While urban residential real estate has seen a slight improvement of late and commodity prices have subsided from the highs of 2018, both housing and energy

How likely is a plunge in San Francisco Bay Area real estate market in 2018?

While certain sectors of the Bay Area real estate market are overvalued and poised for a correction or already in a correction, the fundamental drivers are still solidly in place to support continued growth in the size of the market. In contrast to the last real estate market cycle, this round up is going much longer and has survived multiple corrections of 10% in price and volume, shaking out a lot of speculative buyers in the process.

All the new apartment towers coming online in San Francisco this year have created a short-term supply saturation that has depressed rental rates by 10–20% over early 2016 peaks. Since there aren’t as many new towers under construction now as 2–3 years ago, the supply imbalance will eventually move down the demand curve and drive rental rates back to new highs.

Similarly, luxury homes above $5M on the peninsula have seen some softening, but those should pick up once again as the Bay Area retains its safe-haven appeal over the next few years.

As tech employment remains strong, incomes are still climbing. While the working class is getting priced out of prime locations, they’re still finding ways to stay around. The overall housing demand will continue to increase as the Bay Area attracts additional knowledge workers seeking their fortunes.

San Jose alone is adding 12,000–14,000 net new people to its population each year, currently reaching over 1.05M. With net new housing supply trailing the population increase, residential real estate prices will get squeezed higher. For commercial real estate, there’s a massive boom in supply coming. It’s uncertain how the market will absorb all the new space.

For the Bay Area real estate market to weaken significantly, something catastrophic would have to occur. But, such black swan events are notoriously hard to predict. Without assigning probabilities, I’ll just say they’re unlikely to occur.