San Francisco Bay Area Apartment Building Market

Financial markets worldwide have seen dramatic volatility in this past 12 months, the Bay Area economy and new hiring have cooled, and the San Francisco house and condo market started to normalize after 4 feverishly overheated years. From a wide variety of sources, we are hearing of a big jump in apartment vacancy rates, with more apartments for rent than in many years, and the beginning of a decline in rent rates from recent all-time peaks. As would be expected, preliminary indications of a transition to a cooler market appear to be starting to show up in apartment building sales activity, but as illustrated in the charts below, no significant change is yet showing up in the statistics. The second half of 2016 will undoubtedly provide more insight regarding the speed and scale of any changes in market conditions.

Generally speaking, in the analyses below, we break out the 2-4 unit market from the 5+ unit market, as the two have some fundamental differences in market dynamics. The smaller buildings are often purchased by owner-occupiers, or, in San Francisco, by investors planning to sell the units separately as TICs. This significantly changes the financial evaluation of such properties.

This first chart gives an idea of the sizes of the markets in San Francisco, Alameda and Marin Counties.

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Median Sales Price and Dollar per Square Foot Trends
2-4 Unit Buildings: San Francisco, Alameda & Marin

2011 to 2016 YTD

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Cap Rate & Average Dollar per Square Foot Trends
5+ Unit Buildings: San Francisco, Alameda & Marin

2012 to 2016 YTD

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Price per Unit, Gross Rent Multiples, Median Price Trends
5+ Unit Buildings: San Francisco Only

2007 to 2016 YTD

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Further information regarding San Francisco neighborhood submarkets can be found in our last 2 reports: Q1 2016 & 2015 Market Reports

Below is one section of our list of 5+ unit apartment building sales reported to MLS in the first half of 2016. The full list is here: San Francisco Apartment Building Sales

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Inventory, Demand, Price Reductions & Expired Listings
Multi-Unit Apartment Buildings in San Francisco

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As seen in the second chart above, most of the SF multi-unit buildings that closed escrow in the first half of 2016 sold relatively quickly and averaged 5% over the original asking price. Buildings that went through price reductions before selling took much longer and sold at significant discounts. And quite a few listings expired or were withdrawn without selling, a clear indication of a substantial disconnect between what many sellers wanted and what buyers were willing to pay.

San Francisco Housing Inventory & Era of Construction

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San Francisco New Housing Construction Pipeline

One of the big dynamics playing out in both the SF residential home and residential investment markets is the large number of new housing projects that have recently come on market or expected soon. Note that of projects under construction or approved by Planning (and leaving aside the long-term mega-projects such as Treasure Island), rental units outnumber condo (sale) units by about 2 to 1. This is a very recent development in SF housing construction, which saw virtually no market-rate rental housing construction for decades. (See era of construction chart above.) This expected rush of new rentals, most of which are at the (very) high end of rental cost, is coming just as the rental market is clearly softening in the city.

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The chart above is based upon the San Francisco Business Times superb in-depth analysis of the many housing projects, rental and sale, market rate and affordable, currently in the Planning Department new construction pipeline, mapping and describing major projects of 60 units or more. Our chart attempts to summarize some of their data. Please note that projects are constantly being added, revised, sold to new developers, or even abandoned, and the median time from filing a plan to building completion is 3 to 6 years depending on the size of the project. Our full report is here: SF Housing Inventory and Pipeline Report.

Changes in San Francisco Employment Trends

What has been supercharging the Bay Area rental market for the past 5 years has been the incredible increase in new jobs, estimated at over 600,000 in the Bay Area, and 100,000 in San Francisco alone. This has put enormous pressure on rents throughout the metro region (the most expensive in the country) as new hires, many with very well paying jobs, desperately searched for housing. However, since 2016 began, it appears that the trend in new hiring has reversed, just as new rental housing inventory has been hitting the market in quantity: Significantly less demand, extremely high rents and increased supply of apartments for rent is creating a new reality, at least for the time being. The most expensive segment, especially in those areas where new construction is clustered, is probably most affected: Almost all the new, market-rate inventory is concentrated in the highest price ranges.

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Our report on rental market trends is here: Bay Area Rent Report

Broker Performance: Residential Multi-Unit Sales

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Paragon Commercial Brokerage Listings

Please contact me with any questions or if I can be of assistance in any other way.

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. Properties not listed on or reported to MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 6 to 8 weeks earlier.

© 2016 Paragon Commercial Brokerage

A Soft Landing after 4 Years of Market Frenzy?

San Francisco Median Sales Prices by Quarter

Since median sales prices fluctuate so much by season, the most useful metric is year over year, i.e. comparing Q2 2016 to Q2 2015. In Q2 2016, the year-over-year appreciation rate was 4% for houses and less than 1% for condos, as compared with 2014 to 2015 rates of 20% and 18%.

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Transition

By virtually every measurement of supply and demand, the SF real estate market cooled in Q2 2016 when compared to the 4 previous, often wildly overheated spring selling seasons. Listing inventory is up significantly, while the number of sales is down; the number of listings that expired without selling jumped by over 50%; and, as seen above, median sales prices for houses and condos increased year over year, but at much smaller percentages than the torrid rates of previous years. On the other hand, to keep perspective, the months supply of inventory is still under 3 months of inventory, which typically denotes a seller-advantage market in the rest of the country; the median days on market was a relatively low 24 days in Q2; and almost 70% of SF home sales went for over the asking price. Many homes are still selling quickly for very high prices.

Within the city, different market segments are experiencing varying realities. Very generally speaking, the market for more affordable homes is stronger than that for luxury homes; the market for houses stronger than that for condos; and the market for luxury condos cooling most distinctly. Districts with the most new construction, i.e. adding more supply, are usually softening more quickly. It also appears that the city is cooling before other, more affordable Bay Area County markets. San Francisco led the way out of the market recession as the recovery began in 2012 and now may be leading the way in the transition to a less frenzied market. It is also true that transitional markets often send mixed signals in their data.

In any case, it is typical for the market to slow down appreciably during the mid-summer months and then pick up again after Labor Day. Which does not necessarily mean it is not a good time to either buy or sell. For buyers in particular, there is usually greatly reduced competition for listings and thus greater scope to negotiate purchase prices.

Average Sales Price to Original List Price Percentage
Trends in Overbidding

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As the market has cooled, competitive bidding has declined, thus this past June saw an average sales price 3% over original asking price as compared to the crazy 11% seen in June 2015, when it hit an all-time peak.

Appreciation Trends, 2011 to 2016 YTD, by Neighborhood

These four charts below track median sales price appreciation from 2011 to 2015, generally the period of rapid increases, and then from 2015 to the first half of 2016, when prices started to stabilize for most areas. Areas that were hit hardest by the distressed property crisis, such as Bayview, often have the highest appreciation rates because they were bouncing back from unnatural lows in 2011. Median condo price appreciation is iffier as a measurement of change because the surge of new construction condos, which are typically more expensive than older units, have substantially impacted values in some neighborhoods. (House inventory in SF has barely changed in many decades, so year-over-year sales are closer to apples to apples.) There are also neighborhoods that have gone through both substantial gentrification and lots of new construction in recent years, such as the Mission and Hayes Valley.

