Buyer Represented (more…)
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Since Case-Shiller Indices cover large areas – 5 counties in the SF Metro Area – which themselves contain communities and neighborhoods of widely varying home prices, the C-S chart numbers do not refer to specific prices, but instead reflect home prices as compared to those prevailing in January 2000, which have been designated as having a value of 100. Thus these charts are broad generalizations about appreciation (or depreciation) trends: for example, a reading of 250 signifies that home prices have appreciated 150% above the price of January 2000. For data on actual median home prices for specific locations, please access our main market analysis page: Paragon Market Reports. At the very bottom of this report, there are a few charts on overall median home prices in SF, Marin and Lamorinda/Diablo Valley.
Please note that we don’t update every chart in this report every month since what is most meaningful are longer-term trends.
Long-Term Appreciation Rates by Price Segment
Case-Shiller divides all the house sales in the SF metro area into thirds, or tiers. Thus the third of sales with the lowest prices is the low-price tier; the third of sales with the highest sales prices is the high-price tier; and so on. (The price ranges of these tiers changes as the market changes.) As seen in this first chart, the 3 tiers experienced dramatically different bubbles, crashes and recoveries over the past 12 years, though the trend lines converged again in 2014 – this is discussed in detail later in this report.
Short-Term Appreciation Rates by Price Segment
In recent months, home prices have been increasing significantly, with more affordable houses seeing the highest appreciation rates. But 2017 has been an unexpectedly feverish market for all market segments.
Longer-term trends are always much more meaningful than short-term fluctuations.
The S&P CoreLogic Case-Shiller Index for the San Francisco Metro Area covers the house markets of 5 Bay Area counties, divided into 3 price tiers, each constituting one third of unit sales. Most of San Francisco’s, Marin’s and Central Contra Costa’s house sales are in the “high price tier”, so that is where we focus most of our attention. We’ve also included some data on the Case-Shiller Index for metro area condo values, but unless otherwise specified, the charts pertain to house prices only. The Index is published 2 months after the month in question and reflects a 3-month rolling average, so it will always reflect the market of some months ago. In effect, we are looking into a rearview mirror at the market 3 to 5 months ago. The December 2017 Index was published at the end of February 2017. Much more information regarding the Index’s methodology can be found on its website.
The 5 counties in our Case-Shiller Metro Statistical Area are San Francisco, Marin, San Mateo, Alameda and Contra Costa. (And we believe the Index generally applies to the other Bay Area counties as well.) There are many, vastly different real estate markets found in such a broad region, moving at different speeds, sometimes moving in different directions. San Francisco’s single family dwelling (SFD) sales, which are what Case-Shiller measures, are only 7% to 8% of the total SFD sales in the 5-county metro area, while Alameda and Contra Costa make up over 70% of SFD sales.Therefore, the Index is always weighted much more to what is going on in those East Bay markets than in the city itself. (Marin’s percentage is about 7% and San Mateo’s about 14%.) SF makes up a much larger proportion of condo sales in the metro area, as condos are now the dominant type in home sales now in the city.
These first 2 charts below illustrate the price recovery of the Bay Area high-price-tier home market over the past year and since 2012 began, when the market recovery really started in earnest. In 2012 – 2015, home prices dramatically surged in the spring (often then plateauing or even ticking down a little in the following seasons). The surges in prices that have occurred in the spring selling seasons reflect frenzied markets of high buyer demand, low interest rates and extremely low inventory. In San Francisco itself, it was further exacerbated by a rapidly expanding population and the high-tech-fueled explosion of new, highly-paid employment and new wealth creation. The markets in the Bay Area are appreciating at somewhat different speeds, depending on the price segment. As clearly seen in the second chart above, the low-price tier has been seeing the most dramatic movement, but all 3 segments saw spikes in 2017.
For more regarding how seasonality affects real estate: Seasonality & the Real Estate Market .
This chart below highlights the highly seasonal nature of home price appreciation over the past 5 years.
