A consideration of the main factors at play behind the current San Francisco real estate market, some of which reflect general macro-economic trends and some of which are specific to the city itself. As we’ve seen in 1989, 2001 and 2008, many of these factors can stall or go into reverse very quickly in the event of a large, negative, economic, political or even ecological event.
In 2016, the market in San Francisco started to cool off somewhat after 4 years of a ferociously high-demand/low-supply dynamic. By any national standard, it is still a strong market, especially in the more affordable price segments, but it has distinctly changed with listing inventory increasing and buyer demand softening. The influx of newly constructed condos have affected the condo market most of all, especially the luxury condo market.
- Population growth vs. New Construction: San Francisco has recently been adding approximately 10,000 – 12,000 new residents per year. New construction is booming again in the city, and tens of thousands of new housing units are now somewhere in the planning and construction pipeline. Thousands of new condos and apartments (mostly at the high end of prices) hitting the market have been affecting the supply and demand dynamic, with both condo prices and apartment rents ticking down from 2015 highs – especially in those districts where new construction is concentrated. It will be interesting to see how influx continues to affect the market as more inventory arrives. There is no question that the city continues to suffer from a grievous lack of more affordable housing.
- Employment growth: San Francisco has recently hit new highs in the number of employed residents and its unemployment rate is as low as it has ever been. Many of these new jobs – in high tech, bio tech and professional occupations – are very well paid. Approximately 14,000 units of housing have been built in San Francisco since 2010. Over the same 6 years, the number of employed residents has increased by about 100,000. In light of the mismatch between supply and demand, the pressure on housing prices is not surprising. Employment actually dropped in the first 6 months of 2016 and then surged again in mid-summer to its highest point ever.
- Stock market upswing: Though there was some major volatility in the period from autumn 2015 through autumn 2016, adding in the recent surge after the election, the S&P 500 is way, way up from 2011. The affluent have benefited most from this large increase in the value of financial assets, and San Francisco has one of the most affluent populations in the country. When people feel wealthier, they spend more on homes, second homes and real estate investment properties. However, we believe much of the local affluent population has become somewhat more cautious with all the extreme volatility – China stock market, oil price crash, Brexit, the 2016 election – that has occurred in the stock market over the past 20 months.
- Brand new wealth: Thousands of newly affluent residents, including significant numbers of millionaires and even billionaires, have been created in the Bay Area in recent years from stock options, IPOs and company sales. This super-charged the “wealth effect” on the real estate market from 2011 through mid-2015. According to Wealth-X, San Francisco ranks 3rd in the nation for number of “ultra-high-net-worth” residents. However, since mid-2015, there have been very few new IPOs, so the dynamic creation of huge amounts of brand new wealth has slowed. On the other hand, the Bay Area is still full of large start-ups like Uber, Airbnb and Palantir, which certainly have the potential to go public in the not too distant future, and start minting, once again, new millionaires by the dozens or even hundreds. It’s also interesting to note that: “San Francisco ranks first among U.S. cities in income mobility, i.e. the opportunity to rise upward on the income scale thanks to its schools, its growing economy and its compact physical size that doesn’t produce walled-off divisions.” (San Francisco: a city pushed to new limits and opportunities)
- High rents: Purchasing a home in San Francisco, with the attendant multiple tax benefits, being able to take advantage of low interest rates, and equity accrual (as well as the possibility of future appreciation), often makes compelling financial sense if the alternative is to pay an extraordinarily high rent (with none of those benefits). SF rents started to plateau in mid-2015 and have dropped a little in 2016 and early 2017, but they are still the highest in the country.
- Low interest rates: from 1996 to 2006, the average interest rate on a 30-year fixed rate loan was approximately 6.3%. By late July 2016, it was running under 3.5%, and as of late-March 2017, it was running about 4.2%. Even after the relatively big post-election jump, the large reduction, 2007 to present, in the cost of financing has made an enormous difference in affordability and the ongoing cost of housing. To a significant degree, declines in interest rates to these near-historic lows have subsidized increases in home prices. It is extremely difficult to predict interest rate movements, but if rates continue to rise appreciably, it will certainly affect housing affordability.