Houses

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Condos

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Generally speaking, neighborhoods were chosen because they had higher numbers of sales, which usually makes the statistics more reliable. However, median prices can sometimes fluctuate dramatically without great meaningfulness when different baskets of relatively unique homes simply closed in different periods. This is especially true in the most expensive districts: As an example, 20 house sales closed in Pacific Heights by 6/29/16 for a 2016 YTD median price of $5,675,000. Then, one more closed on 6/30/16 and the median price jumped to $6 million. A reminder not to take specific median price appreciation percentages too seriously: They illustrate general trends, not exact measurements of changes in home values.

Context

Anyone who reads real estate news, blogs or newsletters knows that there are 2 particularly vehement camps, each with emotional and sometimes financial attachments to diametrically opposed positions: One never stops insisting that the market is great and getting better (and apparently always will, for both buyers and sellers), and the other never stops shouting, usually gleefully, that the market is crashing or about to crash. Both marshal and exaggerate selected statistics and ignore others. The truth is that there are cycles, lulls and fluctuations in real estate markets and no market can go up 20% a year forever (nor should we want it to). On the other hand, we do not currently see local or macro-economic conditions suggesting any imminent crash. While it is true that economic, political or even environmental crises of various magnitudes can erupt suddenly (such as, in the past 12 months, the Chinese stock market plunge, the crash in oil prices, and Brexit), the impact of these crises can vary enormously, and it is very difficult to predict when the next one will hit.

The SF market is clearly in some kind of transition, currently at a relatively moderate pace, hopefully signifying what is called a soft landing from an over-exuberant state. The speed and scale of any further adjustment should become clearer over the second half of the year.

San Francisco Luxury Home Market
A Breakdown of Expensive Home Sales by City District

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Luxury Home Sales Trends, by Quarter

Luxury house sales were basically the same year-over-year in Q2 (though listing count was up almost 25%), however luxury condo sales saw a significant year-over-year drop, even while the number of expensive condo listings on MLS jumped to its highest level ever. The resale luxury condo market is clearly being impacted by an increase in new, luxury condo projects coming on market, especially in those areas where most of the new construction is occurring.

Some of the new projects coming on line or expected soon will be the most expensive ever seen in San Francisco, estimating average dollar per square foot values for their units over, and sometimes well over, $2000. It will be interesting to see the match up of supply and demand for these condos, since such values in the existing resale market are relatively rare, as illustrated in the third chart below.

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Condo Sales by Average Dollar per Square Foot Values
2012 to 2015 Trends, for Condo Sales Reported to MLS

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Home Sales Breakdown by District

Underlying the median sales prices commonly quoted is commonly a huge range of prices in the specific home sales that go to make them up. We have updated our breakdowns for every district in San Francisco. Below are 2 of 15 charts:

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San Francisco Residential Construction Pipeline
Projects of 60+ Units, per San Francisco Business Times Analysis

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The San Francisco Business Times performed a superb in-depth analysis of the many housing projects, rental and sale, market rate and affordable, currently in the Planning Department new construction pipeline, breaking out and describing major projects of 60 units or more, and mapping them as well. Above is our attempt to boil down much of that information into one chart. Please note that projects are constantly being added, revised, sold to new developers, or even abandoned, and the median time from filing a plan to building completion is 3 to 6 years depending on the size of the project.

Hundreds of condos under construction have already been pre-sold to buyers, with close of escrow and occupancy to occur upon final building completion, sometimes well in the future. These sales of units not yet built still have a significant impact on market supply and demand dynamics.

It is also interesting to note that of projects either under construction or approved by Planning (and leaving aside the long-term mega-projects such as Treasure Island), rental units outnumber sale units by about 2 to 1. This is a very recent development in SF housing construction, which has long been dominated by condo projects (though there are plenty of those too). This expected rush of new rentals, most of which are at the high end of rental cost, is coming just as the rental market is dramatically softening in the city. Indeed, the rental market appears to have cooled much more quickly than the sale market.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what is actually going on in the present in the future. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics. It is impossible to know how median prices apply to any particular home without a specific comparative market analysis.

© 2016 Paragon Real Estate Group

Significant Changes in San Francisco & Bay Area Employment Trends

Analyzing new data (preliminary May numbers) from the CA Employment Development Department indicates a significant shift in Bay Area employment numbers. As seen in the first chart below, looking at the 4 central Bay Area Counties, comparing the first 5 months of last year to the same period of this year, the change in the number of employed residents during each 5-month period went from an increase of 28,100 last year to a decline of 5,000 in this past December to May.

(Santa Clara County continued to grow in number of employed residents, but at a substantially reduced rate from the previous year).

This is the first time since 2009 that the number of employed residents in this area has declined instead of increasing during this period, though this is still relatively short-term data and doesn’t prove a lasting, long-term trend.

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These next 2 charts give longer-term perspectives of year-over-year changes in San Francisco itself.

This first chart below, again, compares changes in employed-resident numbers in San Francisco alone in the first 5 months of each year. (Early 2010 saw a much greater increase, +27,000, but was not included in the first chart for reasons of scale.)

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This chart shows long-term annual changes in employed-resident numbers in San Francisco.

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Changes in employment figures, up or down, typically affect the rental market relatively quickly and dramatically – more so than the real estate purchase market – and that certainly appears to be the case in San Francisco, where softening demand and rents have been widely reported. The big increases in employment, and thus of population, in the past 5 years put immense pressure on rental rates around the Bay Area.

The decreases in employment we’re seeing in 2016 have also been coupled with recent, increased rental inventory construction, albeit most of which has been at the very high end of rent rates. In other words, a possible significant decrease in demand is being coupled with increased supply of apartments available to rent.

Average asking rents have plateaued over the last 3 quarters (first chart below), for the first time since 2011. This may disguise a decline in actual rent rates which have not yet showed up in the statistics. Comparing the annual employment chart above and the second, annual rent-rate chart below illustrates how employment numbers and rent-rates typically move in parallel.

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You might also find our market report from earlier in June of interest: Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what is actually going on in the present, in the future.

© 2016 Paragon Real Estate Group

Wealth, Employment, Demand, Inventory, Affordability and San Francisco Home Prices

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents

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Chart: Long-term SF Rent Trends

Two of the biggest drivers of local real estate demand in recent years have been increasing employment and new wealth creation, both of which exploded in San Francisco and the Bay Area. Approximately 600,000 new Bay Area jobs and 100,000 SF jobs have been added in the past 6 years. IPOs, unicorns and surging stock valuations created thousands of millionaires, dozens of billionaires and trillions of dollars in new wealth. The S&P 500 roughly doubled in the 5 years to mid-2015. Interest rates plummeted. And there was an exuberant optimism that the boom would only continue to soar. Add those ingredients to a deeply inadequate supply of housing and the result is a real estate market boiling over, with skyrocketing home prices and rents.