Longer-Term Trends & Cycles
The next 4 charts below reflect what has occurred in the longer term (for the high-price tier that applies best to San Francisco, Marin, San Mateo and the most affluent portions of other counties), showing the cycle of recession, recovery, bubble, decline/recession since 1988. Note that, past cycle changes will always look smaller than more recent cycles because the prices are so much higher now; if the chart reflected only percentage changes between points, the difference in the scale of cycles would not look so dramatic (as seen in the third chart below).
Comparing San Francisco vs. U.S. Appreciation since 1987
Interesting divergences occurred after the 1989 earthquake, making the SF recession longer and deeper in the early 1990’s, during the dotcom spike and drop, and since the latest market recovery began in 2012, which in SF was supercharged by the local boom in high-tech.
Annual MEDIAN SALES PRICE Changes in San Francisco
As a point of comparison: NOT Case-Shiller data. First houses, then condos.
In the city, the house median sales price continued to appreciate in 2016, albeit at a much slower rate than the previous 4 years. The condo median sales price, impacted by both a cooling in the market and a surge in new-construction condo inventory, generally remained flat year over year in 2016. Both segments have seen new bursts of appreciation in 2017 (not charted below).
Different Bubbles, Crashes & Recoveries
This next 3 charts compare the 3 different price tiers since 1988. The low-price-tier’s bubble was much more inflated, fantastically inflated, by the subprime lending fiasco – an absurd 170% appreciation over 6 years – which led to a much greater crash (foreclosure/distressed property crisis) than the other two price tiers. All 3 tiers have been undergoing dramatic recoveries. The mid-price-tier is just now back to its previous peak values, but the low-price-tier is still below its artificially inflated peak value of 2006 (though recently, it has been appreciating quickly). It may be a while before the low-price-tier of houses regains its previous peak. The high-price-tier, with a much smaller bubble, and little affected by distressed property sales, has now significantly exceeded its previous peak values of 2007. All neighborhoods in the city of San Francisco itself have now surpassed previous peak values by very substantial, and sometimes astonishing margins.
Different counties, cities and neighborhoods in the Bay Area are dominated by different price tiers though, generally speaking, you will find all 3 tiers represented in different degrees in each county. Bay Area counties such as Alameda, non-Central Contra Costa, Napa, Sonoma and Solano have large percentages of their markets dominated by low-price tier homes (though, again, all tiers are represented to greater or lesser degrees). San Francisco, Marin, Central Contra Costa (Diablo Valley & Lamorinda), San Mateo and Santa Clara counties are generally mid and high-price tier markets, and sometimes very high priced indeed. Generally speaking, the higher the price, the smaller the bubble and crash, and the greater the recovery as compared to previous peak values.
Remember that if a price drops by 50%, then it must go up by 100% to make up the loss: loss percentages and gain percentages are not created equal.
The price thresholds for the different tiers changes every month, based upon the prices of the homes that sell in that month, so you may see small variations on various charts. For example, in the past year, the threshold for the Bay Area high-tier house price segment has ranged from $956,000 to $1,087,500 (in October 2017). We don’t always adjust these figures in every monthly chart.
Mid-Price Tier Homes: Approx. $685,000 to $1,100,000
Smaller bubble (119% appreciation, 2000 – 2006) and crash (42% decline) than low-price tier. A strong recovery has put it somewhat above its previous 2006 peak.
High-Price Tier Homes: Approx. $1,100,000+
Much smaller bubble/ much smaller crash:
84% appreciation, 2000 – 2007, and 25% decline, peak to bottom.
Has been climbing well above previous 2007 peak values.
Case-Shiller Index for SF Metro Area CONDO Prices
In San Francisco, where many neighborhoods vastly exceed the initial price threshold for the high-price tier, declines from peak values in 2007 in those more expensive neighborhoods typically ran 15% – 20%, and appreciation over previous peak value has also exceeded the high-price tier norm.
Median Sales Price Trends
Central Contra Costa County
Bay Area Counties Median Price Trends
And here are a few charts looking at San Francisco median sales price appreciation trends in specific neighborhoods.
All data from sources deemed reliable, but may contain errors and is subject to revision. Statistics are generalities and how they apply to any specific property is unknown. Short-term fluctuations are less meaningful than longer term trends. All numbers should be considered approximate.