- Renting instead of selling: Very high rents and very low interest rates have convinced some owners who would have sold their homes to rent them out instead, and the Airbnb rent-to-tourists option is probably adding to this (even if in many instances, it violates city statutes.) As an adjunct to the financial calculation for renting instead of selling, we are also hearing from some owners that they are afraid that if they sell now, they or their children will never be able to afford to move back. All this further depresses the supply of new listings coming on market, exacerbating the inventory shortage. This is particularly true of houses in San Francisco, of which virtually no new ones are being built. (Condo construction is booming, and condo owners have a tendency to move much more often.) Not selling as frequently: According to a November 2016 report by ATTOM Data Solutions, “homeowners who sold in the third quarter [of 2016] had owned their home an average of 7.94 years, a new high in our data and substantially higher than the average homeownership tenure of 4.26 years pre-recession.” This big decline in turnover goes a long way to explaining the extremely low inventory levels of homes on the market: Owners are selling much less often.
- Work there, live here: A relatively recent development, many of the people working or taking new jobs in Silicon Valley high-tech and bio-tech now insist on living in the city, creating what might be called a “reverse commute” from past patterns. The Google bus phenomenon (picking up employees in the city and ferrying them to offices in Mountain View) is just one illustration of a trend which puts considerable additional pressure on our housing market.
- Magnet effect: Economic, social, cultural: San Francisco, a small city of 7 by 7 miles, is now the capital of perhaps the strongest, fastest growing, most lucrative, highest-prestige business segment in country: The Bay Area economy is the envy of the world. San Francisco is also in one of the most beautiful, best educated, most tolerant and culturally rich metropolitan areas in the world. That makes the city a magnet for smart, creative, ambitious people from all over the planet and they are willing to pay a premium to live here. (Of course, at certain levels of housing costs, people and companies start to look for alternatives, even if they’d much prefer to be located in SF. And that doesn’t begin to address the issue of teachers, police officers and so many other employment profiles, who can’t begin to think about affording to buy a home here.) There has clearly been a general demographic trend for post-college adults, aged 24 – 39, to move back into urban core areas – and that certainly is dramatically occurring in San Francisco. (See the books, “The Great Inversion & the Future of the American City” and “Who’s Your City? How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life.”)
- Limited supply: Almost two thirds of the city’s housing is in rental units, much of it under rent control. The number of homes suitable for owner-occupancy and available to purchase each year is relatively small, usually 6,000 to 8,000 units. The SF homes market is less than half the size of the markets in either Alameda or Contra Costa counties.Furthermore, new housing construction simply has not been adequate to the city’s needs over the past 35 years. 49% of San Francisco’s housing stock was built prior to 1940. As seen in the chart below, the surge in population during WW II led to a burst of building, which then steadily declined to clearly insufficient levels until the big increase in condo construction at the end of the 1990’s. The 2008 market crash ended that cycle, and the current feverish boom in home construction has been quickly gathering steam only in the past few years – however, as increasing volumes of new-construction housing units come on market, it has been significantly altering the supply and demand dynamic that has prevailed 2012 – 2015. Worth noting is that ever since the mid-1990’s the units being built are typically 1 or 2-bedroom condos or apartments, instead of 2 and 3-bedroom houses, i.e. the new housing units being added accommodate fewer people per unit. Our report on new housing construction in San Francisco is here: SF Housing Inventory & Construction Report
Tax benefits: We won’t count this as one of the 10 factors behind the current market, because the enormous tax benefits of homeownership in the U.S. are always present, boom or bust (until Congress legislates large, unexpected changes to U.S. tax law), but still they are a big factor underlying the housing market. Being able to deduct interest costs and property taxes allows homes to cost (much) more and yet remain affordable to buyers. And there is also the $250,000/ $500,000 exclusion of gains realized upon sale of a primary residence from capital gains taxes: There is not another financial investment we can think of that allows one to reap profits of this magnitude without any tax liability. It’s interesting to note that the tax benefits of homeownership in this country are rarely found anyplace else in the world.