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Market Transition, Lull or Short-Term Fluctuation?

But in mid-2015, fears regarding the world economy burgeoned; Bay Area IPOs started to dry up, (over 80 in 2013 to mid-2015; 1 so far in 2016); the valuations of many high-profile IPOs and unicorns declined; and the firehose of venture capital investment slackened. The S&P 500 is now flat year over year and housing affordability has dropped close to historic lows. Hiring slowed and then in early 2016, employment numbers started to decline a little in San Francisco. Some of the wild exuberance leaked out of the general economic optimism, and in the city, demand began to soften a little, while listing inventory started to tick up.

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Chart: Long-term SF Employment Trends

In the first 4 months of 2016, after 6 years of heated growth, the trend in increasing employment numbers in San Francisco reversed itself. This aligns with stories of local start-ups starting to slow hiring and trim staff as venture capitalists have become more demanding. However, this change in hiring could be a short-term phenomenon.

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Since 2012, the spring selling season has been the most dynamic period of median home price appreciation. In spring 2016, after years of major increases, year-over-year house and condo price appreciation basically plateaued.

Note: Virtually every time the analysis is changed even slightly, the result will change. The combined house-condo median sales price ($1,280,000) was 5% higher year-over-year, still way down from its 23% jump seen in 2015. Median sales prices can be and often are affected by other factors besides changes in fair market value.

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In 2016, the supply and demand dynamic shifted somewhat, with the number of listings available to purchase increasing, but the number of closed sales declining. (There was also a significant increase in listings expiring or being withdrawn from the market without selling, an indication of sellers demanding more than buyers were willing to pay.)

Slowing or plateauing appreciation does not imply a crash, and the cooling of a desperately overheated market to something closer to normal is not bad news. Indeed, an improvement in housing affordability (and supply) would be good news, both socially and economically. Likewise, a shift from irrational exuberance in the local economy to rational optimism would be a healthy change.

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San Francisco Luxury Home Market

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As mentioned in previous reports, it appears the luxury segment has softened to a greater degree than more affordable segments (some of which remain very competitive): The number of high-end listings in MLS has jumped, while sales have plateaued or declined. Why the more dramatic change in the luxury condo market? Firstly, increased competition from new, big, luxury-condo projects may be taking a toll (more supply). Secondly, a significant percentage of these very expensive units are usually purchased as second or third homes, not primary residences: When economic uncertainty swells, this is a market segment often affected first (less demand). Note: We do not have access to up-to-date statistics on new-project, luxury condo sales activity, so do not know if that segment has also cooled or is simply cannibalizing the resale market illustrated above.

Based on preliminary data, it appears that accepted-offer activity in May for luxury houses was very strong, possibly even exceeding levels of Spring 2015, suggesting that buyers took advantage of the greater selection of listings to jump in. If so, this will show up in the sales data for June.

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Rental Market Trends

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The rental market is especially sensitive to changes in hiring, and, as illustrated above, asking-rent appreciation has plateaued. It is quite possible that actual lease rents have already started to decline, though no decline has yet shown up in the above statistics. (There is no MLS for reporting actual rents paid, so we have to rely on advertised asking-rent data, which is a lagging indicator.) Clearly, available apartment inventory has grown, and renter demand has softened. Large new apartment buildings have been entering the SF market, with more in the pipeline. This quote is from a June 1 Bloomberg article: Softening apartment rents in New York and San Francisco have forced landlord Equity Residential to lower its revenue forecast for the second time this year, as newly signed leases are not meeting company expectations.

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Important Caveats & Perspective

This recent data measures relatively short-term changes and may reflect only a temporary economic lull or market fluctuation (which is not uncommon). Also, different neighborhoods, property types and price segments in San Francisco are experiencing varying market conditions, from still-quite-hot (non-luxury houses) to cooler (luxury condos).

A staggering amount of wealth yet remains in the Bay Area. Hundreds of local companies worth hundreds of billions of dollars, including the likes of Uber, Airbnb, Palantir and Pinterest, remain in the near-future, possible-IPO pipeline, and economic optimism can shift quickly. Our business environment continues to be the envy of the world, and unemployment rates persist at near-historic lows. San Francisco ranks with the greatest cities of the world in quality of life, even if stressed by growth and housing-affordability issues. Overall city and Bay Area housing supply remains acutely inadequate to recent population increases.

Compared to almost any other in the country, our real estate market remains quite strong as measured by a wide variety of standard supply and demand statistics, and a substantial percentage of San Francisco home listings still sells quickly for well over asking price.

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Advice for Buyers

Buy a home that is affordable now and in the foreseeable future, keeping an appropriate reserve for the unexpected. Buying for the longer term is usually safer than for the shorter term. Lock in a low, fixed, interest rate for an extended period. Expand the list of neighborhoods you are willing to consider and do not just run after brand new listings, but look at those the market has passed by: There will often good buying opportunities with greater room to negotiate. Do not be afraid to make offers below asking price and to negotiate, but carefully review the most recent comparable sales and market indicators. During the summer and mid-winter holiday seasons, the competition for listings significantly declines, and can be excellent times to buy. Be patient: New homes come on the market every day.

Historically, homeownership in the Bay Area has been a good investment, because of long-term appreciation trends, the advantages of leverage, what is called the forced-savings effect (each mortgage payment including principal pay-down), and the many tax advantages. Talk to your accountant or financial planner regarding how these factors might impact you specifically. Admittedly, if one has to sell at the bottom of a down cycle, it can be painful.

Advice for Sellers

There are still plenty of motivated, qualified homebuyers in San Francisco, but do not take for granted that mobs of desperate buyers will show up waving over-asking offers. Price your home correctly right from the moment of going on market as overpricing can have significant negative ramifications. Prepare your home to show in its best possible light: You only have one chance to make the right impression on buyers. Hire an agent who will implement a full-court marketing plan to reach every possible prospective buyer and seize their attention. Stay up to date on comparable listings and sales, market conditions and trends, and adjust appropriately. If you receive an unacceptable offer, do not be insulted: It almost always makes more sense to issue a counter offer instead of outright rejection.

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San Francisco Housing Inventory & New Home Construction

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Above are 2 charts from our updated report which contains a great deal of additional information: SF Housing Inventory & Construction Report

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Statistics are generalities, longer term trends are much more meaningful than short-term, and we will always know more about what’s actually going on in the present, in the future. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics.

© 2016 Paragon Real Estate Group

San Francisco New Housing Construction & Inventory Trends

Many of the charts included below are based on the San Francisco Planning Department’s excellent 75-page 2015 Housing Inventory report, released on May 27, 2016, which can be accessed using the link at the bottom of this article. We are very grateful for the enormous effort put into creating that report by Audrey Harris and other Planning Department personnel.

Numbers in different charts below will not always agree: This is due to the vagaries of how and when condos and other housing units are counted as filed, authorized, permitted or completed by the different agencies who compile this data. As far as the real estate market is concerned, the situation is complicated by the fact that new construction condos are often marketed and “sold” (offers accepted) well before they finish construction, i.e. market dynamics of supply and demand may be significantly affected by units that do not yet exist.

