San Francisco Real Estate Forecast for 2014: Higher Prices Good for Some, Bad for Others

Here’s a San Francisco housing market forecast for 2014, in a nutshell. Home prices will continue to rise through next year, but not as much as they did in 2013. Modest earners will have a hard time finding, and keeping, affordable housing. For-sale inventory will remain limited and may fall even further in 2014, increasing competition among home buyers. Sellers will continue to be in the driver’s seat.

That was the condensed version. Here is the broader story.

San Francisco Housing Market Forecast for 2014

According to the Urban Land Institute (ULI), San Francisco is expected to remain one of the top housing markets for real estate investors in 2014. But as prices continue to rise, investment returns will diminish. This will drive some investors out of this market and into others, in search of higher yields. This trend would benefit “regular” home buyers by decreasing competition.

We saw the start of this trend in 2013, as large investment firms scaled back their purchases within the fast-rising San Francisco real estate market.

In the latest Emerging Trends in Real Estate report, published annually by ULI and PricewaterhouseCoopers, San Francisco was cited as the #1 housing market for investors in 2014. It was the top pick in 2013, as well. According to the report, investors feel “the city is a solid buy for all property types, with each of these recommendations higher than the average for the other major markets.” The report also cites a thriving local economy that is expected to add new jobs at a rate of 2% next year.

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Earlier this year, the property valuation experts at Veros Real Estate Solutions published a 12-month forecast for home prices across the U.S. According to their report, “San Francisco and other metro areas in California are poised for the country’s strongest levels of [home price] appreciation” in 2014.

The Veros forecast covers 324 metro areas across 13,502 zip codes. By their estimation, the San Francisco real estate market will appreciate more than any other metro area next year, with gains of more than 12% expected through summer of 2014.

Two other California metros, Los Angeles and San Jose, rounded out the top three strongest markets for next year.

Affordable Housing Hard to Find for Many

Highest home values, U.S. Cenus Bureau
Highest home values in U.S. Click to enlarge.

According to the latest data from the U.S. Census Bureau, San Francisco County has the third-highest home values of any county in the U.S. (See graphic on right.) This creates problems for those with more modest incomes.

According to David Sobel, head of the nonprofit San Francisco Housing Development Corporation, any resident who makes less than $85,000 per year “has a huge problem finding and retaining affordable housing” in 2014.

Current real estate conditions are tough for buyers, but good for sellers. A June 2013 study by ZipRealty ranked San Francisco as the best city in the U.S. for sellers, based on list-to-closing price ratio. This ratio shows how much home buyers are paying, relative to the original listing price. The S.F. Bay Area housing market had a ratio above 100, which means some homes are selling for more than the asking price. This should come as no surprise to anyone who has shopped for a home recently.

Still a Sellers’ Market, But Less ‘Extreme’

Our forecast for the San Francisco real estate market in 2014 calls for a continuation of the above trends, to some degree. We expect these classic “sellers’ market” conditions to extend well into next year, though the market may be less extreme next year.

Housing inventory is still declining, but the rate of decline appears to be slowing. This could lead to a better balance of supply and demand in future months, which would have a cooling effect on home prices within the red-hot San Francisco real estate market.

Analysts predict more ‘sustainable’ price gains in 2014

According to Realtor.com’s monthly housing summary, the number of homes for sale across the metro area dropped by 7.91% from October 2012 to October 2013. Six months ago, that number was much larger. This suggests a slowdown in the year-over-year reduction of inventory, which would come as welcome news to frustrated home buyers.

Rising Home Prices in San Francisco Cause Surge in Evictions

Rising home prices are often viewed as good news, from an economic standpoint. But there’s a darker side to the rapid appreciation seen within the San Francisco housing market. Along with rising property values, we are also witnessing a surge in evictions.

A recent analysis requested by Supervisor David Campos found that the number of Ellis Act evictions in San Francisco increased by 170% over the last three years.

The Ellis Act is a California state law that enables property owners to evict tenants when they want to take their properties off the market. In recent years, many owners have used this act to evict their tenants prior to selling the property. Rising home prices compound the issue by giving homeowners a stronger incentive to sell.

According to the San Francisco Chronicle, a handful of neighborhoods account for the bulk of evictions. “The Mission District, where housing prices rose by nearly 30 percent over the three-year period, topped the list, with 71 between 2009 and 2013.” Russian Hill, the Castro, Inner and Outer Richmond, and North Beach also had a high number of Ellis Act evictions in recent years.

In November, Mayor Ed Lee, Supervisor Campos, and several state lawmakers said they were working on legal changes to reduce the number of Ellis Act evictions going forward. This could become one of the top issues for San Francisco’s housing market in 2014.