Economic slowdown in Bay Area triggers 'cooling of a desperately overheated' luxury market

Dive Brief:

Paragon Real Estate Group reported that luxury housing market sales in the San Francisco Bay Area are on the decline because of an economic slowdown in the region's once-hot startup and IPO market, according to the San Francisco Business Times.
Paragon said that in times of economic uncertainty, luxury markets are typically the hardest hit, but Bay Area job losses have also caused rising rents to "plateau" in the residential market and possibly the commercial market as well.
Paragon said that the "cooling of a desperately overheated market to something closer to normal" does not spell doom for Bay Area homeowners and that an adjustment to a more realistic view of the market is "healthy."

Dive Insight:

Paragon added that San Francisco luxury market homes often translate to expensive condos or second and third homes for wealthy buyers. However, IPOs in the San Francisco business sector have dwindled to one so far in 2016, down from 80 during the period 2013-mid-2015, Paragon told the Business Times. The company also pointed out that concern over a slight decrease in employment — the first in six years — could trickle down to homeowners.

Last month, real estate marketplace Open Listings refuted a Redfin report that said home prices in San Francisco were falling, clarifying that any slump was limited, so far, to the luxury market, condominiums and homes listed at $3 million or more. In its report, Open Listings said that the April 2016 median Bay Area sales price was $1,285,000, an "all-time high." Nevertheless, the prediction of a luxury-market slowdown is nothing new. In a previous Paragon report in November, the company reported a shift in the market away from high-end listings and, at the time, considered whether the glut of luxury condominiums could be a factor.

Ever-increasing San Francisco home prices and rents have been held up as an example of the low-inventory-high-demand quandary facing many potential homebuyers in markets across the country. In fact, this week, CoreLogic reported that April U.S. home prices rose 1.8% from March and 6.2% from April 2015. CoreLogic attributed that unexpectedly steep rise to tight inventory and low mortgage rates.

Real estate groups have urged builders to step up new home construction, particularly at the entry-home level, but builders have said the price of developed lots and the increasing cost of adherence to regulatory requirements often make the starter home market cost-prohibitive.