The politics of new home development in San Francisco are not for the weak of heart. There are vociferous disagreements between neighborhood and homeowner associations, developers, affordable housing advocates, tenant’s rights groups, business groups, and pro-, slow- or no-growth advocates regarding how it should best proceed (or not proceed). The battles are non-stop in every political or legal venue available.

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Comparing total inventory (illustrated above) to annual sales reveals that condos and TICs turnover about twice as often as houses in San Francisco. About 2% to 2.5% of all SF houses are now sold each year, an extremely low turnover rate, which has exacerbated the city’s inadequate, house-listing inventory situation. For condos, turnover runs in the 4.5% to 5% range, which is roughly in line with national averages for home sales, and for TICs, turnover is in the 5% to 6% range. These are all very general approximations. Since condos and TICs are typically smaller than houses, and often purchased by younger buyers and/or smaller households – singles, couples, beginning families – it’s not surprising they sell more often than houses, whose owners are often older, more settled in life, and have larger households.

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The process of application and review, public hearings (and sometimes ballot proposals), revisions, entitlement, permitting, construction, inspection and completion is complex and lengthy. Housing units are being planned and built, and existing units are being altered and removed. And there are many housing types: rental or sale units, market rate or affordable, social-project housing or luxury condominiums.

The new-housing landscape in San Francisco is in constant flux: new projects, developer plan changes, city plan changes, and shifts in economic and political realities. The basic fact is that the city, after its recent 2008-2012 new-construction slump, is now experiencing a huge building boom. However, it should be noted that booms can slow dramatically or even come to a screeching halt if economic circumstances significantly change.

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Residential Development by City District

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SF Development Pipeline Map

New construction has been concentrated in a few specific districts of the city, mostly where there are commercial lots able to be converted to residential use and where higher density housing projects are most viable. The ability to take under-utilized commercial property sites and turn them into multi-unit or even high-rise residential projects is particularly prized. Generally speaking this describes the quadrant of San Francisco around and to the southeast of the Market Street corridor.

New Housing Construction by Bay Area County

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Affordable Housing Construction

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Very generally speaking, the city requires that new home developers either dedicate 15% of their units to affordable housing, which could be built on-site or on another city site, or contribute to the city’s affordable housing fund “in lieu” of building the units themselves. (The rules are more complicated than that, and there’s something on the June ballot that will change them further.) There are few subjects more difficult and politically charged in San Francisco than affordable housing: how much should be built where and who should be responsible for the costs.

Affordable housing units are allocated, rented and sold under rules and formulas pertaining to social and economic circumstances and housing cost. Large projects are also built on an ongoing basis by private-public social organizations for dedicated purposes such as senior housing. Looking at the number of units actually being built, there is a general consensus that current construction is deeply inadequate to needs.

In 2015, a total of about $73 million was collected from developers as partial payments of in-lieu fees for projects.

Bay Area Housing Affordability Trends

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Bay Area Housing Affordability Report

San Francisco Housing Units Demolished,
Merged and Removed

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Housing units are gained by additions to existing housing structures, conversions to residential use, and legalization of illegal units. Dwelling units are lost by merging separate units into larger units, by conversion to commercial use, or by the removal of illegal units.

New Development Pipeline

We also have an overview of the quarterly San Francisco Planning Department’s Pipeline Report, which complements the annual Housing Inventory reports with a longer term perspective: The San Francisco Residential Pipeline Report.

There are over 60,000 housing units of all kinds currently in the pipeline – and the pipeline is growing and changing quickly now – but some of the bigger projects (such as Treasure Island, Hunter’s Point/Shipyard, Candlestick Point) may take decades to complete. Also, just because a project is in the pipeline does not mean it will be built as planned, or even built at all.

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Pipeline Analysis, Based on SF Business Times June 2015 Project Breakdown
(A little outdated but still providing useful insight)

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San Francisco Housing Stock Breakdown
A Fascinating 2014 Analysis by the San Francisco Controller’s Office

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The Context behind San Francisco New Housing Development

What ultimately underpins new housing construction is demand. San Francisco has been experiencing surging population, employment and new wealth creation, that has so far been outpacing new housing supply. However, as of spring 2016, it appears that new hiring has slowed, at least in the short term.

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Insufficient Housing = Increasing Prices & Rents

Below are two of our charts illustrating the rental and sale markets in San Francisco. As of spring 2016, it appears that appreciation rates may have begun to finally slow or plateau.

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Condo Values by Era of Construction

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The first golden age of SF apartment buildings, many of which were later turned into condos, was in the period of 1920 – 1940: The units in these buildings are large, light, gracious and filled with elegant detail. Pacific Heights and Marina are filled with these buildings. Though there are beautiful condos built in other eras (Edwardian flats, Art Deco apartments), the second golden age really arrived with the latest burst of new-condo construction, built for an increasingly affluent population: These units are ultra-modern, high-tech and feature highest quality finishes and amenities. They are exemplified by the new, luxury high-rises of the greater South Beach-Yerba Buena area, though variations on this theme, in non-high-rise form, have been springing up all over the city.

The units in these newer buildings command a premium both when rented or, as seen in the chart above, when sold – now surpassing an average dollar per square foot value of $1000, and sometimes far above that. This is the major motivator for developers today, many of whom are now concentrating on luxury or what might be called ultra-luxury condo construction. There is a question as to whether the luxury segment is being overbuilt considering the size of the buyer pool for such expensive units.

Housing Unit Construction by Bedroom Count

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We haven’t found an easy place for construction data by unit size, so this first chart above is extrapolated from SF MLS sales of condos built 2001 -2015. It may not apply perfectly to units built as apartment rentals or affordable housing.

Typically, the smaller the unit, the higher the dollar per square foot value on sale or rental, however in San Francisco, 3+ bedroom condos are often high-floor units with spectacular views that sell for extraordinary sums – but these would be outliers to the general rule.

Below are links to the SF Planning Department Pipeline and Housing Inventory report webpages. They contain a huge amount of data, which we have attempted to represent accurately. As noted by their authors, who did an incredible job, the original reports themselves are “compiled and consolidated from different data sources and subject to errors due to varying accuracy and currency of original sources.”

2015 SF Planning Department Housing Inventory Report, Issued May 2016

San Francisco Planning Department Pipeline Report

SF Development Pipeline Map

Midway through the Spring 2016 Selling Season

San Francisco Median Home Price Appreciation
Short-Term & Long-Term Trends

As seen in the first chart below, the combined house-condo median sales price hit a new high in April. However, as the second chart illustrates, so far this year, while median house prices continued to appreciate, condo and TIC prices appear to have generally plateaued. 2012-2015, spring was the most dynamic, high-demand/low-supply selling season of the year.