This chart below is a simplified, smoothed-out and approximate look at the last few real estate cycles in the San Francisco Bay Area, illustrating estimated percentage changes in home prices from successive peaks and bottoms of the market. The years between these high/low points are simply depicted here as straight lines (which does not reflect reality). Different market segments – areas, property types, price segments – have experienced varying appreciation and depreciation rates over the years and how this chart applies to any specific property is unknown without a tailored analysis.
We want to reiterate that none of this implies justification for an ever-appreciating real estate market: Almost all these factors can stall or even go into reverse, and as mentioned earlier, in 2016, conditions began to cool. Real estate and financial markets are prone to a wide variety of extremely complex and hard-to-predict economic and political factors, and they typically go in cycles: up, down, flat, up again (repeat). And economic and market fluctuations are not uncommon within cycle phases. Still, the above factors are, we believe, the fundamental realities underpinning the city’s homes market in recent years.
San Francisco’s real estate market is now heading into the beginning of its 6th year of its current market recovery since the crash and recession that ran 2008 – 2011.
Our full report on real estate cycles is here: 30+ Years of San Francisco Real Estate Cycles
Comparing the PURCHASE of a 2-bedroom, 2-bath, 1080 square foot condo at the
2016 median San Francisco sales price of $1,150,000, to the RENTAL of a comparable apartment at a San Francisco market rate of approx. $4,400 to $4,600/month rent
Median sales price per 2016 MLS sales; monthly rent based on averaging Zillow,
RealFacts & Rent Jungle asking rent data in late 2016/early 2017
Rent vs. buy calculations depend on a wide variety of financial data and projections –prevailing and future interest, property tax, inflation, home-appreciation and investment-return rates – as well as data pertinent to you and your specific purchase, such as your marginal income tax rate and how long you plan to stay in the home you purchase. Altering any of these factors can change the calculation significantly. And, of course, one could not consider buying under the scenario below if one did not have the cash for the initial down-payment and closing costs.
We have tried to be conservative in our projections, for example, putting in an annual home appreciation rate of 3%, when for the last 30 years, San Francisco has seen an average, compounding appreciation rate of 5 to 6%. (Since 2011, the SF median house price has appreciated about 90%.) However, appreciation rates vary enormously in shorter time periods, and can go negative in downturns, such as occurred in 2008, and the ability to ride out down markets can make a big difference in financial returns. We believe we have used similarly conservative inflation and investment-return rates, and used the prevailing average, conforming mortgage interest rate in February 2017.
How long you plan to stay in the home you purchase is an important factor, because the longer you stay, the more of your monthly mortgage payment goes to principal pay-down, and the longer the period of amortization of closing costs.
The below calculations were created using a calculator Paragon licenses from a third party. We strongly recommend that you consult your accountant or financial planner to discuss your financial situation, potential tax advantages and other specific pros and cons of purchase as they relate to your situation. What follows is only one scenario and should not be relied upon to make important decisions.The New York Times also has a very flexible rent vs. buy calculator, which allows you to put in your own data, rate projections, and purchase scenarios: NYT Rent vs. Buy Calculator.
The Purchase Scenario and Financial Parameters
Estimated Loan Information
Your total monthly housing payment was estimated at $6,239.38. Your down payment was estimated at $230,000 purchasing a home priced at $1,150,000. This is for a 30 year mortgage at 4.2% in the amount of $920,000. Your total purchase closing costs are estimated at $16,800.00 (about 1.5% of the purchase price).
In the analysis, the current monthly market rent is set at $4,400. The expected inflation rate of 2% annually was used to estimate future rent ($4,488 in the second year) and property taxes (though in California, increases in property taxes are strictly limited due to Prop 13 regulations). The rate of return used for the investment of down-payment monies by renters was 3% per year after taxes – obviously, this will vary widely by type of investment and time period. (If one had their money in CDs, one could only dream of an after-tax return of 3% in recent years. On the other hand, stocks have had a terrific run.)
