This question is from Anu in San Diego.

I am a big fan of your show and i listen to all your episodes.

I would like to know your opinion on the relative effect of upward vs downward forces on SF home prices. There is upward pressure on SF homes currently because of low interest rates and pent up demand. In the coming months, there may be downward pressure due to job losses and overall bad state of the economy. But there may be additional demand for bigger houses because of many more people working from home and thus needing more space. In my local market, I am seeing a ton of folks upgrading their houses because a 3-4 bedroom house is not enough anymore as both spouses require a separate home office now. This trend may be here to stay as more companies announce permanent work from home options. I would love to know your opinion on how this may play out in future. Will some category of homes see increased demand vs lots of delinquencies in another segment? Or do you think the delinquencies will have an effect on the entire housing market?

Anu this is a great question. In fact there are several questions. You are correct in pointing out that very few existing houses were designed with work spaces in mind. Some homes had an office designed into them. My house was a rare exception to that trend. Most of the time, people are repurposing a bedroom as an office. If you live in an apartment, then the dining room table is one of the few options. San Francisco itself is a small market, but the SF Bay area consists of many markets and spans nearly 2 hours driving distance from one end to the other. The Bay area seems to be mirroring many of the same migration characteristics that we’ve seen in other hub cities like NYC, Toronto and Seattle.

Those who have been renting luxury apartments in the city left the high density environment when it was clear that they had no reason to be a short distance from an office that was closed anyway. They can afford to buy a much larger property in a lower density environment, but don’t necessarily want to leave the metro area altogether. After all, they’re not quitting their job.

People are shunning downtown apartments. Conversations with people I know who live in San Francisco are showing the trend clearly. The same has happened in NYC and Toronto. Toronto currently has 30,000 vacant apartments for rent in the core of the city. That’s a huge number. People are leaving their rental apartments in droves. Vacancies in some buildings are approaching 50%. Rents have fallen 35% across the city. I’m hearing that it’s like a ghost town in the core of the city. People simply don’t want to be confined to a box in the sky with no amenities during a lockdown situation where they have to work, eat, sleep and exercise. All of this seems like a prison.

For half the price of a rental 1BR apartment in San Francisco, you can buy a 3BR 1,400 SF townhouse in San Rafael with a patio, plenty of amenities including a swimming pool and gym, a two car garage.

The suburbs don’t have the problem of homeless people. You don’t see protest marches in a residential neighborhood. But you do in the core of the city. People feel safer in the suburbs. The reasons for exiting the core of the city just keep piling up.

We are seeing millennials who had been living in the city finally getting married, starting families and now looking for a bit more space to spread out. The condo market, in particular the luxury end of the condo market is over-supplied in the short term. The luxury apartment rental market is also oversupplied for the next while and this is where we are seeing a massive correction.

I believe the correction we are seeing is confined to select segments of the market. This change is going to be with us for another 3-5 years before we find a new market balance point.