© 2015-2018 Paragon Real Estate Group
Out of recession comes recovery; recovery builds into market over-exuberance;
over-exuberance leads to negative adjustment; negative adjustment sparks recession.
Begin again.The scale, length and triggers of each part of different financial and real estate cycles can vary dramatically, but the stages and their sequence tend to be quite similar.
NOTE: This is a condensed version of our much longer, full report (with many more charts), which is available here:Article: 30+ Years of San Francisco Real Estate Cycles
.Financial-market cycles have been around for hundreds of years, from the 1600’s Dutch tulip mania through today’s speculative frenzy in crypto-currencies. Though cycles vary in their details, their causes, effects and trend lines are often similar, providing more context as to how the market works over time.
It is extremely difficult to predict when different parts of a cycle will begin or end in order to time one’s purchase, especially since homeownership is typically so much more than just a financial investment. Boom times, even periods of “irrational exuberance,” can go on much longer than expected, or get second winds, with huge jumps in values. On the other hand, negative shocks can appear with startling suddenness, often triggered by unexpected economic or political events that hammer confidence, adversely affect a wide variety of market dominos, and then balloon into periods of decline and stagnation. These negative adjustments can be in the nature of a bubble popping, the slow deflation of a punctured tire, or some combination of the two.
Going back many decades, all the major Bay Area recessions have been tied to national or international economic crises. Considering the fundamental strengths of the local economy, absent a major natural disaster, it is unlikely that a major downturn would occur due simply to local issues. However, local issues can exacerbate a cycle: The 1989 earthquake intensified the effects of the national recession in the early 1990’s; our greater exposure to dotcom businesses produced a spike up and down with the NASDAQ bubble & 2000-2001 crash; and our current high-tech boom has poured fuel on our up-cycle during the current recovery.
All bubbles are ultimately based on irrational exuberance, criminal behavior or both, whether exemplified by junk bonds, stock market hysteria, untenable levels of debt, or incomprehensible or dishonest financial engineering. However, it should be noted that the 2008 crash was abnormal in its scale, and much greater than other downturns going back to the Great Depression. The 2005-2007 bubble was fueled by home buying and refinancing with exorbitant, unaffordable levels of debt, promoted by predatory lending practices such as deceptive teaser rates, no-down-payment loans and an abysmal decline in underwriting standards. The market adjustments of the early 1990’s and early-2000’s saw declines in Bay Area home values in the range of 10% to 11%, as compared to the terrible 2008 – 2011 declines of 20% to 60%. (However, prices are now above their 2007 peaks.)
Whatever the phase of the cycle, people think it will last forever. Going up: “The world is different now and there’s no reason why the upward trend can’t continue indefinitely.” And when the market turns: “Homeownership has always been a terrible investment and the market will not recover for decades” (or even “in our lifetimes” as one Nobel-Prize-winning economist said in 2012). But the economy mends, the population grows, people start families, inflation accumulates over the years, and the 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 jumped back in – or “explodes” might be a better description – and home prices started to rise again.
As long as one doesn’t have to sell during a down cycle, Bay Area homeownership has almost always been a good or even spectacular investment (though admittedly if one does have to sell at the bottom of the market, the results can be painful). This is due to the ability to finance one’s purchase (and refinance when rates drop), tax benefits, the gradual pay-off of the mortgage (the “forced savings” effect), inflation and long-term appreciation trends. The best way to overcome cycles is to buy a home for the longer term, one whose monthly cost is readily affordable for you, ideally using a long-term, fixed-rate loan. Quoting a NYT editorial, “Renting can make sense as a lifestyle choice… As a means to building wealth, however, there is no practical substitute for homeownership.”
It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.
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. Longer term trends are much more meaningful than short-term.
The real estate markets in the SF Bay Area are parts in an overall economic reality that includes a number of financial, demographic and psychological components – all of which are impacting each other in constantly changing ways. Some are local, and others reflect national or even international events or trends. They often run in parallel, but can also diverge or reverse themselves very suddenly, as is well illustrated in many of the charts below. Below are snapshot analyses of what we see as major cogs in this economic machine.