After adjusting for your initial tax saving based on interest and property tax deductibility, and for the principal pay-down portion of your monthly housing cost, your net housing cost payment is reduced from $6,286 to $3,867, well below the market rate rent for a similar apartment of $4,400 to $4,600.
Note that with condo ownership, the greatest portion of home insurance cost is covered in the monthly HOA association dues & maintenance. For a 2BR/2BA condo, these dues typically run $350 to $550; we added a little bit to the calculation to cover the personal property portion of the insurance not covered by the HOA policy.
According to the above calculation, using the specified rates of appreciation, inflation and investment returns, your home purchase breaks even in approximately 2.7 years.
This is based on your home’s estimated equity minus 6% closing costs when you sell your home. It also assumes your home will appreciate at 3% per year and you have an income tax rate of 25%. If you cannot remain in your home for at least 3 years you should strongly consider continuing to rent.
The breakeven point was calculated by examining how long it would take to create enough equity in your home to exceed the value of investing your cash on hand (at 3% after-tax return). We also accounted for differences in your monthly rent and house payments.
Typically, by far the most important financial advantage of buying is the increase in home equity (and your net worth) over time, as is calculated in the last column below. Firstly, there is the monthly reduction of your loan amount, which increases your home equity. Secondly, there is the effect of inflation/home appreciation on the value of your home over time. Since the purchase was made using a 20% cash down-payment, there is also the significant financial advantage of leverage: When home values go up 10%, the increase in your cash down-payment is approximately 50% (though there is an adjustment for closing costs).
It’s worth noting that with a fixed rate mortgage rate (and Prop 13 limitations on property tax rate increases), one’s housing costs stay relatively stable over time, while rents typically continue to increase much more quickly. As the years pass, this can add substantially to the benefit of buying.
As mentioned earlier, the New York Times also has an excellent rent vs. buy calculator: NYT Rent vs. Buy Calculator. We could not use screenshots due to copyright law, however when we ran a very similar scenario through its calculator, based on living in the condo purchased for 5 years, it came to the conclusion that if you could rent a similar home to one you were buying (for $1,150,000), at a rent of $3,700 per month or less, then you should probably rent. That is, it came to a very similar conclusion to the calculator we used above, that with a market rent in the $4,400 to $4,600 range, buying was an option worth serious consideration.
The NYT also published this excellent editorial on the financial implications of homeownership: NYT Homeownership & Wealth Creation
Typically, the purchase of a new home is one of the largest financial transactions and investments of one’s life. Whatever home you purchase should work for you now—fulfilling your basic housing requirements at an affordable monthly cost. We also suggest retaining enough monies after purchase for a sufficient reserve fund.
Historically, San Francisco real estate has generally proven to be an excellent investment over the longer term (and sometimes, over the shorter term, such as if you had purchased in 2011 and sold today). This is due to the advantages of leverage (the ability to finance much of the purchase); the significant tax benefits of home ownership; economic, demographic and geographic conditions in the city; and long-term appreciation trends. Among other things, real estate is usually considered one of the best hedges against inflation.
If one doesn’t “refinance out” increasing home equity, home ownership (as you pay down the principal balance on your mortgage month by month) typically acts as a “forced” savings account to build household wealth, as mentioned in the NYT editorial referenced above. In addition, the $250,000/$500,000 tax exemption on capital gains on the sale of your principal residence can supercharge the financial return when you do sell. (We cannot think of another investment with this advantage.)
Here are some questions to consider:
- How long do you plan to own the home you wish to purchase? Buying and selling in the short term always entails more risk and makes it more difficult to recoup closing costs on purchase and sale.
- Are current interest rates advantageous for buyers? Lower interest rates make an enormous difference in the ongoing costs of homeownership (and your return on investment). A long-term fixed rate at a low interest rate is hugely advantageous to buyers.
- Apropos of this rent vs. buy analysis: How does the cost of home ownership, with existing tax benefits, compare to renting? How does it compare in the calculation of building your financial assets over time?
- How important is it to you to own the home you live in, with all that implies—security, control, pride of ownership, the ability to make changes and improvements according to your own tastes and needs?
