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Media Reports Suggest Major Bay Area Decline

The sources of the data behind the below (and many more) articles: an online survey by a PR company; an analysis of traffic on a real estate website; the alleged cost of a U-Haul to Las Vegas; anecdotal opinions from a handful of venture capitalists on a mid-west bus tour; and new U.S. census data, more often than not selectively or misleadingly quoted to sound most ominous. (The WSJ article was by far the most fastidious with using hard data from reliable sources, though it was still alarmist in tone.)

Quotes and headlines from selected media articles in March 2018

[According to a survey] “49 % of Bay Area residents were looking to move out.”
Business Insider

“San Francisco is such a boomtown that people are leaving in droves.”
Wall Street Journal

“Silicon Valley is over” “In the last three months of 2017, San Francisco lost
more residents to outward migration than any other city in the country.” 

New York Times

“San Francisco is so expensive that more people are leaving than moving in
– and it could mean disaster for the nation’s tech capital.” 

SFGate

Bad news, predictions of crashes, the arrogant finally getting their comeuppance: These stories grab eyeballs and get re-posted on social media. And much of the country finds the Bay Area insufferably smug – its wealth, home prices, unicorns, Google buses, 26-year-old billionaires, liberal politics, and much else – and if it is finally getting its just deserts, that is entertaining news. I get that: Sometimes, I find us insufferably smug myself. But let us investigate the issues a bit deeper.

First of all: Without argument, there are big economic and social challenges facing the Bay Area: high housing costs; high state income taxes; recent federal tax law changes; the hostility of the current federal government to foreign immigration; rising income inequality, poverty and homelessness; growing commute times and other quality of life issues; national and international concerns; and, yes, population migration trends too. This was covered in some detail in our recent report Positive & Negative Factors in Bay Area Markets. It is certainly true that places like Austin and Seattle, with much lower housing costs and no state income taxes, are actively luring our businesses to relocate or expand there, and doing so with some significant success.

But, for a much more realistic illustration of what is going on in the Bay Area, here is some hard data from U.S. Census and CA Employment Development Department data released in March:

More people are NOT leaving San Francisco or the Bay Area than arriving. When you tally both domestic migration in and out (to and from other places in the U.S.), and foreign migration, more people are arriving than leaving. It is true than in the past 2 years, domestic net migration has shifted to a net loss, but that deficit is still overcome by the large positive in foreign immigration. Is the shift in domestic migration worrisome? Yes, if it continues to grow. But it is not cataclysmic in its current proportions, and there are further underlying factors to consider, which shall be discussed later in this report.

San Francisco County: Residents Leaving, New Residents Arriving
Net Domestic & Foreign, and Total Net Migration Numbers, per U.S. Census
The last column in each year tallies the net positive migration number

5-County San Francisco Metro Area Migration

The last column in each year tallies the net positive migration number

The Bay Area population is still growing both from migration and natural factors (births less deaths), albeit at slower rates than the torrid pace of previous years. As the WSJ admits in its article, SF and SF metro area populations are not shrinking: The SF Metro area population increased by .6% in the last 12 month period, as measured by the census through 7/1/17, which is one tenth of 1 percent lower than the .7% national rate. And a slower rate of growth than our recent population explosion is not a bad thing, since the Bay Area is bursting at the seams from growth without concomitant improvements in housing supply and infrastructure.

Long-Term Population Trends: San Francisco County

Short-Term Population Changes: 5-County SF Metro Area

The representation by Business Insider that 49% of residents were looking to move out is simply absurd. Really? Every other person? If people were fleeing or planning to flee in the proportions suggested, one would expect every other home in the Bay Area to sport a “for sale” sign, while the percentage of homeowners selling their homes is actually at historic lows: Less than 2% of SF house owners sold their homes in 2017. (The ratio was higher for condo owners, but still low at something over 4%.) I suppose it is possible that in the frenzy to get away, people are simply abandoning their homes instead of selling them.

New Listings Coming on Market: San Francisco County

Bay Area employment growth remains extremely strong. According to the CA Employment Development Department, for the six big Bay Area counties (the 5-county SF metro area plus Santa Clara County), no matter which month of 2017 one looks at, the year-over-year increase in Bay Area employed residents, ranged from 60,000 to 90,000. As the WSJnotes: “The broader Bay Area is the most robust metro region in the nation in terms of payroll job growth, according to the most recent regional analysis from the University of California-Los Angeles Anderson Forecast, an economic forecaster.”