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Market Dynamics by Property Type & Price Segment

As mentioned in our April report, different segments of the market appear to be diverging. The below charts separate the San Francisco homes market into house and condo/co-op/TIC segments, then further subdivide each into 4 price segments. The lowest, most affordable, price segments are defined by the median sales prices for the first 4 months of the year. The highest price segments (or luxury home sectors) are defined, approximately, by the top 10% of sales.

Very generally speaking, the house market has remained hotter than the condo market, which appears to have cooled to some degree (but nothing remotely approximating a crash), and more affordable homes are seeing significantly more demand than luxury homes, where the pool of potential buyers is much smaller. The luxury condo market, in particular, may be being impacted by an increase in large, new, luxury-condo projects arriving on market, especially in those districts where they are mostly being built. The number of resale luxury condo listings in San Francisco hit an all-time high in April.

These analyses do not include new-project condo activity unreported to MLS, which is now a significant portion of the market: Unfortunately, our access to definitive data regarding current activity in new condo sales is limited.

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More on the luxury market: SF Luxury Home Market Analytics

Percentage Changes in Median Sales Prices
& Average Asking Rents, 1994 to Q1 2016

The first chart tracks year-over-year changes in annual median sales prices for San Francisco houses. The year of greatest percentage appreciation was 2000 at the height of the dotcom bubble (though on a dollar appreciation basis, recent years far exceeded earlier periods). This is a generalized overview: Homes in different neighborhoods and in different price segments often saw wide variations in annual appreciation rates.

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More on real estate cycles: 30+ Years of Bay Area Real Estate Cycles

This second chart illustrates appreciation in average asking rents. Note how much rents declined after the dotcom bubble ended, while the effect of the 2008 financial markets crash was much milder. We have heard from multiple city sources that available rental inventory has significantly increased and renter demand significantly decreased in recent months, which may reflect a possible softening in new, high-tech hiring. We shall see if this begins to show up more definitively in upcoming rent and employment statistics. Or it may simply be a temporary lull in the market.

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More on SF & Bay Area Rents: Rent Trends Report

Our Q1 report on the apartment building market: Bay Area Apartment Market

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 4 to 6 weeks earlier. Last but not least, different analytical systems sometime calculate standard real estate statistics differently, which can deliver variable results.

© 2016 Paragon Real Estate Group

The San Francisco Luxury Home Market | Homes of $2 Million & Above

The bar charts compare year-over-year data, going back 2 years, for the latest month. The line charts track monthly data over a period of 3 to 5 years. Note that it can take 7 to 15 days after a month’s end for agents to enter in transaction data pertinent to the month in question, so statistics for the latest month can sometimes change significantly as this data is added to calculations.

Seasonality can play a significant role in many real estate statistics as the market ebbs and flows during active and less active sales seasons. Typically, the market is most active in the spring and fall, and slower in the summer and, especially, the mid-winter holidays. The luxury home market is even more deeply affected by seasonality than the general market.

To keep things simple, we have, rather arbitrarily, designated homes of $2 million and above as luxury homes. The threshold should be higher for houses (probably in the $2.5m to $3m range), and somewhat lower than $2m for condos, but then we couldn’t get both property types on the same charts. Needless to say, what one gets for one’s money in different neighborhoods varies enormously. Statistics are generalities, most useful for illustrating general market trends.

Moving your cursor across any line chart will pull up month by month data. It may take these auto-updating charts a few moments to load onto the webpage.

New Listings Coming on Market, by Month

September is usually the single biggest month for new high-end home listings. Spring is typically the most active season for new listings. New listing activity plunges during the mid-summer and mid-winter holidays.

Total Number of Active Listings for Sale during Month

Number of Listings Accepting Offers, by Month

Number of Sales, by Month

Percentage of Listings Selling for over Asking Price, by Month

Median Percentage of List Price Achieved on Sale

Over 100% usually signifies competitive overbidding; under 100% signifies more aggressive buyer negotiation.

Median Dollar per Square Foot (upon Sale)
3-Month Rolling Average

Months Supply of Inventory (MSI), by Month

The lower the MSI, the greater the buyer demand as compared
to the inventory of listings available to buy.

Median Days on Market before Acceptance of Offer
3-Month Rolling Average

Expensive Home Sales by San Francisco District & Neighborhood

Note that these charts using differing price points for the “luxury home” designation.

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Other reports you might find interesting:

Market Analytics for General SF Market

30+ Years of San Francisco Real Estate Cycles

San Francisco Neighborhood Affordability

10 Big Factors behind the San Francisco Real Estate Market

Bay Area Apartment Building Market

Link to San Francisco Neighborhood Map

It is the relationship between supply and demand that defines the state of the market. Looking at one statistic such as the number of sales, without comparing it to how many listings were available to purchase, may give a distorted view of market conditions. Some statistics, such as months supply of inventory take both supply and demand into account. Last but not least, short-term statistics sometimes fluctuate without great meaningfulness – longer-term trends are always most meaningful.

Sales data usually reflects market activity, i.e. when a new listing comes on market and offers are negotiated, occurring 4 to 8 weeks before the sale date. Thus, for example, sales in June mostly reflect new listings and offers negotiated in late April and May.

Recessions, Recoveries & Bubbles

Below is a look at the past 30+ years of San Francisco Bay Area real estate boom and bust cycles. Financial-market cycles have been around for hundreds of years, all the way back to the Dutch tulip mania of the 1600’s. While future cycles will vary in their details, the causes, effects and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going — much more than dwelling in the immediacy of the present with excitable pronouncements of “The market’s crashing and won’t recover in our lifetimes!” or “The market’s crazy hot and the only place it can go is up!” 

Note: Most of these charts generally apply to higher-priced Bay Area housing markets, such as those found in much of San Francisco, Marin, Central Contra Costa and San Mateo Counties. (Different market price segments had bubbles, crashes and recoveries of differing magnitudes in the last cycle, which is addressed at the end of this report.)

Market Cycles: Simplified Overviews

Up, Down, Flat, Up, Down, Flat…(Repeat)

The first chart below charts changes in dollar values, according to the Case-Shiller Index method (January 2000 = a home value of 100). The second chart graphs ups and downs by percentage changes at each turning point.

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Smoothing out the bumps delivers the simplified overviews above for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, inflation builds up over the years, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumps back in (or “explodes” might be a good description) and prices start to rise again. It’s not unusual for a big surge in values to occur in the first couple of years after a recovery begins.

All bubbles are ultimately based on irrational and/or criminal behavior, whether exemplified by junk bonds, Savings & Loan frauds, dotcom stock hysteria, “Dow 30,000” exuberance, “the end of the business cycle” nonsense, gorging on unsustainable debt, runaway greed (without any corresponding desire to produce anything of value) or dishonest financial engineering, but the most recent subprime-financing/ loan-fraud bubble was even more abnormal than usual, because it was fueled by large numbers of buyers purchasing homes that they clearly couldn’t afford (liar loans, deceptive teaser rates and the abysmal decline in underwriting standards) with no actual investment in the properties being bought (no down payment, 100%+ loans).

