The Bay Area housing recession is already here

Whether or not the U.S. tips into a recession next year, there’s an uneasy feeling in the Bay Area that economic fallout from the pandemic is only beginning.

A nasty combination of rising interest rates, inflation, tech layoffs and a sputtering stock market have many in the region hunkering down for an economic slowdown, if not a full-on recession. Meanwhile, the state’s coffers are expected to shrink considerably, with a legislative analyst forecasting a $25 billion budget deficit tied to poor stock market performance.

“The economic storm clouds are gathering,” said Ted Egan, San Francisco’s chief economist. 

It’s a different animal than 2008. But the post-Covid economy in the Bay Area—particularly in hard-hit San Francisco—could leave the region’s builders and planners hard-pressed to prepare for the next boom. 

While a downturn may alleviate high rents and building costs in the short run, stunted housing production and an impossible financing calculus on all sides could send housing prices skyrocketing in the longer term. 

Here’s how it could happen: If new construction dips for even a few years, the city’s housing supply could become so constrained that during the next economic boom, when buyers and renters are once again flush with cash, prices could skyrocket.

“When the economy comes back, rents go further up, and then low-income folks bear the brunt of it,” said Shishir Mathur, professor of urban and regional planning at San Jose State University. “My hypothesis is, at least in the Bay Area, the housing prices are going to come back very quickly.”

Bay Area Council Economic Institute Executive Director Jeff Bellisario expects a recession to arrive over the next year, not with a bang but with a whimper. 

“I think what we’re experiencing now is a much more gradual, slower economic correction, as opposed to real collapse,” Bellisario said, unlike the devastation brought on by the Great Recession in 2008 or the dot-com bust in 2000 that flattened the local business economy.

But due to high interest rates, housing has already taken a hit: Both mortgage rates and construction loans are now unattainable for most people.

Bay Area home values are falling, and are expected to fall further in the next year after reaching new heights in spring 2022. San Francisco home prices will tumble further than any other U.S. metro area next year, according to Zillow. 

“You could, in theory, say housing is in a recession,” Bellisario said.

Though it looks more like a dip than a wholesale collapse—San Francisco home prices are expected to drop about 4% next year—home values in the region haven’t declined significantly since the Great Recession. And San Francisco, the beating heart of Bay Area commerce, is a national outlier in that rents are still well below pre-pandemic averages. 

That’s made a difficult equation for local home builders, who are facing high costs combined with a potentially reduced return on investment if rents remain low. That’s reflected in city data showing residential building permits declining as housing developers pull back on the city. In the greater Bay Area, census data shows new permits declining as the housing market cooled this fall.  

If a recession does hit, the cost of land could fall and construction costs could drop, too—as good a time as any to get building, Egan said. But if rents stay low and interest rates high, that all but ruins the calculus for prospective builders.

“Covid suppressed everything,” said Brynn McKiernan, vice president of development at Emerald Fund. “And then if there is a recession, it’s very much a one-two punch for the Bay Area and San Francisco for housing production.”

With pandemic-related government relief starting to run dry, the crisis has already arrived for some renters—especially those hit the hardest by Covid shutdowns, who tend to be low-income or people of color.

According to data from the U.S. Census Bureau, around 5% of Bay Area households were still behind on their rent or mortgage payments as of May of this year.

“We still have a lot of people who haven't gotten back on their feet,” said Shanti Singh, communications director for Tenants Together, a San Francisco-based tenants rights advocacy group. “What’s scary is people are going to take on debt, and they already have.”

Any marginal dip in market-rate rents won’t do much to help those with the lowest incomes or those who may lose their jobs entirely if the economy deflates. Buyers, too, are “fence-sitting,” holding onto their money while borrowing costs are high and confidence in the market is low.

A state budget deficit could weaken investments in housing in other areas, some planners worry: Critical social safety net programs to keep residents out of homelessness rely on state money, too. Social programs are what state Sen. Scott Wiener says he is most focused on when advocating for San Francisco in the state budget process early next year.

“We’re going to have to be very vigilant and protect the programs that are life-saving,” Wiener said.

If there’s one silver lining in an economic slump, it’s that lower land costs can present opportunities for affordable housing development.  

“Affordable housing can actually be countercyclical,” said Sam Moss, who runs Mission Housing Development Corporation. “There are opportunities for affordable housing to not only survive but thrive during a recession.”

Moss said that because San Francisco taxes itself through city bonds for affordable housing—the most recent of which passed in 2019—it can fund projects in the short term that later get matched or even tripled by the state. Affordable housing developers, who may otherwise get outbid on real estate, can buy and build later in a recession.

But the financing depends on an intact state budget and the availability of matching funds—which aren’t guaranteed.

California’s projected $25 billion “budget problem”—legislative parlance for a deficit—will leave at least some programs on the chopping block when lawmakers get to hashing out budget priorities next year. The state’s Housing and Community Development department declined to comment on how housing funding may be affected in the case of a state budget shortfall.

Meanwhile, the Mayor’s Office of Housing and Community Development (MOHCD) worries that those matching funds are getting too competitive: Since 2020, most projects in San Francisco have been rejected, MOHCD communications manager Anne Stanley wrote in an email to The Standard.

But Moss said that in San Francisco, housing approvals take so long anyway that a project funded by the city today wouldn’t even need state money until—hopefully—the storm has passed.

“The hope is that in three to five years, the bank account opens back up to the state,” Moss said.