First Quarter 2015 Update: The San Francisco Real Estate Market

San Francisco Home Value Appreciation

Median-Price_SF_SFD-Condo-Combined_by-Qtr

The chart above illustrates the continued march upward of median home sales prices in San Francisco. However, if we separate out house from condo sales, an interesting trend appears: The median house sales price basically stayed flat from Q4 2014 to Q1 2015, but the median condo sales price jumped from $995,000 to $1,080,000. Drilling down further, the median sales price for SF 3-bedroom houses in Q1 was $1,200,000; for 2-bedroom condos, it was $1,199,000, i.e. effectively the same. Much of this is due to the fact that the greatest number of houses in the city exists in the less expensive western and southern neighborhoods, while 1) condos are mostly found in more expensive areas, and 2) new home construction in San Francisco for the last 10 years has been dominated by very high-end condo projects. That trend is only accelerating in the current building boom.

This is illustrated below in a comparison of house and condo average dollar-per-square-foot values in the first quarters of 2008 – 2015. For the first time, overall SF condo sales just hit an astounding average of $1000 per square foot. Much of this increase is being fueled by recently built condos selling for far higher figures.

Avg-DolSqFt_SFD-vs-Condo_Q-1-2008_to-Present

More Affordable Neighborhoods Take Off

When the SF market recovery began in 2012, the more affluent neighborhoods led the way in rapid home-price appreciation, but in 2014, the more affordable neighborhoods took the lead. Of course, there are few places outside San Francisco where houses of $1.2 million would constitute the “affordable” segment of the market, but as median house prices in the greater Noe, Eureka & Cole Valleys area accelerated over $2 million (and over $4 million in the Pacific Heights-Marina district), buyers started to fan out, desperately looking for less expensive options. That sparked increased competition and the chart below illustrates the resulting year-over-year appreciation rates in some of those neighborhoods.

This is not to suggest that the higher-end house markets in the city are languishing. That is not the case – the markets are crazy there too – but generally speaking, recent appreciation rates have not been as robust as in less costly neighborhoods. Information on home prices around the city can be found here: SF Neighborhood Values.

Q1-14_to_Q1-15_SFD-Price-Appreciation_by-Neighborhood

Statistics are generalities that can be affected by various factors, and different baskets of unique homes sell in different quarters. And different statistics can disagree: For example, as seen above, Bernal Heights, which has been white hot, saw year over year median price appreciation of 10%, but its average dollar-per-square-foot value jumped 19%. Consider these statistics to be general indicators instead of precise measurements of changes in home values.

Sales Prices, Price Reductions and Days on Market

Further indications of the heat of our market: The vast majority of sales in March sold very quickly, without going through a price reduction, and averaging a whopping 10% over asking price. That relatively small percentage of listings that went through price reductions prior to sale took 3 times longer to sell at a significant discount to original list price. And, of course, not every home sells: If a property is deemed significantly overpriced, buyers typically ignore it and, unless price reduced, the listing will ultimately be withdrawn from the market. A hot market doesn’t imply buyers will pay any price that pops into a seller’s head (though sometimes it may seem so).

SP-OP_DOM_by-Month

Factors behind the Low Supply of Homes for Sale

Lately, there have been many articles about the reasons why sellers aren’t selling, which is supposedly the main cause of the market’s drastically low inventory situation. What is rarely mentioned is that by far the biggest factor behind declining inventory is not that sellers aren’t selling, but simply the greatly increased demand over the past 3 years. The number of sales in 2014 was actually about average for the last 15 years. Mostly, it was the competition among greater numbers of buyers that shrunk the supply of homes for sale at any given time.

Below is Slide 3 of three charts from our full report (The Real Story behind Low Inventory). It shows how inventory declines as buyer demand increases, even if the number of new listings coming on market doesn’t fall. Please see the full analysis for our complete reasoning, as well as a list of other subsidiary factors.

The simplified, sample illustration below uses actual data pertaining to buyer demand in the city over recent years, but assumes that the number of new listings stays steady at 600 per month.