In some charts, we use specific data for San Francisco itself, but the trends seen there – such as home price appreciation, employment and housing affordability – are playing out, to varying degrees, throughout the Bay Area. That is, we believe these economic context illustrations generally pertain to the entire region.
All our Bay Area real estate market analyses can be found here: Paragon Reports
Sudden, Dramatic Population Growth
Population Migration into and out of California
Though this chart below refers specifically to state data, the trends illustrated most probably apply to the Bay Area as well. Of course, foreign immigration numbers in 2017 and later years may change dramatically with the recent changes in national policies. If foreign migration into the state drops, and emigration out to other states continues (or accelerates) on the below trend, it would eventually probably have significant ramifications for the Bay Area. This chart refers to 2016 data.
The issue of migrations into and out of California is more fully explored in this article: Article link: CA Migration Trends
Spectacular Employment Growth
The Bay Area has had the strongest employment trends in the nation, adding approximately 600,000 new jobs in the past 7 years. As illustrated below, San Francisco alone has added about 100,000 in that time period. All these new people need somewhere to live, and many of these new jobs are very well-paid. Note that after dropping in early 2016 (per the economic cooling to be discussed later in this report) and then climbing back up again in the second half of 2016, hiring has basically plateaued in 2017. (Too much should not be made of short-term data.)
New Housing Construction
Though ramping up in recent years, new housing construction has not come close to meeting the needs of a rapidly increasing population, and most of the recent new construction would not be considered “affordable housing,” as developers have concentrated on more expensive condo and apartment construction. So while helping to fill an urgent need for new housing, it has not really helped less affluent, normal-working-class segments of the population. (Affordable housing construction is increasing, but still in very inadequate numbers.)
New Housing Pipeline
A snapshot of what is currently in the pipeline for new construction in the city: Over 60,000 housing units of all kinds (sale, rental, affordable, social-project). 3 huge, long-term projects make up a big percentage of units planned. Note that the pipeline is constantly changing: new plans submitted, and existing plans changed or even abandoned. Just because something is in the pipeline does not mean it will end up being built. Economic downturns typically shut down new development plans very quickly.
San Francisco appears to have a much bigger new-housing construction pipeline than most other Bay Area counties, some of which have very little planned or in the works.
Mortgage Interest Rate Decline
The 35% to 45% decline in interest rates since 2007 has played an enormous role in real estate markets, in effect subsidizing much of the home price increases seen in the past 6-7 years. Since the 2016 election, rates first jumped up 23% and then declined again to, historically, very competitive rates below 4%. The fear that rates might rise again soon may have been one factor behind the feverish spring 2017 markets seen around the Bay Area. It is notoriously difficult to predict interest rate movements with any confidence.
For landlords, the very substantial drop in interest rates coupled with the huge jump in rents, as detailed below, turned apartment buildings into cash machines, especially those purchased prior to the recent surge in investment property prices. Declining interest rates helped real estate owners of all types; unfortunately, renters reap no advantage from the shift.
Short-Term Interest Rate Movements
The monthly fluctuations in consumer confidence reported on in the media are relatively meaningless and without context, but longer-term movements are much more meaningful to overall economic trends. Psychology – confidence, optimism, fear, pessimism – often plays a huge role in financial and real estate markets. And events can sometimes turn consumer confidence one way or another very rapidly, whether such movements are rational or not.
New Wealth Creation: Initial Public Offerings
Besides the effect of increased, well-paid employment, the sudden creation of brand new wealth has been a very, very big factor in Bay Area real estate markets. IPOs can create tens of thousands of residents who suddenly feel much, much wealthier, and that impacts home buying. Local IPO activity increased through mid-2015, pouring hundreds of billions of new dollars into the economy, and then suddenly stopped in its tracks when financial markets suddenly became very volatile in September 2015. This particularly affected the high-end homes segment: Not only were new millionaires not being minted by the dozen, but the affluent are typically most sensitive to financial news and market volatility.
