San Francisco Supply and Mortgage Rates Impact

San Francisco Condo Market in Healthy Equilibrium: While the Bay Area as a whole is generally a supply-constrained environment, the city of San Francisco currently has a healthy level of inventory in its pipeline.

There is roughly a year’s supply in the city, with 1,090 condominium units currently selling, as well as 950 units under construction (and three times as many rental units!). Condominiums that are approved for construction total over 3,000 units with an additional +/- 30,000 units yet to be determined as for-sale or rental. San Francisco condominium inventory is just above the historical norm, though not considered oversupplied and will need additional construction going forward to satisfy demand.

Increasing Interest Rates Will Undoubtedly Shrink the Buyer Pool: Interest rates are on the rise, and it’s going to directly impact the proportion of those who can qualify for homes.

On a 30-year fixed mortgage at 4.0 percent, roughly one-quarter of Bay Area households can qualify for a $1 million mortgage. When the mortgage rate increases to 5.0 percent, as John Burns projects for the year 2020, the proportion of households that can qualify drops to 20 percent.

A 6.0 percent rate would lead to 16 percent qualified households.

A 5 percent rate translates into a 20 percent decrease in the buyer pool of qualified buyers for a $1 million mortgage over the next four to five years.

Growth Still Remains at Decelerating Rates: The Bay Area has generally experienced rapid pricing appreciation from 2011 through 2015. This surge in pricing following the Great Recession was not sustainable for the long term, though there is still growth ahead at more modest increases.

The Burns Home Value Index projects pricing appreciation at the MSA level. Prices in 2017 and 2018 are up 1 percent to 5 percent annually across all five Bay Area markets, with the initial signs of a declining market occurring in San Francisco and the East Bay by 2019.

Rental Market Slowing: For the first time in years, San Francisco rents have stopped appreciating and in some cases are beginning to see reductions in some communities.

Whereas the rental market has typically been the “affordable” substitute to ownership, rents have grown at extraordinary rates in the San Francisco MSA. This pushes demand for the rental market to less core locales such as Dublin, San Ramon, or even farther.

Supply Remains Solid in San Francisco City, Though Extremely Limited Elsewhere: The current supply in San Francisco is adequate to support current levels of demand. Surrounding areas such as San Mateo and Marin counties, however, are woefully under supplied.

These areas are largely built-out locales (specifically through the Peninsula) with expensive land values and are often very difficult to gain approval for new construction.

The E/P Ratio Not What It Seems: The employment-to-permit ratio is typically thought to be in balance at 1.25 jobs for each additional housing unit. During the recent surge in San Francisco employment, this ratio jumped to levels of more than 10 jobs per housing unit, showing a seemingly massive relative lack of supply.

Though supply was in fact scarce, this ratio is misleading in the sense that not all of these jobs provide income levels necessary to purchase or even rent within the San Francisco MSA. This leads to a massive “export in demand,” creating a need for housing outside of the job-originating markets such as the San Francisco MSA and into more outlying markets such as the East Bay (such as the state Route 4 corridor).