Inventory_FS-Illustration_Slide-3

Comparing Bay Area County Markets

These 3 analyses are excerpted from our recent article, Taking the Temperatures of Bay Area Real Estate Markets. The full report includes 5 other charts, all of them fascinating.

Bay-Area_DOM_by-County Bay-Area_Increase_in_Employment Bay-Area_Median-SFD-Condo_Sales-Price-by-County

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 how they apply to any specific property is unknown without a tailored comparative market analysis. Sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier, i.e. they are a month or so behind what’s actually occurring in the market as buyers and sellers make deals. All numbers should be considered approximate.

The Story behind San Francisco’s “Extremely Low Inventory” (It’s not because no one is selling)

First some context: For the last 15 years, the number of MLS home sales in San Francisco has ranged from 4663 in 2009 to 7887 in 2004, with an average of 6115 per year. In 2014, MLS sales numbered 6120. Sales outside of MLS have increased as the market has become hotter (for both legitimate and not-so-good reasons), and non-MLS new-condo sales have also increased. These 2 categories of sales would swell the 2014 total.

From another angle, studies have estimated that on average about 5% of U.S. owner-occupier homeowners sell annually. According to the census, there are approximately 125,000 owner-occupied housing units in SF: 5% would equal 6250 home re-sales per year. Sales of tenant-occupied homes and new construction condos would be additional.
The numbers of new listings and home sales in San Francisco are certainly lower than expected in such a hot market and some of the subsidiary reasons are discussed at the end of this analysis. However, as seen above, annual sales numbers are not wildly out of whack from historical trends.

The principal factor behind the perception of drastically low inventory is simply hugely increased demand: Over the past 5 years, the city’s population and employment rolls have soared, while new housing construction has not remotely kept pace. Higher demand means homes sell more quickly, which then shrinks the number of listings on the market at any given time (which is really how we perceive supply). An analogy: The water hole (of listings for sale), fed by a relatively constant stream (of new listings coming on market), still gets significantly diminished as more people drink from it.

Below are 3 charts illustrating the issue. The first two, regarding days-on-market and percentage of listings accepting offers, are based on actual SF market statistics. The third chart is a sample illustration of the effect of increasing demand on the supply of homes for sale, even if the number of new listings coming on market doesn’t decline.

Chart 1: New listings are selling much faster.

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Chart 2: The percentage of listings selling each quarter has significantly increased.

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Chart 3 (sample illustration): Higher demand – even with a constant number of new listings coming on market – dramatically decreases the inventory of homes for sale at any given time.

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There certainly are other, distinctive factors exacerbating our low inventory market:

1) As noted earlier, with the frenzied market, more sales have been occurring off-MLS, and these homes don’t show up as new listings in the public inventory for sale. (The Pros & Cons of Off-MLS Listings)

2) Annual sales of TIC units and 2-4 unit buildings have plunged in the last 7 years by over 500 sales, a substantial drop in an overall market of San Francisco’s size. This is probably due mostly to changes in SF tenant eviction and condo conversion laws. (Note: TIC units are a property type found virtually no place else but the city.)

3) With extremely high rental rates and extremely low mortgage interest rates, a small but growing percentage of homeowners, who typically would have sold their homes, are renting them out instead – and the Airbnb vacation-rental phenomenon (with even higher rent rates) can only be adding to this. (Renting vs. Selling One’s Home)

4) Unless they’re moving out of the area, some potential sellers are daunted by the challenge of finding new homes under existing market conditions and are simply staying put until things calm down.

5) A sizeable percentage of our new (mostly very high-end) condos are being purchased as second homes by the locally affluent or as investments by foreign buyers. These non-resident buyers add to demand and help soak up supply, and for a number of reasons, may not sell as often as typical homeowners.

In many counties other than San Francisco, the big decline in distressed property sales has affected inventory and sales.

The factors above are all probably diminishing listing inventory to greater or lesser degrees, but ultimately, it’s not that the annual number of new listings – i.e. the number of homeowners selling – is so drastically low by historical measures. It’s the relationship between supply and demand that fundamentally determines market conditions, and for the last 3 years, a relatively stable supply has become terribly inadequate to a dramatically escalating demand.