The Bay Area has an astounding pipeline of possible IPOs in the not too distant future – Uber, Airbnb, Palantir and Pinterest, to name a few of the biggest. If and when these companies go public, and how the IPOs are received, are a real wildcard for the region’s real estate markets. There is the potential to unlock tremendous wealth held in relatively non-liquid private equity into billions of spendable dollars. On the other hand, if there was a dotcom-like implosion, the effects would be quite serious. (We don’t expect such an implosion, though a sudden financial crisis could still have significant negative ramifications, especially for currently unprofitable start-ups.)
New Wealth: Stock Market Appreciation
The gigantic surge in the stock market over the past 9 years has also made people feel much wealthier, which, besides making new money available to purchase a home or a bigger home, stimulates consumer (and venture capitalist) confidence, which feeds yet more positive energy into the markets.
As of January 5, 2018, the S&P has increased another 40 points since this chart below was updated on January 2. According to the October 7th Economist magazine, when the index was about 200 points lower, Only at the peak of the two bubbles [in the 1920s and the dotcom bubble] has the S&P 500 been higher as a multiple of earnings measured over a ten-year cycle. For whatever you believe that is worth.
Financial Market Volatility
The above S&P chart smoothed out all the volatility to illustrate the overall steady climb in stock market values since 2009. Below is a snapshot of the volatility that occurred from autumn 2015 to late summer 2016 (with an allusion to the big jump that has occurred in 2017 YTD): stock markets plunged in September 2015 to recover fully by November, then plunged again in January 2016 to recover again by April. Then came a smaller response to the Brexit vote. This volatility affected IPOs, venture capitalist confidence (to continue funding start-ups), hiring, and real estate markets, especially of more expensive homes. One local, respected economist predicted in late 2015 that soon “there would be blood in the streets of San Francisco” from a collapse in high-tech and housing booms. Then financial and real estate markets, hiring, VC and consumer confidence bounced back dramatically in 2017, and he revised his estimate for streets filled with blood to 2019 or 2020.
for the 25 most populous metro areas in the nation. The SF Metro Area ranks first.
Again, this chart is for San Francisco, but similar trends occurred throughout the Bay Area. Rents are actually more sensitive to employment trends than home prices, as new employees pour in during boom times or the newly unemployed flee high SF costs in a major downturn. (See dotcom boom and bust in the chart below.). Soaring population and employment in recent years without a concomitant increase in housing supply made rents soar to the highest in the nation. Extremely high rents (with no tax, equity accrual or appreciation benefits for renters) push many into buying as a better long-term financial alternative. (However, in San Francisco as well as Oakland, the majority of existing rental units are under rent control to the significant advantage of long-term tenants.)
Rents declined from a peak in 2015 due to increased supply (new apartment buildings coming on market) and a softening in high-tech hiring through mid-2016. In 2017, there have been some preliminary signs of a slight recovery in rent rates, though the data is still very short term. There are still many thousands of new apartments in the new construction pipeline in San Francisco, which may pressure rents downward once again depending on whether hiring and demand ramp up again.
Commercial Lease Rates
What goes on in commercial rents is another angle on the residential real estate market, since the growth or decline of the city’s businesses is a very significant factor underlying housing demand. Despite increasing amounts of new office space coming on line, commercial lease rates continue to hold up, not only because of new and growing start-ups, but because of huge new leases being signed by high-tech heavyweights such as Facebook, Google, Amazon and Dropbox, who have decided to expand their footprints in the city. Office lease rates are very sensitive to economic conditions, having dropped precipitately twice in the last 17 years, first after the dotcom bubble burst and then after the 2008 financial markets crash.
Besides the approximate 10 million square feet of commercial space under construction in SF, there are another 20m square feet somewhere in the longer-term planning pipeline (not all of this is office space). Besides the issue of a possible economic downturn, it remains to be seen if such an enormous amount of new supply (if actually completed) can comfortably be absorbed without a significant drop in lease rates even if no downturn arrives in the near future.
