Perspective: Bay Area Home Prices Could Hold Up in 2020

Will Bay Area home prices drop in 2020, due to the ongoing coronavirus pandemic and economic turmoil?

You might think that question would warrant an automatic “yes.” But history proves otherwise. The reality is that home prices in the Bay Area could actually weather the current storm, as they’d done in previous economic downturns.

Home sales have declined, and that trend could continue through spring and into summer. But house values might just level off for a bit and then turn north again later in 2020 or early 2021.

Historically speaking, Bay Area home prices don’t always drop during times of economic recession. They’ve behaved differently in past recessions — sometimes rising, sometimes leveling, and sometimes dipping temporarily.

So it’s hard to say what will happen this time around. A best guess at this stage is that Bay Area home prices will level off over the coming months, and resume an upward climb once the economy revs up again.

To get a better sense of what might happen going forward, let’s pause to take a look back.

Charts: Bay Area Home Prices in Past Recessions

Every economic downturn is different, so it’s hard to make “side-by-side” comparisons from one to the next. But we can gain some perspective by looking at how Bay Area home prices have behaved in past recessions.

The chart below shows the home price index for the San Francisco-San Mateo-Redwood City metropolitan division. It spans from the 1970s through 2019 and includes the last five recessions in the U.S. (shown here as gray vertical bars).

The first you’ll notice is that Bay Area home prices don’t always drop during economic downturns. In fact, it’s different every time. During the 1980 recession, house values in the San Francisco area continued rising. They dipped slightly during the next (and longer) recession, and again during the 1990 – 1991 recession.

In 2001, we had another recession brought on by the bursting of the dot-com bubble. Bay Area home prices “survived” that one as well, coming out of the recession higher than they were before.

The 2008 – 2009 recession was a different story entirely. In that scenario, the housing market crash actually led us into a recession. But today’s real estate and mortgage markets are vastly different from back then. So a repeat of that kind downturn appears unlikely.

The next chart below shows the house price index for the Oakland-Berkeley-Livermore statistical area. As you can see, it more or less follows the same pattern as the San Francisco-area home price chart above.

The point to this little history lesson is that Bay Area home prices don’t always drop during a recession.

Here’s a related analysis for the state of California.

Another Decade, Another Economic Downturn

So here we are again, going through the downward part of an economic cycle. And it has many local residents wondering: Will home prices in the Bay Area drop in 2020, due to the coronavirus pandemic and global recession?

The answer is … we don’t yet know. It’s too early to say. Home-price trends are measured in hindsight, by comparing one month to those that preceded it. As of late April 2020, we don’t have enough hindsight data to detect a drop in home prices across the Bay Area.

It’s also important to realize that housing market trends can vary from one city and county to the next. Before this crisis began, home values were already leveling off in some of the formerly red-hot markets like San Jose. During that same period, prices were rising steadily in other parts of the Bay Area.

So we might see a “mixed bag” going forward, with some markets experiencing a modest dip in prices and others weathering the storm. But such trends will likely be temporary, like the pandemic itself. As the state’s economy starts to pick up again (which some are predicting will happen later this fall) the real estate market will rise along with it.

California’s coastal real estate market have always had high demand from buyers. Inventory, meanwhile, remains limited across the Bay Area. So the supply-and-demand fundamentals will continue to put upward pressure on home prices, once things start moving back toward normal.

Forecast Predicts a Flattening, Not a Decline

A number of forecasts issued recently suggest that we will, in fact, se a slowdown in home-price appreciation as the public health crisis drags on. That’s to be expected. Government-issued quarantine orders have slowed the housing market and reduced demand. So it’s only logical that a slowdown in price growth would follow.

But it’s not all doom and gloom. Some analysts have predicted that home prices in the U.S. will level off — but not decline — over the coming months. In other words, they expect home values to “freeze” in place for a while.

One of those forecasts came from the housing research team at Freddie Mac, the government-sponsored organization that buys loans from lenders. In mid-April, the group predicted that home prices nationwide would merely level off through 2020 and into 2021. After that, they expect house values to essentially pick up where they left off, by rising again.

In their latest quarterly forecast, Freddie Mac’s research team wrote:

We forecast house prices to fall 0.5 percentage points over the next four quarters. Two forces prevent a collapse in house prices. First … U.S. housing markets face a large supply deficit. Second, population growth and pent up household formations provide a tailwind to housing demand. Price growth accelerates back towards a long-run trend of between 2 and 3% per year.

Quarterly forecast from Freddie Mac. April 13, 2020.

The bottom line: No one can say for certain if Bay Area home prices will rise, drop or “flatten” over the coming months. There’s a lot we don’t know at this point, like how long the stay-at-home orders will remain in effect. But we do know that Bay Area (and nationwide) home values have survived economic downturns in the past. So they could survive this one as well.