This, of course, is the classic dynamic which puts upward pressure on 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. All numbers should be considered approximate. Please contact us with any questions or concerns.

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Taking the Temperatures of Bay Area Real Estate Markets

Across the Bay Area, how many listings sell without price reductions, how quickly do they sell, and at what percentage of asking price? What role does employment play in the real estate market? Which are the biggest and smallest county markets, and how do prices and rents compare?

The white-hot – some would say overheated – core of the Bay Area homes market is San Francisco and Silicon Valley, and the heat radiates out from there, diminishing as one gets further away. This core is defined by the incredible strength of the economy, much of it supercharged by the high-tech boom. However, there are also cultural and lifestyle factors, as well as what might be called the creativity/innovation-cluster effect, all of which have almost gravitational attractions. Indeed, San Francisco is almost a perfect example of the “super city” concept, drawing in people from all over the country and the world like a giant magnet.

Because it’s close and a (relatively) easy commute to these areas, and so affordable by comparison, Alameda County (which includes Oakland) is also crazy hot. Marin has a strong market but is less feverish, firstly because getting to Silicon Valley isn’t as easy – one has to fight one’s way across the whole city to get to Highways 101 and 280 south – secondly, because it’s a very wealthy and expensive county, so it doesn’t offer quite the attraction of big home price discounts, and perhaps thirdly, because Marin has the highest median age in the Bay Area (45 years), and much of the high-tech employment boom is characterized by (pre-family forming) youth who prefer a more urban environment.

As one gets further north, east and south of the inner core, the markets become less overheated: It’s not that these markets are weak – in fact, some are quite hot and they’ve all been strengthening for the last 3 years. It’s simply that they’re not characterized by a feeding frenzy of almost overwhelming demand meeting limited inventory. Except for sellers eager to maximize their homes’ sales prices, that’s not necessarily a bad thing.

It should be noted that many of the charts below reflect February sales data. Generally speaking, Bay Area markets have become significantly hotter as the calendar gets deeper into prime spring selling season.

Most of these charts speak for themselves, so we’ve kept commentary to a minimum.

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As an illustration of perhaps the Bay Area’s most important market dynamic, this chart below delineates new job creation over the past 6 years. In San Francisco, for example, there are over 95,000 more employed residents than in 2009, and according to the San Francisco Business Times (3/6/15), there are currently 8600 unfilled software engineer positions in the city. During the same 6-year period, approximately 10,000 new housing units were built in the city. That ratio of new employment to new housing equals a desperately competitive housing market.

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Other factors play important roles in the Bay Area markets – such as affluence and education levels – and many of these are assessed on a county by county basis in our 2014 report on San Francisco Bay Area Demographics.

And updated maps of comparative home values around the Bay Area can be found here:Bay Area Home Price Maps

San Francisco Farmers’ Markets



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10 Factors Behind the San Francisco Real Estate Market [INFOGRAPHIC]



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Another Feverish Spring Market? March 2015 Report

Overbidding & Inventory; Bay Area Home Price Map; Renting vs. Buying;
Different Markets = Different Bubbles, Crashes & Recoveries

Preliminary statistics and, even more so, indications on the ground in the current hurly burly of deal-making are sending strong signals of another very competitive real estate market in San Francisco as we approach spring. If it continues to develop as it’s looking right now, this would make the 4th intense spring season since the market recovery began in early 2012.

Once again, buyer demand has surged early in the new year without a corresponding increase in listing inventory: High demand meets low supply generates competitive bidding – sometimes fiercely so – and upward pressure on home prices. This doesn’t mean every listing is selling over asking price or even selling at all – even in a red hot market, 20% – 30% of homes are price reduced before selling or withdrawn from the market without a sale taking place (usually due to overpricing). There are also hotter and cooler pockets within the market: Right now, more affordable homes – for example, condos under $1 million – appear to be in particularly high demand.

Sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier, i.e. they are a month or so behind what’s actually occurring in the market as buyers and sellers make deals. Sales volume in January and February was down 20% year over year, reflecting a market that pretty much shut down in the last two weeks in December, and then started the year with extremely low inventory.

Overbidding List Prices

SP-OP_All-SF-Sales-Combined_by-Month

This chart above illustrates seasonal trends in competitive bidding, which underlies the phenomenon of homes selling for over asking price. For the last few years, the average percentage of sales price to list price has been peaking in spring. But already in February, prices averaged a whopping 8% above asking – very few other markets in the country are seeing anything similar. Drilling down by property type, SF house sales in February averaged 12% over asking, condos averaged 7% over, and 2-4 unit buildings 2%. Houses are becoming a smaller and smaller percentage of city home sales (since virtually no new ones are being built), which has generally made them the most competitive market segment.

In previous years, the percentage over asking has peaked in May, reflecting offers negotiated in late March, April and early May.

Inventory
February-Inventory-Levels_SF

Seasonality_Listings-For-Sale

Seasonality_New-Listings

Seasonality in the Bay Area often has more to do with summer and winter holidays than the actual weather since, unlike back east, January and February often look more like spring here. New listings and overall inventory bottom out in December, and then slowly rise in the new year. What is super-charging the market is that buyers woke up after the holidays and jumped back in the market much earlier than sellers have put homes up for sale in quantity. For the past 3 years, this unbalanced dynamic between the high pressure of buyer demand pushing against an insufficient supply of listings continued through spring, causing dramatic home-price increases, until the market slowed during the summer. We shall soon see if prices can jump higher once again in coming months.

Days on Market before Acceptance of Offer

Months Supply of Inventory

DOM_Blended_SFD-Condo-Coop_Month

MSI-SFD-Condo-Co-op

The greater the demand, the faster listings go into contract (i.e. accept offers), and the lower the average days on market (DOM) and months supply of inventory (MSI).Both these statistics are currently in deep “seller’s market” territory. Of course, this could change dramatically if we get a sudden tsunami of new listings or if a large, negative economic event happens, but right now, we don’t have any reason to expect either to occur in the next few months.

As points of comparison, the national average days-on-market is more than twice that of San Francisco’s (approximately 69 days vs. 30), and the national MSI figure is almost 3 times higher than the city’s (approximately 4.7 months of inventory vs. 1.6). Many new listings in San Francisco are going into contract within 7 to 14 days of coming on market, as eager buyers swarm over them.

Bay Area Median House Prices

This map gives a very general idea of comparative home values around the Bay Area. Remember that median prices will often disguise enormous variety in the underlying individual home sales.

We’ve also updated our SF neighborhood map for house and condo prices, which can be found online here: San Francisco Median Home Price Map

2-15_Map_Bay-Area_Median_House-Price

Renting vs. Buying in San Francisco

2-15_Rent-vs-Buy_Medians-Comp_C

Someone moving to or within San Francisco basically has 2 choices: Renting at market rate or buying at market rate. And rents have gone up so much locally that after accounting for multiple tax benefits, low interest rates, principal loan-balance pay-down (which adds to home equity) and estimated long-term appreciation, buying often looks like the financially attractive course. Above is one chart of a much more detailed analysis comparing the cost of renting a 2-bedroom San Francisco apartment at the current median asking rent, with the monthly cost of buying an SF home at the current median sales price after adjusting for tax deductions and principal pay-down.As seen above, the net monthly cost of buying can be less renting.

There are many personal and monetary issues that pertain to this decision and our analysis is based on a number of financial assumptions – interest, inflation, appreciation and tax rates; downpayment amount; maintenance and insurance costs – that you may not agree with or might not apply to you. You can review our full analysis and also perform your own calculations here: Renting vs. Buying in San Francisco

Different Markets, Bubbles, Crashes & Recoveries*

The real estate market is often spoken about as if it was a single monolithic entity performing in a consistent way – but nothing could be further from the truth. Markets vary enormously between states, cities, neighborhoods, property types and price segments. The S&P Case-Shiller Index looks at the Bay Area market* by breaking all house sales into 3 price segments – low, mid and high price tiers – each containing one third of the total number of sales.The exact price range of each tier changes as the market appreciates or depreciates, or more sales occur in one price range than another: Right now, the “high-price tier” starts at $872,000. In February of 2012, the high tier started at a threshold of $537,000.

