days to close a loan, I know this number says 47 days, fortunately, we still have pretty good experience actually. We still have people, a lot of our clients, closing loans in 30 days or even 25 days. However, we also have one bank that has been closing loans much longer. It is about 47 days, and it was getting pretty nerve-wracking for us. In general, just to let everybody know that if you are writing offers, just be sure to talk to your loan officer, making sure that you know their timeline because if you know they pass that 30 days closing, and then you cannot close, and your seller’s not willing to extend, it can be pretty detrimental to your buyers.

I thought this is also quite interesting from the Mortgage Bankers Association. They have said that commercial and multi-family borrowing falls 48% in the second quarter of 2020, and the share of mortgage loans in forbearance decreases for the eighth straight week to 7.44%. I feel like there’s bad news and good news here. Both of you are in the mortgage loan business, especially in commercial, do you agree with this?

Marty Lefton: I think it’s really too soon for that second bullet point, it’s gonna get a lot worse.

Dr. Lawrence Souza: That’s right.

Helen: Thank god this is not my words, it’s just from the Mortgage Bankers Association. It actually came out in August, they were saying that it has decreased for eight straight weeks to 7.44%. I believe the forbearance had decreased, but then is it going to lead to foreclosures in the future? I’ll wait for you guys to talk more about it later.

In terms of the mortgage interest rate here, as you see, especially residential mortgage interest rates have been coming down. I pulled this one again from Wells Fargo, they went down to 3.125% for 30 years fixed as of today. Again reminding everybody that just because they said 3.125% doesn’t mean everyone qualifies for 3.125%, it really depends on your qualification, but just to give you an idea is that last time when I showed this slide, it was 3.25%, so it did drop a little bit.

Marty Lefton: Hey Helen, are they still requiring like deposits of like a million dollars to get that?

Helen Chong: Well, not in order to get this number. I know that we have a client who brought in a million dollars to Wells Fargo and dropped below 2.75%.

Actually I didn’t pull this here, but there’s another mortgage broker, he is a wholesale lender. They’ve been advertising like at 2%, 1.99% or something, but you have to pay all these crazy points in order to get that, but of course, they don’t talk about it upfront, so a lot of people fall for that.

Well, the projections, I have marked this chart to compare the changes from last month. The red circles mean that the projection came down and the green circles mean that the projection went up. As you see that most organizations have projected that the mortgage rate is going to come down even more for 2020, but then 2021 2Q, the projection now has gone up slightly so 3.2%, 3.15% instead of 3.07% last month.

Now let’s take a look at the multi-family side. This is from Freddie Mac and they have been showing the growth of the gross income has dropped obviously in 2020, and also the vacancy rate though has gone up a little bit. It’s quite interesting that some people might think that — oh, you know if the income growth has dropped this much, the vacancy rate probably goes sky high, but absolutely not the case. Obviously we have the eviction moratorium currently, so the vacancy rate hasn’t really been affected that much, but a lot of cities are starting to come up because their eviction moratorium is expiring, so a lot of people definitely have been fighting for that.

Here I highlighted Oakland, San Francisco, and San Jose, and you see the annual change in vacancy rate versus the 2020 forecasted vacancy rate. The vacancy rate, for San Jose or basically the Bay Area, is close to 6% now. It’s like a little higher, it’s used to be lower before around 3, 4%. It’s definitely gone up for the forecast, and the vacancy rate is going to increase across all major metros, but they’re saying that the highest is actually in Dallas, Charlotte, and also Jacksonville.

This chart shows the annual change in the vacancy rate versus forecasted rent growth. As you see that the y-axis shows the vacancy rate increase, the basis point increase, and the x-axis is the rent growth. So if you’re on the right side, that means your rent actually is forecasted to go up a little bit more, and the left side, most of the cities are going down. However, there’s no correlation, even though the rent growth is going up, the vacancy rate is actually pretty high, they are 200 to up to over 350 basis point increase, despite the rent growth, so this is actually quite an interesting graph.

Now we also have been talking so much about that $600 unemployment benefit that expired on July 31st, and that $600 per week on this unemployment benefit covers only 50% of the income in San Jose for the median income over here. If the unemployment rate remains elevated after the termination of the unemployment benefit from the CARES act, we are going to anticipate renters to become more cost-burdened resulting in more evictions, doubling up, or moving to lower-cost housing options. We have seen all across the United States, every city you’re hearing that everybody was very worried about it. That’s also one of the reasons why buyers are on hold, thinking — I don’t know how we should even value a property. The origination volume is expected to decline in 2020, and it can range from 20% to 40%, but from what they are saying is that the robust growth over the past several years though will position the industry to absorb the impacts from this recession.

I don’t know about this, when I saw this I really wanted to hear what you think. Do you really think that because we’ve been doing so well in the past few years, people are pretty much okay for this coming recession? Any thoughts?

Dr. Lawrence Souza: This is a different ball game. It’s a different recession.

Marty Lefton: When you bring this up Helen, are we looking at it from the residential market? Are we looking at the commercial market? Are we doing both?

Helen Chong: I think both, I mean in general, and this is mostly about multi-family, a lot of tenants. I mean, for the $600 unemployment benefit it’s going to affect a lot of the tenants and landlords.