This Recovery vs. Previous Recoveries

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The light blue columns in the above chart graph the home-value appreciation that occurred in the first three years of each recovery – our latest rebound has been somewhat quicker than other recoveries, probably due to 1) the depth of the previous market decline, and 2) the huge, high-tech employment, population and wealth boom that has played out in San Francisco and nearby counties. The gray columns chart the appreciation of past recoveries from the beginning to peak value for each cycle (except for the latest cycle, for which the peak has not yet been defined), and the red bars delineate the percentage declines from those peaks, pursuant to the market adjustments that occurred. As always, note that market appreciation and depreciation rates can vary widely by county, community and neighborhood.

Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run 5 to 7 years. We are currently about 4 years into the current recovery, which started in early 2012. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 years. (The 2001 dotcom bubble and 9-11 crisis drop being the exception.) Generally speaking, within about 2 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained — among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis — typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash — are taking longer to re-attain peak values. However, higher priced homes — which predominate in San Francisco, Marin and San Mateo Counties — have already surged well past their previous peaks.

This does not mean that these recently recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future. Real estate markets can be affected by a bewildering number of economic, political and even natural-event factors that are exceedingly difficult to predict.

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In the 2 charts below tracking the S&P Case-Shiller Home Price Index for the 5-County San Francisco Metro Area, the data points refer to home values as a percentage of those in January 2000. January 2000 equals 100 on the trend line: 66 means prices were 66% of those in January 2000; 175 signifies prices 75% higher.

1983 through 1995

(After Recession) Boom, Decline, Doldrums

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In the above chart, the country is just coming out of the late seventies, early eighties recession – huge inflation, stagnant economy (“stagflation”) and incredibly high interest rates (hitting 18%). As the economy recovered, the housing market started to appreciate and this surge in values began to accelerate deeper into the decade. Over 6 years, the market appreciated about 100%. Finally, the late eighties “Greed is good!” version of irrational exuberance — junk bonds, stock market swindles, the Savings & Loan implosion, as well as the late 1989 earthquake here in the Bay Area — ended the party.

Recession arrived, home prices sank, sales activity plunged and the market stayed basically flat for 4 to 5 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.

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1996 to Present

(After Recession) Boom, Bubble, Crash, Doldrums, Recovery

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This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and continued to accelerate til 2001. The dotcom bubble pop and September 2001 attacks created a market hiccup, but then the subprime and refinance insanity, degraded loan underwriting standards, mortgage securitization, and claims that real estate never declines, super-charged a housing bubble. Overall, from 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at times from 2006 to early 2008.) The air started to go out of some markets in 2007, and in September 2008 came the financial market crash.

Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures — most of San Francisco got off comparatively lightly with declines in the 15% to 25% range. The least affluent areas got hammered hardest by distressed sales and price declines; the most affluent were typically least affected. Then the market stayed flat for about 4 years, albeit with a few short-term fluctuations. Supply and demand dynamics began to change in mid-2011, leading to the market recovery of 2012.

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The Recovery since 2012 (Case-Shiller)

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This chart above looks specifically at home price appreciation since 2012 when the current market recovery began. Generally speaking, the spring selling seasons have seen the most dramatic surges in appreciation. It’s not unusual for appreciation to slow or flatten in the second half of the year. This chart below illustrates the connection between seasonality and appreciation over the past 4 years.

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The Panorama: From the late 1980’s to Present

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San Francisco Median Sales Price Appreciation

The charts below look at median sales price movements in San Francisco County itself over the shorter and longer terms. These do not correlate exactly with Case-Shiller – firstly because C-S tracks a “metro area” of 5 Bay Area counties, and secondly, because median sales prices are often affected by other factors besides changes in fair market value (such as significant changes in the distressed, luxury and new-construction market segments; in interest rates; seasonality; buyer profile; and so on).

The Current Recovery: 2012 – Present

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In 2011, San Francisco began to show signs of perking up. An improving economy, soaring rents, low interest rates and growing buyer demand coupled with a low inventory of listings began to put upward pressure on prices. In 2012, as in 1996, the market abruptly grew frenzied with competitive bidding. The city’s affluent neighborhoods led the recovery, and those considered particularly desirable by newly wealthy, high-tech workers showed the largest gains. However, virtually the entire city soon followed to experience similar rapid price appreciation.

San Francisco median home sales prices increased dramatically in 2012, 2013, 2014, and then again in the first half of 2015. In the second half of 2014, after the spring frenzy had cooled off, home prices flattened out, which is what occurred in 2015 as well. At this point in early 2016, we are waiting to see what the new spring market brings.

Longer-Term: 1993 – Present

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Comparing San Francisco, California & National
Median Price Appreciation

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San Francisco has been out-performing the overall state and national markets.

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San Francisco Rents

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Besides, home prices, home rental rates are major indicators of what is occurring with housing costs and the local economy. If anything, rents have appreciated even more extremely than home prices in San Francisco (and other areas of the Bay Area) – and, of course, renters get no advantages from low interest rates, multiple tax deductions and advantages, or home-price appreciation over time. One classic indicator of an overpriced home market is when prices outpace rents. So far, this has not happened in San Francisco: Both types of housing costs have soared in recent years.

It’s interesting to note that SF rents actually dropped much further after the dotcom bubble burst than after the 2008 financial markets crash, though the latter was a much more destructive economic event. It suggests that local rents may be more affected by the simple ebb and flow of high-tech hiring and employment than by other macro-economic issues, such as stock market changes. If one loses one’s job and the likelihood of finding another in the area plunges, it may be an immediate imperative to move to a less expensive rental area (pressuring rents lower); if one’s net worth plunges with a stock market crash, one may no longer afford to buy a home (pressuring home prices lower). This is an oversimplification, but may still go some ways to explaining the different scale of reaction by purchase and rental markets to different macro-economic events.

Rent Trends Report

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Mortgage Interest Rates since 1981

It’s much harder to decipher any cycles in 30-year mortgage rates, but rates remain astonishingly low by any historical measure, and this, of course, plays a huge role in the ongoing cost of homeownership and the real estate market.

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More information regarding underlying demographic and economic conditions of the current real estate market can be found here: 10 Factors behind the SF Market

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Housing Affordability Index (HAI) Cycles, 1991 – Present

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Unsurprisingly, there is a reverse correlation between the trend lines for housing affordability rates and those of real estate price cycles (above). HAI rates jump higher in market recessions, peaking at the bottom of the market, and then decline as the market recovers, bottoming out when peak prices are hit. The lowest Bay Area housing affordability housing index rates (probably in history) were hit in 2007 right before the 2008 market crash. The Bay Area overall is still above those lows in its current recovery.

The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It’s important to note that in the past (certainly going back at least 50 years), major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events (though the 1989 earthquake, which occurred just before the national recession began, certainly exacerbated the local downturn). Ongoing speculation on local “bubbles” often neglect to remember this.

Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it’s interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers can’t find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.

San Francisco, with a Housing Affordability Index (HAI) reading of 11% is about 3% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.

Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.

