San Francisco's Housing Slowdown Could Spread

San Francisco, once the hottest housing market in the U.S., is now one of the coolest, in a reversal that could presage a broader slowdown if more buyers decide it isn't worth chasing rapidly rising prices.

Home price growth continues to accelerate in many parts of the country, driven by a lack of supply and rising demand. The S&PCoreLogic Case-Shiller Indices, which cover the entire nation, rose 5.5% in the 12 months ended in April, after a revised 5.6% year-over-year increase in March.

Prices in San Francisco increased 5% in April, making the Bay Area one of the slowest growing markets in the U.S. and well behind markets such as Atlanta, Boston, San Diego, Las Vegas and Phoenix.

San Francisco's apartment market also is sluggish. Average rents decreased 0.3% in the second quarter compared with a year earlier, according to data released this week by Reis Inc.

Economists said the weakening is being caused by a confluence of factors: slowing job growth, less demand from new buyers put off by high prices and, on the rental side, an increase in new apartment supply as developers try to cash in on a multiyear boom.

"Supply gets the headlines," said Conor Wagner, an analyst at Green Street Advisors, a research firm. "If we had the same level of tech job growth and this (new) supply, there probably wouldn't be an issue."

Technology-sector employment is still expanding but at a much slower rate. Jobs in the technology, media and information sector were growing by about 15% two years ago but now there is roughly 1% growth, according to an analysis of Bureau of Labor Statistics data by real-estate research firm Green Street Advisors.

That means fewer high-paid workers are able to snap up pricey homes and rentals.

"Tech is growing more slowly than the rest of the economy and tech has been the thing that has been driving the economy forward the last decade, " said Ted Egan, chief economist for the city of San Francisco. "We are in the middle of a notable slowdown."

In many ways San Francisco is a unique market. The average home price has more than doubled since 2009, according to Case-Shiller, making a slowdown virtually inevitable. The economy is overwhelmingly driven by the technology industry, unlike most other big cities.

But there are parallels with the rest of the U.S.

Economists, for instance, said the rate of price growth across the nation is unsustainable and a significant slowdown in home-price gains or even falling prices in some places is inevitable, especially if job growth slows.

The number of home sales in the Bay Area in February sank to its lowest level since 2008, down 3.5% from a year ago and off 12.5% since 2015, according to PropertyRadar, a California real-estate research firm.

"You're just seeing the grinding higher of prices weighing on sales," said Madeline Schnapp, Director of Economic Research for PropertyRadar.

Nationally, home prices hit a fresh record in September and the pace of growth accelerated steadily through March. But in April, just seven of 20 cities reported greater year-over-year price increases than a month earlier.

"The question is not if home prices can climb without any limit; they can't," said David Blitzer, managing director at S&P Dow Jones Indices. "Rather, will home price gains gently slow or will they crash and take the economy down with them? For the moment, conditions appear favorable for avoiding a crash."

The price gains across the U.S. in recent years were driven by rising wages, a large demographic of people entering their 30s and looking to buy homes, and limited supply. Economists have said they are concerned that price growth that continues to outpace income growth isn't sustainable.

Despite the slight slowing this month, prices are still growing much faster than incomes. But home-price growth remains less than half of what it was during the housing bubble in the mid-2000s. For much of 2005, for example, prices increased by more than 14% annually.

Economists are concerned, however, about a handful of markets that have been seeing double digit or near-double digit growth. Seattle led the way in April with a 12.9% home-price increase and Portland reported a 9.3% year-over-year gain. Dallas, which recently replaced Denver in the top three, posted an 8.4% annual increase in home prices.

After seasonal adjustment, the national index rose 0.2% month-over-month, the 10-city measure also rose 0.2% and the 20-city index rose 0.3%. After seasonal adjustment, 13 of 20 cities saw prices rise in April.

Sales of previously owned homes increased in May, in a sign that demand remains strong despite a shortage of homes for sale. Existing home sales rose 1.1% from the prior month to a seasonally adjusted annual rate of 5.62 million, the National Association of Realtors said last week.

Write to Laura Kusisto at

(END) Dow Jones Newswires

June 27, 2017 13:23 ET (17:23 GMT)