Will San Francisco Home Prices Fall This Fall?

By John Wake

I think so.

San Francisco home prices have gone up an average of 18% a year since 2012!
Using the latest Case-Shiller Home Price Index, San Francisco home prices are up a total of 84% since 2012.
Nominal San Francisco home prices are now higher than they were at the peak of The Great Real Estate Bubble in 2006.

But now it looks like San Francisco’s residential real estate market has lost its upward mojo.

Compare the home prices for the 5 West Coast cities covered by the Case-Shiller Home Price Index.

Click to Enlarge

U.S. West Coast Home Price Increases From April to July

Portland = 4%
Seattle = 3%
Las Angeles = 2%
San Diego = 2%
San Francisco = 0%

San Francisco home prices have lost all of their upward momentum but, of course, San Francisco home prices couldn’t keep going up at 18% a year forever.

I expect San Francisco home prices to fall a bit this fall but the big question is about next year.

Short High Season. You can see on the graph that San Francisco home prices have an extremely strong tendency to increase rapidly in the first part of the year and then they level off in May or June.

This year, however, home prices leveled off earlier, in April. The early leveling off is another sign of a weakening San Francisco real estate market, especially since Seattle and Portland were so strong at the same time.

Tech Blah. It appears the tech boom peaked in 2015.

Tech is to San Francisco what oil it to Houston. Like Houston, a slowdown in your top industry does not necessarily mean that home prices will fall but it certainly means home prices will stop skyrocketing. But I suspect the San Francisco economy is MORE dependent on tech than the Houston economy is on oil.

Foreign Tea Leaves. The other big question for San Francisco home prices is whether Chinese buyers will continue buying. They’re mostly investors so will they continue to buy when appreciation falls back to earth? Will they continue to buy if San Francisco home prices fall even a little bit? I doubt it.

My advice to Chinese and other real estate investors in San Francisco would be to very seriously consider selling soon.

Sure, some change could happen in China or elsewhere to reignite foreign buying but that’s unpredictable.

And sure, San Francisco will eventually have another tech boom but I doubt it will take off within the next couple of years.

But as an outsider looking into the San Francisco real estate market from afar, I’d say sell.

Vancouver Contagion? And what happens if Vancouver home prices actually fall this fall? Will real estate investors – foreign and domestic – start to pull back along the entire West Coast?

2017 High Season. The high season that starts in February will be fascinating.

How small (or big) will the price jump be during the 2017 high season?
How short (or long) will the 2017 high season be? Do prices level off in March, April, May or June?

How the high season plays out will tell us how the rest of 2017 is likely to play out.

Price Expectations. It seems San Francisco home prices are unhinged from economic fundamentals, well unless you consider future price expectations a fundamental.

Price expectations change extremely slowly but I’m guessing with all the recent reporting on the San Francisco real estate market that expectations for future price increases are falling.

Flipside of Irrational Exuberance. This price expectation game is a double-edged sword.

When prices are rising, many people expect prices to continue to rise so many buyers want to buy ASAP and they’re willing to pay more than the current fair market value.
But when prices are falling, many people expect prices to continue to fall so many buyers put off buying and they’re reluctant to pay the current fair market value.

If the general consensus eventually becomes that San Francisco home prices are falling, none of the other fundamentals will matter much, many investors and homeowners will rush for the exits.

Smart Money. And I didn’t even talk about how some of the smartest money is selling U.S. real estate assets.