Any investment has both potential risks and rewards—which only you can weigh according to your financial circumstances, your tolerance for risk, your timeline, and your projection of future economic trends. If you have to sell during a down market, the financial ramifications can be negative. Please consult your accountant for a more detailed analysis of the above factors.
This report was created in good faith using data and analytical tools deemed reliable, but it may contain errors and is subject to revision. It is not meant to convince anyone to do anything, but to simply provide additional decision-making tools and information. Ultimately, the end result of any investment will depend on the exact purchase and sell dates.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. Tax law can change at any time, which could impact the calculations provided above. We encourage you to seek personalized advice from qualified professionals – accountants, financial planners, and loan agents – regarding all personal finance, tax and loan issues.
The charts below are based upon San Francisco home sales reported to MLS during the 12 months from 2/16/16 – 2/15/17, breaking out the neighborhoods with, generally speaking, the most sales within given price points. Other neighborhoods not listed did have smaller numbers of sales within given price segments.
The overall median HOUSE price in the city in 2016 was $1,325,000, so the under-million-dollar house is becoming increasingly rare. For context, in 2011, 75% of San Francisco’s house sales were below $1,000,000; that percentage has dropped to 24% to 26% (depending on how one is measuring). The vast majority of house sales in this price segment now occur in a large swath of neighborhoods running across the southern border of the city, which are by far its most affordable house markets: from Bayview through Portola, Excelsior, Visitacion Valley and Crocker Amazon, to Oceanview and Ingleside.
The chart’s horizontal columns reflect the number of sales of houses with at least 2 bedrooms, with parking, for under $1 million, while the median sales prices noted are for all 2BR house sales during the period. Median price provides a good idea of overall neighborhood house prices.
Where to Buy a CONDO, CO-OP OR TIC for under $1 million
The overall SF median condo price in 2016 was $1,095,000, and sales under $1m still occur in almost every area of the city that features these property types – but a studio unit in Russian Hill may cost as much as a 2-bedroom condo in Diamond Heights. Note that these charts only reflect sales reported to MLS, and many new-project condo sales do not.
Of these property types, condos make up about 90% of sales, stock co-op apartments 1 to 2%, with TICs making up the balance. TICs typically sell at a significant discount (10% – 20%) to similar condos.
The horizontal columns reflect the number of sales under $1m broken out by 1-bedroom and 2-bedroom units. You can see that if you want to buy a condo in the South Beach/Mission Bay district, you are pretty much limited to 1BR units (or studio units). The box of median sales prices is just for 1BR units, again simply to give an idea of relative values between neighborhoods. Median price is that price at which half the sales occurred for more and half for less.
Spending $1 Million to $1.5 Million in San Francisco
In this price point for houses, one starts moving into another layer of neighborhoods in the west and the central-south areas of the city: The Sunset and Parkside neighborhoods, Golden Gate Heights, Miraloma Park, Sunnyside, Mission Terrace, Bernal Heights and others as shown. There has been a lot of upward pressure on these areas in the past 2 years in particular.
The horizontal columns reflect the number of sales, with the average dollar per square foot values for the homes in this price range noted alongside.
Condo and co-op sales in this price range are mostly concentrated in those areas where newer condo developments have surged onto market over the past 10 – 15 years, and continue to arrive in increasing numbers – South Beach, Mission Bay, Inner Mission, Hayes Valley, Dogpatch, SoMa – as well as in high-end neighborhoods such as Pacific Heights, Russian Hill and the greater Noe-Eureka Valleys area.
Condos & Co-ops for $1.5 million to $1.85 million
Houses for $1.5 million to $2 million
Buying a HOUSE for $2 million to $2.999 million
When you get to the $2 million to $2.999 million range, the house market becomes dominated by the greater Noe-Eureka-Cole Valleys district, the St. Francis Wood-Forest Hill district, the Potrero Hill-Inner Mission area, the Inner-Central Richmond and Lake Street area, and Inner Sunset/ Golden Gate Heights. One no longer can find much in this price range in the Pacific Heights-Marina district.
