If you’re looking for indications of where California’s economy will be in a couple years, take a look at San Francisco County. Home prices have far surpassed the pre-Millennium Boom years and jobs are fully recovered due to the presence of the high-paying tech industry in San Francisco.

All the same, high prices and limited inventory have shut out many would-be homebuyers, causing sales volume to fall precipitously in 2017, continuing to fall in 2018. 

View the charts below for current activity and forecasts for San Francisco’s housing market.

Updated September 11, 2018. Original copy posted March 2013.

Home sales volume slips

Chart update 09/11/18

2018* 2017 2016 2004: Peak Year
San Francisco County home sales volume 4,100 4,900 5,900 8,130

*first tuesday’s forecast is based on monthly sales volume trends, as experienced so far this year, and economic conditions affecting the market.

Home sales volume in San Francisco County always runs a step ahead of the rest of the state. San Francisco home sales volume peaked in 2004 — a year before the statewide peak — before receding in 2005-2006. Home sales volume bumped along at a relatively level-to-down annual pace in 2012-2016, but fell significantly in 2017. This decrease continues in 2018, with sales volume year-to-date (YTD) down 16% from 2017 as of Q2 2018. This decrease is due primarily to extremely high home prices, which have rapidly outpaced incomes.

Further, the increased use of adjustable rate mortgages (ARMs) in San Francisco County is an ominous indicator of buyer overreach in the mid- and low-tier properties, but the uptick is nowhere near the dangerous percentage of ARM use seen during the extremes of the Millennium Boom.

In 2018, homebuyers feel discouraged by too-high home prices in the area. Sellers are likewise hesitant to list for fear of not finding the right replacement home. Since home sales in this region run a year or two ahead of the rest of the state, expect a downturn (of less magnitude) to occur statewide in 2018-2019.

Turnover rates are mixed


Chart update 12/31/17

2016 2015 2014
San Francisco County homeowner turnover rate 9.0% 8.0% 7.4%

San Francisco County renter turnover rate

16.1% 17.3%

San Francisco’s renter turnover rate fell in 2016 after rising in 2015. On the other hand, the homeowner turnover rate (producing sales and relocating buyers) continued to rise in 2016 to 9%. This is roughly level with the level of homeowner turnovers occurring before the 2008 recession.

Renter and homeowner turnover rates indicate both the willingness and corresponding ability of renters and homeowners to move. With the loss of jobs and income during the Financial Crisis and 2008 Great Recession, turnover rates in San Francisco fell. However, both renter and homeowner turnover rates recovered more quickly in San Francisco than elsewhere in the state due to the region’s swift jobs recovery and high concentration of employers.

Following the recession, renters in particular regained a higher level of mobility, as the young professional class inhabiting San Francisco is often more inclined to rent than own. However, the significantly high rents in San Francisco are now swiftly pushing renters out of the city and into the nearby counties of Alameda and Contra Costa. Those with rent-controlled apartments strive to stay put which kills turnover and new construction.

Looking forward, turnover rates will likely be highest in 2021-2022, one year ahead of the rest of the state. These years will see the confluence of Generation Y (Gen Y) first-time homebuyers and retiring Baby Boomers (Boomers) hitting the home buying market at once.

Homeownership to improve gradually

Chart update 09/11/18

Q2 2018
Q1 2018 Q2 2017
San Francisco County homeownership 56.4% 56.2% 55.1%

The homeownership rate in the Bay Area tends to vary more wildly than other parts of the state. However, the general trend from the end of the Millennium Boom until 2015 had been down. The homeownership rate climbed in 2015, only to drop back in 2017-2018 to its current level of 56.4%.

However, the homeownership rate in San Francisco has not suffered quite as much as the rest of the state during this protracted recovery due to the job support delivered by its successful tech industry. All the same, as the homeownership rate in the rest of the state catches up to pre-recession levels in the coming years, don’t expect San Francisco to follow. Due to the high cost of housing and the allure of city living, renting is often preferred in San Francisco.

