Are Republican gains in Congress bad news for the San Francisco real estate market?

Cory Weinberg
San Francisco Business Times
Wednesday, November 5,2014

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Republicans danced to big congressional wins across the country Tuesday – and that could spell bad news for both San Francisco renters and real estate moguls.

Kenneth Rosen, the University of California-Berkeley business professor who chairs the Fisher Center for Real Estate and Urban Economics, told hundreds of real estate players Wednesday morning at a Cushman & Wakefield event that Republican gains could force the Federal Reserve to inch interest rates up more quickly than planned. If that happens, San Francisco’s job growth and the boom in new housing construction may be cut considerably.

“The election of a Republican Congress will put more pressure on the Fed to normalize sooner. The Fed is independent, but they go through these [congressional] hearings and there’s a lot of people who believe the government can’t run the kind of deficits they want with big spending programs, so the Fed is indirectly doing this by creating money,” he said. “There will be a lot of pressure on (Fed chair Janet Yellen) to normalize rates.”

“We’ve had five years of interest rates at zero. They’re going to start moving, probably in the middle of next year,” he added.

The Fed pledged this fall to keep interest rates near zero for a “considerable time” after it finished asset purchases, because of only moderate economic growth.

Rosen’s analysis typically draws big real estate crowds, and he especially plays up his close relationship with Yellen, a former Berkeley professor. He echoed the Fed’s own forecast at the event, expecting the yield on Treasury bills to rise from 0.1 percent to 1.2 percent. He put Treasury bond rates up at 3.7 percent next year, jumping at least another percentage point by 2017.

San Francisco’s economy has been riding high in part because of technology companies’ easy access to capital – gobbling up venture capital dollars and taking advantage of stock gains to buy smaller companies and hire more workers. That employment growth helps feed real estate demand in the city, putting apartment and condo building pace at a peak.

That growth is “at the mercy of overall capital markets,” Rosen said at a similar presentation Monday. “A slowdown will surely happen. We won’t see the bubble burst, but we’ll see a correction. Capital markets have allowed them to hire and lease space all in excess of their current needs.”

What does that mean for individual renters? Oz Erickson, a city developer who heads the Emerald Fund, told me last month that the most expensive city for renters in the country could see an even tighter squeeze. If builders can’t borrow money as cheaply, those costs will be passed onto renters.

“The biggest risk of all is interest rates,” he said. If interest rates rise faster than expected, “you’re talking about rents needing to go for a one-bedroom from $3,000 to $4,600 just to meet extra costs from interest. If that happens, everything stops.”

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