Marty Lefton: I think it’s going to be very interesting. At least what I’m seeing is every market’s going to be drastically different, and San Francisco to me is a tremendous case study right now that all of this applies to in San Francisco, because it’s so dense, because it’s been such a market that’s thrived on. You go up there because you’re young, and it’s vibrant, and it’s fun, and there’s food, there’s entertainment, it’s gone. So then you get the ripple effect where people are going — well then, why am I paying these high rents; and they go — wait, I can work remotely. Then you really have a perfect storm where these can start to scatter, and the question is where are they going to step, and are they going to scatter east? And when I say that, it may be like an Austin east, are they going to start coming down to the peninsula, and the south bay, because I suspect we’ll get some coming down this way, which will offset some of the pressures in the south bay market, but I think San Francisco is in a very precarious situation for a lot of reasons.

Dr. Lawrence Souza: I read something that 5% of Manhattan’s population is gone, five percent. So if you take that same statistic and apply it to San Francisco, which are very similar cities, you’re looking at 40,000 people who have left San Francisco since march.

Helen Chong: That’s crazy. Yeah, I’m not surprised. Literally I had a call this week, I mean, I get this kind of calls almost every week, and this person told me, I was like yeah we’re done with San Francisco we’re moving down to the peninsula.

Marty Lefton: Well, there’s another kind of aspect of the city that I don’t think the average consumer even realizes, it’s behind the scenes, which is people who live in apartments up there, but then when they wanted to own, they might try to buy a condo. Well, a lot of times they couldn’t find the condos, and then they went for TICs, where we take a multi-family building and in effect do a backdoor to create a condo, with a huge document like this. Those are not dying because people just don’t want to live on top of each other because they’re afraid. So all these things are going on simultaneously which will affect multi-family pricing in the city eventually. You know, from a lending perspective, the lenders are going to assume a 10% to 25% vacancy now, where they had 5% in the past. Now we’re gonna be questioning, okay, now we have to look at everybody and go, how many of these tenants have paid? How many of these tenants are holding back on pay because they don’t have to? So then you get another hit to the income so those people, those investors, that were let’s just say leverage to the health, are definitely going to feel stressed. And the question is whether you’re there on a CMBS loan, which has more challenges in getting out of those, or are they going to find a friendly bank who’s going to be patient with them somehow, and maybe convert it to interest-only for a while. I think all of these things will happen at the same time.

Helen Chong: Absolutely. Well, we do have this reduced employment benefit for $400 a week now, so hopefully, this helps a little bit until the end of the year, but I think there’s just so many things that most people have never seen before. I get these prediction projections all over, so that’s why I’m so curious, I really want to hear what Dr. Souza is going to say.

This is just something from abc7 news talking about all this rent went down this much, double digits, and San Jose at 8%.

Here is Marcus & Millichap again regarding class A multi-family, talking about the “high-end rentals in the Bay Area facing the largest correction at this stage of the health crisis”. For sure, this is what we see already. It has gone down 6.2% since March, and by just under 3.5% in San Jose and Oakland. Again, you can see that the vacancy rate had gone up quite a bit, 12.9%, and then 6.2% San Jose, Oakland 5.2%, but I feel like it’s probably going to be even higher, just like what Marty was just saying. When you guys underwrite, you know, probably you have to use a much higher number. However, people are still quite confident over the Bay Area’s long-term housing dynamics, so I think that is also another reason why we are still seeing a very strong housing market in terms of the one to four units.

These differences between Class A, Class B, and Class C properties, and you can see the rent growth. So Class A, Class B, Class C. Class A, is very subjective really, but then class A typically is like the higher-end properties, and Class B is a little bit middle ground, and then Class C is the lower-end. That’s the easiest way to explain without going into detail because, in every city, every region could be different on how you look at Class A, Class B, and Class C. What they are projecting is that the rent growth for Class A, obviously, is very very small, and Class B is slightly better, but Class C, on the other hand, actually is doing pretty well. These are changes in the US on average. And then the vacancy, same thing, very interesting you see Class C has the lowest vacancy compared to Class A and Class B, so this is going to be quite different for people to look at properties to buy in the future.

Here again, is that less-dense and lower-cost metros near large gateway hubs are showing more positive multifamily performance. People want to be close to the gateway, the big cities, but then they might be a little bit further out, and then less-dense areas.

Finally, just want to show a little bit about San Francisco, talking about the companies signed new lease only on 266,000 square feet of office space in the second quarter, the lowest level since at least the 1990s, Silicon Valley same thing, the lowest rate in 16 years. And then on top of that, there’s this Prop 15, the split roll, is a job killer. If you get to vote for this, please be sure to vote no. They are basically proposing that they want these commercial properties to pay property tax based on the market value of that year, instead of the 2% increase, so that it can increase the revenue for the city. But at the same time we all know that if you increase property tax on the commercial property with triple net, everything they could pass it down to the tenants, the tenants are going to pass that cost down to the consumers. So I’m against it, but I guess that’s another topic for another time.

We hope this market update is informative and useful to you. Visit our HG-TV page to watch the full recording of the 11th Bay Area Housing Q&A Webinar — Commercial RE & Multifamily Outlook.