Buying a LUXURY HOME in San Francisco
San Francisco houses selling for $3 million and above, and condos, co-ops and TICs selling for $1.85 million and above constitute about 10% of sales and, for the purposes of this report, are designated as luxury home sales. What you get in different neighborhoods for your millions of dollars will vary widely. Views often play a significant role in SF home values, but particularly in the luxury condo market, where the most expensive units often offer staggering views from very high floors. Over the past 15 years – and accelerating in the current market recovery – there have occurred some very large shifts in the luxury home market, with districts other than the old-prestige, northern neighborhoods becoming major destinations for (very) high-end homebuyers. However the northern neighborhoods like Pacific Heights still dominate the ultra-high end in SF: houses selling for $5 million or more. The greater South Beach-Yerba Buena area, with its many new luxury condo towers now comes in second place for luxury condo sales (reported to MLS) after the Pacific Heights-Marina district.
Luxury CONDO, CO-OP & TIC Sales
Luxury HOUSE Sales
San Francisco Neighborhood Map
For prevailing SF (and Bay Area) median home sales prices, our interactive maps of neighborhood and city values can be found here: Bay Area & San Francisco Home Price Maps
Other updated reports you might find interesting:
SF Home Prices by Bedroom Count, Property Type & Neighborhood
Our Most Recent Market Analyses
San Francisco Market Overview Analytics: Interactive, auto-updating charts for all the standard real estate statistics – median sales price, average dollar per square foot, days on market, months supply of inventory, listings for sale, and so on.
San Francisco District Sales Overview: A breakdown of sales by price segment for 14 different sections of the city.
SAN FRANCISCO REALTOR DISTRICTS
District 1 (Northwest): Sea Cliff, Lake Street, Richmond (Inner, Central, Outer), Jordan Park/Laurel Heights, Lone Mountain
District 2 (West): Sunset & Parkside (Inner, Central, Outer), Golden Gate Heights
District 3 (Southwest): Lake Shore, Lakeside, Merced Manor, Merced Heights, Ingleside, Ingleside Heights, Oceanview
District 4 (Central SW): St. Francis Wood, Forest Hill, West Portal, Forest Knolls, Diamond Heights, Midtown Terrace, Miraloma Park, Sunnyside, Balboa Terrace, Ingleside Terrace, Mt. Davidson Manor, Sherwood Forest, Monterey Heights, Westwood Highlands
District 5 (Central): Noe Valley, Eureka Valley/Dolores Heights (Castro, Liberty Hill), Cole Valley, Glen Park, Corona Heights, Clarendon Heights, Ashbury Heights, Buena Vista Park, Haight Ashbury, Duboce Triangle, Twin Peaks, Mission Dolores, Parnassus Heights
District 6 (Central North): Hayes Valley, North of Panhandle (NOPA), Alamo Square, Western Addition, Anza Vista, Lower Pacific Heights
District 7 (North): Pacific Heights, Presidio Heights, Cow Hollow, Marina
District 8 (Northeast): Russian Hill, Nob Hill, Telegraph Hill, North Beach, Financial District, North Waterfront, Downtown, Van Ness/ Civic Center, Tenderloin
District 9 (East): SoMa, South Beach, Mission Bay, Potrero Hill, Dogpatch, Bernal Heights, Inner Mission, Yerba Buena
District 10 (Southeast): Bayview, Bayview Heights, Excelsior, Portola, Visitacion Valley, Silver Terrace, Mission Terrace, Crocker Amazon, Outer Mission
Some Realtor districts contain neighborhoods that are relatively homogeneous in general home values, such as districts 5 and 7, and others contain neighborhoods of wildly different values, such as district 8 which, for example, includes both Russian Hill and the Tenderloin.
As always, the quality of the specific location and the range of amenities of the property; its curb appeal, condition, size and graciousness; and the existence and quality of parking, views and outside space can all significantly impact unit values.
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. Median sales prices often change with even the smallest change in the period of time or parameters of the analysis. All numbers should be considered approximate.