With the release of our latest annual Local Leaders list—the ranking of the top 50 new-home markets ranked by closings, and the top 10 builders in each market—BUILDER takes a closer look at a few of this year's fastest-growing markets on the list. Today we focus on the second and third fastest-growing areas in the country, San Francisco and Sacramento.
The San Francisco area was the second-fastest growing housing market in the nation last year, with a 33.25% increase in housing unit closings between 2016 and 2015, according to the Local Leaders data collected by BUILDER for both single-family and attached housing. The third-fastest market is nearby Sacramento, Calif., which experienced a 32.25% increase in closings in the same period.
Home sellers in the San Francisco market closed a total of 5,322 sales in 2016, up from 3,994 in 2015, and sellers in the Sacramento market closed a total of 4,581 sales in 2016, up from 3,464 in 2015.
“The San Francisco market has been growing rapidly over the past few years, primarily due to the tech industry and general diversification of the market,” says Greg Gross, Metrostudy regional director for Northern California. “The market has also been heavily influenced by Asian investment.”
The Bay Area region has added 94,100 new jobs through March 2017, although the rate of new job formation has fallen 26% YOY, according to Metrostudy data.
Home prices in the area continue to skyrocket, with 25% of new homes priced at over $1 million, well above prices during the peak pre-recession years of 2005-2007, says Gross. This doesn’t come as a surprise to builders and developers in the areas, since the city and surrounding Bay Area are consistently ranked as the most expensive home and rental markets in the nation.
"Our market has grown in tandem to the recent increase in job growth, as well as the substantial number of renters now looking to buy homes,” says Gregg Nelson, principal of California-based Trumark Companies. "There is a serious undersupply of housing in the core areas, and most significantly, housing that home buyers can afford. This will cause an expansion in the outlying markets."
Layne Marceau, president of the Northern California division of Shea Homes, notes that the city’s high housing prices may negatively affect its economic future. “As a business, we’re a function of employment, interest rates, and supply,” he says. “And at the moment, all three of those are in a perfect position for upward pricing movement. It’s not great for the consumer, it’s really not great for the economy, and really, it’s a problem for employers. If you ask the employers of the Bay Area what their biggest challenge is, they will say, ‘providing housing for our prospective employees.’”
This could lead businesses to move operations to more affordable locations, Marceau adds.
Meanwhile, Sacramento’s long-standing housing slump and sleepy, state government-centric downtown have undergone a transformation, as illustrated in a recent Wall Street Journal article.
Multiple revitalization projects have entered into development, including the 11.8-acre Downtown Commons project, the new Golden 1 Center NBA arena, and expansive new condo complexes. The city’s annual job creation has improved continuously over the past five years, and almost 20,000 new jobs have been created in the city this year since March, mostly from growth in the medical and health sciences industries.
At the same time, annual housing starts have risen 13% YOY over the first quarter of 2016, while closings have risen 33%. Much of the new home inventory is priced in the $300K to $400K range; only 3% of new homes are priced under $300K, and none under $200K, according to Metrostudy data.
"The Sacramento market has seen massive value increases over the past five years. Some of the bigger causes of such increases include a shrinking housing supply, years of population growth without much new construction, five years of historically low interest rates that are causing owners to keep the low rate instead of list, and years of heightened investor buying through 2013,” says Ryan Lundquist, a home appraiser based in Sacramento.
"Ultimately these factors have led to a market where inventory is on a clear downtrend,” Lundquist continues. “In the midst of declining inventory, buyer demand has also picked up.” The market currently has 1.3 months of finished inventory, according to Metrostudy.
Some of the Sacramento housing market’s recent activity may stem from an exodus of Bay Area workers looking ready to trade a longer commute for homeownership. Currently, 72% of Sacramento home starts are priced under $500K, compared to 10% in the Bay Area.
“We expect demand [in the Bay Area] to remain steady through 2017,” says Gross. “But…overall cost of homeownership in the Bay Area is outpacing household income growth in most areas. With prices at or above peak pricing in most sub-markets, buyers may begin to rethink their home-buying decisions and decide to rent or move out of the area. The East Contra Costa, Solano, Sacramento and Stockton regions will likely benefit, as homebuyers seek more affordable homes outside of the core Bay area.”