Bay Area Housing Affordability Report

Housing Affordability Rate Calculation Methodology

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Inflation & Interested Rate-Adjusted Housing Cost (since 1993)

The Home Cost Trends chart below reflects a very approximate calculation of monthly home payment costs (principal, interest, property tax and insurance) adjusted for inflation– i.e. in 1993 dollars – using annual median house sales prices, average annual 30-year interest rates, and assuming a 20% downpayment. The average annual compounding CPI inflation rate fluctuated, but averaged approximately 2.4% over the period, and average annual mortgage rates fluctuated from 8.4% to 3.7% (see mortgage interest rate charts earlier in this report), which, as mentioned before, had a huge impact on financing costs.

Adjusting for inflation and interest rate changes means that though the median sales price is now far above that of 2007, the monthly housing cost is still a little bit below then. This isn’t a perfect apples-to-apples comparison because it doesn’t take into account that the amount of the 20% downpayment increased significantly over the time period. Still, since ongoing cost is typically an important factor for homebuyers (at least those getting financing), this affords another angle on our market.

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Different Bay Area Market Segments:
Different Bubbles, Crashes & Recoveries

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The comparison composite chart dramatically illustrates the radically different market movements of different Bay Area housing price segments since 2000. Farther below areupdated individual price charts for each price segment.

Again, all numbers in the Case-Shiller chart relate to a January 2000 value of 100: A reading of 220 signifies a home value 120% above that of January 2000. The chart above illustrate how different market segments in the 5-county SF metro area had bubbles, crashes and now recoveries of enormously different magnitudes, mostly depending on the impact of subprime lending. The lower the price range, the bigger the bubble and crash. In the city itself, where many of our home sales would constitute an ultra-high price segment, if Case-Shiller broke it out, many of our neighborhoods have risen to new peak values. The lowest price segment, more prevalent in other counties, may not recover peak values for years. Updated C-S charts for each price segment are below.

If one disregarded the different bubbles and crashes, home price appreciation for all three segments since January 2000 is now in the 120% – 124% range. Just recently the low-price tier has begun taking the lead in home price appreciation (though, again, it remains far below its previous peak value).

Updated Case-Shiller Price-Tier Charts

Low-Price Tier Homes: Under $560,000 as of 2/16

Huge subprime bubble (170% appreciation, 2000 – 2006) & huge crash
(60% decline, 2008 – 2011). Strong recovery but well below 2006-07 peak values.

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Mid-Price Tier Homes: $560,00 to $900,000 as of 2/16

Smaller bubble (119% appreciation, 2000 – 2006) and crash (42% decline)
than low-price tier. Strong recovery has put it back to its 2006 peak.

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High-Price Tier Homes: Over $900,000 as of 2/16

84% appreciation, 2000 – 2007, and 25% decline, peak to bottom.
Now climbing well above previous 2007 peak values.

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San Francisco Market Reports

San Francisco Neighborhood Values

San Francisco New-Housing Pipeline Update

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers are approximate and percentage changes will vary slightly depending on the exact begin and end dates used for recoveries, peak prices and bottom-of-market values.

Copyright 2016 Paragon Real Estate Group.

New Housing Construction in San Francisco | A Spring Update

The SF Planning Department just released updated Q4 2015 information regarding the new-housing development pipeline. San Francisco is in the midst of one of its biggest new-housing construction booms in history. (The same is occurring on the commercial development side, but this report won’t deal with that.) Indeed, it often seems that new projects of one kind or another are being announced on an almost daily basis, and a detailed map delineating all projects in some stage of the pipeline makes many city districts appear to have measles.

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New housing construction has lagged population pressures for decades – pressures which have soared during the current economic and employment boom – and now there is a scramble to address the inadequacy of housing supply, and, for developers/investors, to reap the rewards of a high demand/low supply dynamic in one of the most affluent and expensive housing markets in the world. Of course, one of the questions now is at what point might new inventory succeed in fully meeting market-rate buyer and renter demand, and possibly proceed to an over-saturation point, thus significantly changing the supply and demand dynamic. Such a change, if it arrives, would certainly affect rent and price appreciation rates.

As of December 30th, there were approximately 62,000 housing units of all kinds – luxury condos, rental apartments, market rate and affordable units, and social project housing – in the relatively near-term pipeline (next 1 to 6 years). Most are in the Market Street corridor area, the Van Ness corridor above Market Street, and in the districts to the southeast of Market Street (see map). If we add the mega-projects planned for Candlestick-Hunter’s Point, Treasure Island and Park Merced, which may take decades to become a reality, the number jumps to well over 80,000. As a point of context, there are approximately 382,000 residential units in San Francisco currently. About 3500 new units were added in 2014. (We are awaiting the city’s 2015 Housing Inventory Report for the 2015 figure, but it will probably be of similar scale.)

Housing supply and affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development the most contentious political topic in San Francisco. Furious battles are ongoing in the Board of Supervisors, the Mayor’s office and the Planning Department; with neighborhood associations and special interest groups; and at the ballot box. Development is not for the faint of heart or shallow of pocket: One cannot contemplate building virtually anything in the city without vehement opposition and sometimes a well-funded coalition in opposition. For developers, the equation to be calculated out includes very high land and construction costs, increasing affordable-housing contributions required by the city, enormous hassle-factor and extended project timelines on one side, and the potential for financial returns on the other. In new San Francisco developments, condos often sell for $1250 per square foot and above, but we are hearing from people on the development side that they can no longer pencil out building new housing in the city in a way that makes financial sense. They believe that many of the projects in the pipeline probably will not actually be built, and thus the  numbers quoted above are greatly overstated.

Of the units in the greater pipeline of 80,000 units, over 9000 units are designated as “affordable housing” – but many of those are in the long-term Candlestick-Hunter’s Point and Treasure Island projects. Because of the nature of the political environment, much to do with how much affordable housing will be built is in flux. Many developers are in intense negotiations with government agencies and neighborhood associations to find a workable compromise between return on investment on one hand, and unit mix and affordable housing requirements on the other. Said requirements may consist of a percentage of units in the project, building affordable units elsewhere in the city, or contributing substantial amounts to the city’s affordable housing fund in lieu of building.

In early March 2016, the San Francisco Board of Supervisors voted to put a city charter amendment on the June ballot, which, if passed, would hugely increase the affordable-housing contributions (in money or in affordable units built) required of developers of projects of 25+ units. Obviously, this would affect the financial equation for builders in the city. The question is will it affect their motivation to build so much as to significantly impact new home construction (market rate and affordable) in San Francisco. If you are interested, the city’s chief economist, Ted Egan, wrote a detailed report on the issue: Economic Impact Report

New housing construction is very sensitive to major economic, political and even environmental events (i.e. natural disasters), so simply because something is in the pipeline doesn’t mean it will be completed as planned within the time frame contemplated. First of all, plans are constantly being changed just in the normal course of things. And if a big financial or real estate market correction (or crash) occurs, as happened in late 2008, projects in process can come to a grinding halt, and new projects substantially altered, delayed or abandoned. Because the timeline in San Francisco can run 3 to 6+ years from initial filing with Planning to construction completion, developers and their lenders make enormous financial bets on what the future will look like. Timing is everything in real estate development, and can make the difference between large profits and bankruptcy. When the music stops – which it always does sooner or later, though the time range of opportunity can vary greatly – not everyone will find a chair to sit down in. That especially applies to those who over-leveraged their projects.