Supply: New Home Listings Coming on Market (SF)
A very significant change has occurred in real estate markets locally and nationally: Homeowners are selling their homes much less frequently. There has been a general decrease in population mobility (people moving for new jobs), a substantial increase in the average age of homeowners (older people move less often than younger), and an increase in owners renting out their homes instead of selling them (encouraged by the aforementioned drop in interest rates and jump in rents). There is also the issue under CA Prop 13 in which homeowner property tax bills grow very, very slowly during the term of their ownership, even if home price appreciation soars: If one moves, one’s property taxes will be reset to the purchase price of the newly bought home. (There is a limited program under Prop 60 for those 55 and older to transfer one’s current property tax assessment to a new home.)
The net net: If demand increases for all the reasons mentioned earlier – demographic shifts, new wealth, new jobs, more confidence – but the number of homes being put on the market declines, that further unbalances the supply and demand dynamic, and creates the pressure that classically leads to higher home prices.
Article link: Homeowners selling less often
Article link: Homeowners growing older
Months Supply of Inventory (MSI)
MSI is a statistic that takes into account both buyer demand and the supply of homes available to purchase. The lower the MSI, the greater the competitive pressure on prices: Very low MSI figures, such as we have been seeing around the Bay Area in almost all market segments, means that there are too many buyers for the number of homes on the market. This leads buyers to bid against one another: Nothing leads to higher prices more quickly than this dynamic.
Median Home Price Trends
This chart is for SF, but the entire Bay Area has seen similar upward swings in home prices since 2012. In many ways, this chart is the result of everything that has been illustrated in previous charts in this report. However, it should be noted that the very considerable appreciation in home values has also increased the wealth of large numbers of homeowners, which feeds back into the financial and psychological loops.
Another interesting dynamic – mostly anecdotal for the time being – is that many Bay Area home sellers are taking their often stupendous capital gains from local home price appreciation, retiring and moving to areas of much lower housing costs (which then helps to pressurize those markets, to the dismay of home buyers there).
Real Estate Appreciation Cycles
This very simplified, smoothed-out graph illustrates the percentage ups and downs in home prices over the past 30+ years per the S&P Case-Shiller Home Price Index for “high-price-tier” homes in the Bay Area: High-price-tier homes predominate in most of SF, Silicon Valley and Marin County, as well as in enclaves in other counties. Like other financial markets, real estate markets are subject to cycles. However, they are hard to predict because there is no hard and fast rule as to how long cycles will run. Booms can last longer than expected, or suddenly get a second wind, and downturns can come out of nowhere to severely negative effect (though downturns don’t have to be severe). There are so many churning, shifting, interrelated economic, political and ecological factors in the mix nowadays, running from local events in the Bay Area to developments in Wall Street or Washington, or China, Europe, North Korea and the Middle East.
Bay Area vs. National Appreciation Trends
What has happened home prices in the Bay Area has also been occurring generally in the country, though our high-tech/bio-tech/fin-tech boom has certainly goosed appreciation here. However, it is interesting to note, that for the most part, the trends are quite similar over recent decades, with divergences for the 1989 earthquake, the dotcom boom and bust, and the most recent recovery. It will be interesting to see if the trend lines converge again as has happened in the past.
San Francisco Housing Affordability
All the factors that have pushed up home prices have pushed down affordability. San Francisco and San Mateo Counties have the lowest housing affordability percentages in the state (and maybe the nation), but affordability has been rapidly declining around the Bay Area. When affordability gets too low, it starts to throw a wrench in some of the other components, like population and hiring. People and companies start moving away, poverty increases, start-ups start up elsewhere, rents begin to soften, and so on throughout the economic ecosystem. And, of course, as clearly illustrated, affordability can move in very dramatic cycles, just like the other factors discussed above. Housing affordability may be the biggest social, political and economic issue facing the Bay Area right now.
With statistics, one is almost always looking in the rear-view mirror, and, as anyone reading the news during the past year knows, the future is an unknown country. As they say in the standard disclaimer, past performance is no guarantee of future results.
This report has been our most read for 5 years: Article: 30+ Years of San Francisco Real Estate Cycles
All our many Bay Area real estate analyses can be found here: Paragon Market Reports
It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis. In real estate, the devil is always in the details.
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. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.