Breaking down the market by price segment is a vast over-simplification – there are many other factors at play – but generally speaking, the lower the price range, the more the housing segment was impacted by subprime/ predatory lending in 2003 – 2006. In turn, that caused the larger price bubble, and then the bigger crash as the foreclosure/ distressed-property crisis took hold.

Most Bay Area counties are dominated by homes in 2 price tiers, low and mid, or mid and high, but there are pockets of homes in all tiers within most counties. The numbers in the 3 charts below all relate to a January 2000 value designated as 100. Thus a reading of 199 indicates a home price 99% above that of January 2000.

Bay Area Low-Price-Tier Houses – Currently under $542,000

The low-price third of sales was massively impacted by subprime lending – people buying homes they couldn’t actually afford. It experienced an insane appreciation rate of 170% from 2000 to 2006, creating an enormous bubble. It then crashed by a catastrophic 60% due to the distressed-home phenomenon. As distressed sales dwindled, the recovery since 2012 has been spectacular, up 81%, but prices are still well below peak values and may not re-attain them for years. (If prices go down 60%, they must go back up 148% to get back to where they started.) Many homes in Alameda, Contra Costa, Napa, Sonoma and Solano* counties fall into this market segment.

Interestingly, this price segment was not impacted by the popping of the dot-com bubble, perhaps because these homeowners were less likely to be speculating in the technology stock market.

Case-Shiller_LowTier_Longterm

Bay Area Mid-Price Tier Houses – Currently $542,000 to $872,000

The mid-price segment was less hammered by subprime, but still significantly impacted. Its appreciation rate was 119% from 2000 to 2006 and its market then crashed about 42% before starting its recovery in 2012. This segment is now up 55% from the bottom and close to its 2006 peak value. Many homes in northern Marin, the southern border neighborhoods of San Francisco, northern San Mateo and various areas of the other counties fall into this price segment.

Case-Shiller_Mid-Price-Tier_since-1988

Bay Area High-Price Tier Houses – Currently over $872,000

Most of the houses in San Francisco, San Mateo and southern Marin, as well as affluent areas in other counties, fall into the high-price third of Bay Area sales, which was not deeply affected by subprime lending and foreclosure sales. Though its bubble and crash seemed dramatic enough to those experiencing them, they were much smaller: It appreciated 84% from 2000 to 2006, including a hiccup drop in 2001 after the popping of the dot-com bubble, and then fell about 25% (compared to 60% for the low-price tier). Its strong recovery since 2012, up about 44%, has now put this segment approximately 8% above its previous peak value in 2006.

Case-Shiller_from_1990

Many neighborhoods in San Francisco, Marin and San Mateo would easily qualify for an “ultra-high” price segment, and it remains generally true that the higher the price, the smaller the crash. For example, most of the more affluent neighborhoods in the city peaked in value in 2007 or early 2008, then dropped 15% to 20% after the 2008 financial-markets crash.Due to the high-tech boom, many areas of San Francisco and San Mateo have significantly outperformed their price-tier in recent years.

Though the price tiers had radically different bubbles, crashes and recoveries, all 3 are now almost exactly the same in relation to the year 2000, showing appreciation of 97% to 99% over the past 15 years. This suggests equilibrium is once again being achieved between them.

* Technically the Case-Shiller San Francisco Metropolitan Statistical Area is comprised of San Francisco, Marin, San Mateo, Alameda and Contra Costa counties, but we believe its general trends apply to other Bay Area counties as well.

San Francisco Combined House & Condo Median Sales Price

Median-Prices_Short-Term

Selected U.S. City Median Rents
Chart courtesy of California Association of Realtors

Rents_by-City_CAR