Number of Employed Residents, per EDD
5-County SF Metro Area + Santa Clara County

Some other factors to consider:

Many of the people leaving inner Bay Area counties are moving to adjacent counties, such as Solano, Sonoma, Sacramento, Santa Cruz, San Joaquin, San Benito and Stanislaus Counties. Many of those people almost certainly continue to work within the metro area. To some degree, the Bay Area economic zone is expanding geographically, not declining.

The Bay Area over the past 7 years has been one of the greatest new-wealth creation machines in history. With the recent Dropbox IPO, it seems to be cranking into gear again – and there are still dozens of other local unicorns such as Uber, Pinterest, Airbnb, Palantir, with total values in the hundreds of billions of dollars – that could yet go public. Uber has already stated its desire to do so in the near future.

A substantial portion of those leaving the Bay area are retirees, cashing out on high home prices to move to less expensive locales, such as other counties in California, and Nevada, Arizona and Oregon. This is not a new phenomenon, as it has been going on for decades, though it may have accelerated in recent years, since cashing out has become so much more lucrative.

Most of those coming to the Bay Area are coming for new jobs, and the Bay Area remains a magnet for many of the best and the brightest around the world. Besides which, every year, thousands of Bay Area students graduate from schools like UC Berkeley, UCSF and Stanford, to take jobs locally as well. Economically, the Bay Area is trading many residents who are, to a large degree, checking out of the economy for people in the prime of their working lives.

Millions of square feet of new commercial office space continue to be snapped up as soon as they come on market, even before the buildings are finished, and the only possible reasons are new businesses arriving and existing businesses expanding, both of which are fueled by continued hiring.

The Bay Area certainly has substantial challenges to face and it is not sure it will overcome its problems. And it is true that people and businesses are moving out in greater numbers than any time since 2002. But, on the other hand, start-ups continue to start up by the hundreds, local business continue to expand, and the Bay Area undoubtedly remains one of the most innovative and dynamic economies in the world. And despite all its faults and problems, it is still, in my opinion, one of the great metropolitan areas and best places to live on the planet.

Other reports you might find interesting:

Positive & Negative Factors in Bay Area Markets
Changing California Migration Trends
30+ Years of Bay Area Real Estate Cycles
Survey of Bay Area Real Estate Markets
All Paragon reports can be found here

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.

© 2018 Paragon Real Estate Group

A Selection of Charts about Debt

Most of the charts below come from the Federal Reserve Bank of St. Louis. We have not had time to comment on each chart and what we believe its significance to be (and, in any case, we are probably unqualified to do so), but you might still find them interesting. Increasing debt levels often play an enormous role in financial cycles. In our view, the increasing amounts of debt being taken on within the country and worldwide (both at historic highs) is dangerous, however historically low interest rates have greatly ameliorated the effects. If rates rise significantly, then high levels of debt can easily become economically destabilizing.

The first 2 charts look at short- and long-term mortgage interest rate trends because they massively influence the financial effect of debt.The third is on consumer confidence, because increasing confidence often leads to taking on higher levels of debt, and “irrational exuberance” often leads to taking on untenable levels of debt. Then the report dives into national, corporate and household debt statistics.

Mortgage Interest Rates
Short-Term Trends

Long-Term Trends

Consumer Confidence

National Debt

U.S. Corporate Debt

Investor (Margin) Debt

Household Debt Statistics

Household Debt Statistics for Selected States

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.

© 2018 Paragon Real Estate Group

Long-Term Trends in San Francisco Real Estate

The great advantage of reviewing annual data is how often the market trend lines clarify into a straightforward dynamic, instead of the constant up and down fluctuations often seen in monthly or quarterly data charts. (Monthly data is constantly being abused by the media, when proper context is not given.) It is similar to standing back to look at a broad view of terrain as opposed to focusing on the one small piece that is right in front of your shoe.

Among other advantages, annual trend lines track greater amounts of data, which usually adds to reliability, and also avoid the fluctuating effects of seasonality on real estate markets. However, we also have dozens of charts that look at monthly and quarterly data, sometimes specifically to illustrate seasonality, but those analyses are in other reports.

