Bay Area will be nation’s coolest housing market in 2020, survey says
Austin, Texas, is expected to be the nation’s hottest housing market this year and the Bay Area the coolest, according to economists and real estate experts surveyed for real estate website Zillow.
On average, the panelists said they expect U.S. home prices to grow by 2.8% in 2020.
Of the 25 large markets included in the survey, the Texas capital earned the top score: 83% expect it to outperform the national average and 7% think it will underperform, for a net score of 76. The hottest markets after Austin are Charlotte, Atlanta and Nashville, with scores of 59, 51 and 49, respectively, Zillow said in the report.
The Bay Area earned the lowest score of negative 40; only 24% said it will outperform versus 64% who think it will underperform. The next coolest markets were San Jose (minus 38), Los Angeles (minus 35), Cincinnati (minus 33) and Sacramento (minus 31).
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, agreed that the Bay Area will lag the nation this year.
After three years of huge appreciation, prices in the Bay Area were down or flat in 2019, depending on location, he said. Rosen expects a further correction this year, especially in Silicon Valley. San Francisco and its inner suburbs will be flat or up slightly, and outer suburbs will be flat to slightly down. Overall, he expects the median Bay Area home price will be flat to up or down 2%.
He pointed out that mortgage rates have risen about a quarter- to half-percentage point from their lows in August and September.
Also, the tax law changes that took effect in 2018 have increased the after-tax cost of owning a home. The law capped the previously unlimited itemized deduction for all state and local income, property and sales taxes at $10,000 combined. “Your property tax, even though constrained by Proposition 13, for many people (is) not fully deductible,” Rosen said. “A lot of people felt good because they were protected (from large property tax increases) by Prop. 13. Even with Prop. 13 still in place, many people have tax bills twice as big” as $10,000.
The tax law also limited the mortgage interest deduction to interest on $750,000 in debt, down from $1 million previously.
He added that the trend of people moving out of California to cheaper states “is going to get bigger in the next five years,” because of higher taxes, higher home prices and growing congestion.
California lost an estimated 197,600 people to net domestic migration during the year ended July 1, according to the state Department of Finance. That is the number of people who left California for other states minus the number who moved here from other states. If you include people moving into the state from other countries, California lost 39,500 residents due to net migration. (Births still caused the population to grow since they exceeded deaths.)
Other data show that California is losing the most residents to Texas, Arizona, Nevada and Oregon.
Mike Englund, chief economist with Action Economics, said that “we will have a pretty solid boom” this year in housing nationwide, led by the South. The southeastern quadrant of the U.S., including Texas, accounted for 53.6% of housing starts last year (numbers for December are estimated). Only 8.8% were in the Northeast, 24.8% in the West and 12.8% in the Midwest.
Research firm Pulsenomics conducted the survey for Zillow. More than 100 experts responded, but only 64 answered the question about individual markets.
A separate report, released last month by Fitch Ratings, said that capping the state and local tax or SALT deduction at $10,000 “may have exacerbated slowing home price growth in certain areas,” including California. Fitch rates corporate and government debt, including mortgage-backed and municipal bonds. It’s owned by Hearst, which owns The Chronicle.
Since early 2018, when the SALT cap took effect, “states with higher property taxes have seen acute home price appreciation slowdown and even price declines in several metropolitan areas” including San Francisco, Fitch said.
It compared home-price appreciation in the 10 states whose residents took the highest property tax and mortgage interest deductions on their 2017 tax returns to the 10 states with the lowest tax and interest deductions. In the high-cost, high-tax states (which included California), the average rate of year-over-year price appreciation fell from 6.4% in January 2018 to 2.7% in September 2019. In the low-tax, low-cost states, the appreciation rate rose very slightly, from 3.9% to 4%, over the same period.
There could be other factors to explain steep drop-off in home-price appreciation in high-tax states after the SALT cap took effect, but “you can see there is a pattern there, a trend you cannot ignore,” said Bulin Guo, an associate director with Fitch.