As a side note, big Chinese developers have been investing in both large residential and commercial real estate development projects in the Bay Area, and, according to reports, continue to aggressively seek additional opportunities. Though significant – constituting billions of dollars in investment – these projects do not constitute the greater part of Bay Area development.

SF Planning Department Pipeline Report

Other reports you might find interesting can be found here:

San Francisco Market Reports

San Francisco Neighborhood Values

30+ Years of San Francisco Real Estate Cycles

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate.

© 2016 Paragon Real Estate Group

San Francisco House & Condo Markets Diverge

In the first quarter of 2016, various market segments in the city began to trend in significantly different directions. Houses, especially those below $2 million, are still often selling in a frenzy of bidding: Recent reports of houses selling with 5, 10 or more competing offers are not uncommon, especially in neighborhoods considered more affordable (by San Francisco standards). Demand remains very high, supply remains extremely low, and new house construction is virtually nil.

However, thousands of new-construction condos have hit the market in recent years or are arriving shortly, with many thousands more in the 5-year pipeline. In recent years, the new supply added to the usual resale-condo inventory still did not keep up with demand, but that seems to be shifting, especially at the more expensive end of the condo market. As of early April, the number of condo listings actively for sale in MLS is up over 40% year over year, and that does not include most of the new-construction condo units hitting the market (not listed in MLS).

This does not mean that condos are not selling, because many are at top prices. But the demand-per-listing ratio is declining, multiple offers are less common, and more listings are expiring without being sold. This particularly appears to be the case in those neighborhoods where most of the new construction projects are concentrated, and, again, the luxury-condo segment appears to be most affected. Apparently, the developer rush to build large projects of very expensive condos, possibly outpacing long-term demand for such units, is also playing out in Manhattan (where admittedly luxury condos are much more expensive).

It is unclear at this point whether new condo projects themselves are being affected in their rate of sales or sales prices. These condos often go into contract during the construction phase, long before sales actually close, and access to information during that period is very limited. There can be no doubt that they comprise serious competition to resale condos in the areas they’re being built.

Please note: The data of one quarter is not definitive and Q1 was a very volatile period for the financial markets, which may have had a short-term effect that might now shift. SF is also a city of micro-markets, so what applies in one district may not apply in another. Q2, just beginning, is typically the busiest of the year, and market trends will become much clearer in coming months. Last but not least, in real estate, what we see today generally reflects the market 4 to 8 weeks ago due to the gap between listings coming on market, offers being negotiated, and sales finally closing escrow.

Market Supply & Demand Trends
by Property Type and Price Segment

It should be noted that some of the Q1 2016 MLS statistics shown below, which appear to illustrate a cooling of certain market segments in San Francisco, would in most other areas of the country often be considered signs of crazy-hot markets.

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An astonishing 84% of Q1 2016 SF house sales under $2 million sold for over asking price, a very small decline from the most active quarters of last year. The percentage for more expensive houses is 16 percentage points lower than less expensive houses, but still above Q1 2015. Condos, also shown in two price segments, have lower percentages than any time in the past 4 quarters. We shall see if those percentages rebound in Q2, as usually occurs once the spring season warms up, or whether increased inventory dampens overbidding going forward.

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The same trends seen in the first chart above apply to this illustration of the median percentage of sales price over list price over the past 5 quarters. For houses under $2 million, the median percentage over asking price remains incredibly high at 12%, a clear sign of feverish competition between buyers. In contrast, luxury condos overall sold just a tiny bit above list price (less than one half of one percent), and in those districts seeing the most high-rise, luxury condo construction, the median sales price to list price percentage fell well below list price (not shown on chart). More supply means less competition and less sense of urgency in buyers; overbidding becomes rarer and buyers negotiate more aggressively.

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Perhaps nothing is more indicative of a cooling market than increasing numbers of listings expiring and being withdrawn from the market without selling. Q1 2016 saw big jumps in expired/withdrawn condo listings over the first quarters of the previous 3 years. Many such listings end up coming back on the market at lower prices.

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Again, houses under $2 million have maintained a very high level of listings going into contract on a monthly basis. High percentages of this statistic keep inventory low even when increased inventory starts coming on market, analogous to putting food in front of a very fast, hungry eater. However, if a low percentage of listings accepting offers is coupled with increasing numbers of new listings, inventory starts mounting quickly, because more unsold listings from previous months get added on top of the additional new listings streaming onto the market. The slow-eating diner is outpaced by the delivery of new courses, and the table fills up with uneaten food.

San Francisco Median Home Sales Prices
House & Condo, by Quarter

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Chart: Median Price Trends since 1993

So far, any market cooling that has occurred is not showing up in Q1 median sales prices: Median prices for both houses and condos remain close to the high points hit in spring 2015. However, for the first time in 4 years, condo median prices did notjump in the first quarter of the year, though neither was there any significant decline.2012 to 2015, overheated spring selling seasons of very high demand and deeply inadequate supplies of homes for sale have fueled most of the home-price appreciation occurring each year in San Francisco. We shall soon know whether this trend will continue this spring, or whether the median prices of some market segments will finally plateau, or even adjust downward with changing supply and demand dynamics.

Employment Statistics

Perhaps nothing underpins an appreciating real estate market more than increasing numbers of people moving into an area to take new jobs, especially well paid ones. These charts illustrate the recent explosion of employment in San Francisco and the Bay Area. Of course, employment trends can slow or even reverse directions as occurred after the dotcom bubble burst. It is interesting to note that SF employment (and rents) fell much more after the dotcom adjustment than after the 2008 financial markets crash. On the other hand, SF home prices only temporarily dipped in 2002, while dropping rapidly in late 2008/early 2009 and then remaining depressed until the recovery began in 2012.

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Chart: SF High-Tech Employment Trends

8

Stock Markets & Interest Rates

After all the travail regarding the stock market volatility since last summer, it is now, as of early April, pretty much back to where it began. And interest rates have actually fallen since the Fed raised the benchmark rate in mid-December. These conditions are typically considered very positive for real estate markets, though both can be subject to sudden and significant change.

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Chart: Short-term Interest Rate Trends


Other recent reports you might find interesting:

San Francisco New-Housing Pipeline
San Francisco Neighborhood Affordability
Seasonality & Real Estate Markets
Bay Area Housing Affordability
S&P Case-Shiller Index for SF Metro Area

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. New construction condos not listed or sold on MLS are not counted in these statistics, though they often affect market dynamics. Sales statistics of one month generally reflect offers negotiated 4 to 6 weeks earlier, thus a fair number of YTD 2016 sales reflect market activity in late 2015.

© 2016 Paragon Real Estate Group