Jumbos and ARMs drive home prices

Chart update 09/11/18

Q2 2018 low-tier annual change Q2 2018 mid-tier annual change Q2 2018 high-tier annual change
San Francisco County home pricing index +11% +13% +9%

Home prices in San Francisco continue to exceed prices of a year earlier, but month-to-month changes are beginning to falter in the mid and high tiers. Low-tier prices are 11% higher than a year earlier as of Q2 2018. Mid-tier prices are 13% higher and high-tier prices are 9% higher than a year earlier.

San Francisco home prices are characterized by rapid starts and stops, as viewed in the bumps in the chart above — particularly in the mid- and high-tiers. Pricing in Southern California markets form a smoother line. San Francisco’s low supply situation is partly to blame, creating a volatile home sales market. The city’s preference for low-density zoning restricts builders from meeting the ever-increasing demand for local housing.

Use of adjustable rate mortgages (ARMs) and jumbo loans keep home prices high in a momentum-hot market, as homebuyers quickly lose purchasing power due to upward shifts in interest rates and pricing outruns income growth. When ARM use increases as rapidly as it has in the area, the outlook for stable sales volume and pricing in the housing market becomes less optimistic. Prices adjust downward following periods when ARM-to-loan ratios rise and fixed mortgage rates do not.

Multi-family construction falters

Chart update 09/11/18

2017 2016 2015
San Francisco County single family residential (SFR) starts 43 123 64

San Francisco County multi-family starts

4,200 4,400

Very few single family residences (SFRs) are built in San Francisco County each year, though this number is increasing slightly. Multi-family construction starts, on the other hand, nearly doubled in 2013 over the prior year. This rise slowed significantly in 2014 but picked up slightly in 2015-2016, only to fall back in 2017. The long approval and permitting process in San Francisco holds down construction starts of all types.

As jobs continue to increase in San Francisco, multi-family construction may feel the benefits. San Francisco’s high-paying tech industry draws a younger population (members of Gen Y), who are most likely to reside in multi-family structures close to the urban amenities San Francisco offers.

However, archaic zoning limiting building height and the density of units in each structure will impair multi-family starts, population mobility and job growth going forward while driving up rents and causing employers to consider other communities.

Jobs fully recovered – and rising

Chart update 09/11/18

Jun 2018 Jun 2017 annual change
San Francisco County employment 1,135,800 1,118,100 +1.6%

San Francisco’s jobs market has well surpassed the point for recovery. Homeowners and renters require income (generally from employment) to make mortgage or rent payments. As a result, San Francisco’s housing market has recovered more swiftly than the rest of the state due directly to its quick healing and expansion in the jobs market.

Jobs have met and exceeded residents’ need for employment, even including San Francisco’s population increase of roughly 70,000 working-age individuals since the start of the 2008 Great Recession. By a statewide comparison, California just caught up to pre-recession levels in mid-2014, not likely to meet the intervening population increase until 2019.

Jobs by industry

Chart update 09/11/18

Jun 2018 Jun 2017 Annual change


39,500 39,500

Real Estate

22,000 21,700

The number of people employed by each of San Francisco’s top employing industries has increased over the prior year. In particular, Professional and Business Services, which includes the technology and support industries, has added the most jobs during this economic recovery.

Employment in the real estate industry has exceeded pre-recession levels. The construction industry is also recovering, its pace quickening in recent months. Future growth for these industries will rely on the success of the multi-family housing sector, which will continue to see growth throughout this decade.

Per capita income has recovered


Chart update 12/31/17

2016 2015 Annual change
San Francisco County per capita income $110,418 $105,997 +4.1%
California per capita income $56,374 $54,718 +3.0%

Per capita income in San Francisco is nearly double that of California’s. Further, San Francisco’s per capita income has far exceeded its pre-recession peak.

However, San Francisco residents spend on average a debilitating 41% of their income on housing expenses. Many more simply cannot afford to live in the city and are forced out to the suburbs, the only place where their paycheck qualifies them for housing.

If you’re looking for indications of where California’s housing market will be in two to three years, take a look at San Francisco County. Here, jobs and income have fully recovered. All the same, home sales volume remains stuck in its bumpy plateau — flat. It’s likely to pick up consistently in 2018 due to increased demand from end users, fueled by San Francisco’s enviable jobs recovery.