All our Bay Area real estate market analyses can be found here: Paragon Reports

Median Price Changes
A Selection of Angles & Presentations

We have many more annual appreciation charts on individual San Francisco neighborhoods and Bay Area cities, which can be found here: Paragon Market Statistics & Analysis

S&P Case-Shiller Bay Area Home Price Index Trends

Case-Shiller does not use median prices to determine appreciation, but instead uses its own proprietary algorithm. The numbers on Case-Shiller charts refer to home prices when compared to a January 2000 home price of 100. Thus if at some point after 2000, the chart number is 150, that signifies 50% home price appreciation since January 2000. Case-Shiller uses a 5-county metro area in its San Francisco analyses. Needless to say, this includes a huge variety of different housing markets.

We probably have 10 charts illustrating Case-Shiller data. This one below breaks out appreciation and depreciation trends by price segment, dividing the market into thirds by number of sales. The reason why this is particularly important recently is that during the subprime bubble and the resulting crash, different price segments had bubbles, crashes and recoveries of hugely different magnitudes, mostly depending on how they were affected by subprime financing, foreclosures and distressed property sales.

Our full report: S&P Case-Shiller Index for SF Metro Area

 

Inventory & Sales Trends

Housing Affordability Trends

Our full report: Bay Area Housing Affordability

 

Luxury Home Market Sales Trends

Our full report is here: San Francisco Luxury Home Market Report

 

Mortgage Interest Rate Trends

Annual General Market Dynamics Trends

Looking at annual trends of a variety major real estate market measures, one is struck by how the different analyses reflect virtually the exact same market dynamics over the past 6 or 7 years, heating up as the market came out of the recession, and then cooling or plateauing in 2016 after market heat peaked in 2015. When multiple statistics line up like this, the data is considered much more meaningful and reliable. However, remember that the San Francisco and Bay Area markets are made up of many distinct segments, and it’s not unusual for the trends in specific segments (prices, locations, property types) to, at times, go in different directions at varying speeds.

Depending on the statistic, a trend line moving up might signify either a market heating up or one cooling down, and vice versa.

Residential Multi-Unit Median Price Trends

Our complete report: San Francisco Bay Area Apartment Building Report

 

Other Economic or Demographic Trends

Selected Factors behind the Real Estate Market

Annual Sales Volume Trends

Much more information can be found on our main reports page:

Paragon Market Statistics & Analysis
Using, Understanding and Evaluating Real Estate Statistics  

It is impossible to know how median and average value statistics apply to any particular home without a specific comparative market analysis, which we are happy to provide upon request.

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.

© 2018 Paragon Real Estate Group

No Let Up in SF Real Estate Market – a Paragon Report

So far in 2018, the market seems to have brushed aside any concerns about increasing home prices, rising interest rates, and new federal tax law changes. It is still very early in the year to come to definitive conclusions about where the year is going, but right now, in most market segments, buyer demand is competing ferociously for a limited supply of listings. This is especially true in the more affordable home segments, and particularly for house listings. The situation is somewhat more complicated in the highest price ranges, especially in the luxury condo segment where supply has been rapidly increasing. Of course, whatever the property type or price segment, it all ultimately depends on the specific property, and its location, appeal, preparation, marketing and pricing.

As an example of what is going on so far in 2018, our dollar volume SF home sales here at Paragon is up 38% for January and February as compared to last year, though admittedly we are outperforming the general market, which is still up by 8% (per Broker Metrics for MLS sales).

San Francisco Median Home Price Appreciation
Year-over-Year Comparisons since 2005

San Francisco year over year median home price appreciation

San Francisco Price per Sq.Ft. Appreciation
Year-over-Year Comparisons since 2005

San Francisco Average Dollar per Square Foot Appreciation

These first two charts above compare year-over-year median and average home values for the same 3-month period, December through February, since 2005. For the past 3 years, appreciation for houses has dramatically outpaced that for condos. This is mostly a factor of supply as new-construction condos have poured onto the market, while the supply of house listings has continued to dwindle in the face of high demand.

We are not enthusiastic about monthly median price movements since they tend to bounce around without great meaningfulness due to a number of factors, and sales volumes are very low in the first 2 months of the year, but, for what it is worth, the SF median house price soared to a new high in February 2018 to $1,715,000 (100 sales across 70-odd neighborhoods, reported to MLS by 3/7/18 – late reported sales may affect this price). Monthly median condo prices have generally been jogging up and down within a relatively narrow range since 2015. Chart: Chart: SF Monthly House & Condo Median Sales Prices

Appreciation by San Francisco District
by Year since 2004

The next 2 charts glance at house value appreciation in a few major districts around the city, from most affordable to more expensive to most expensive. As mentioned before, houses in more affordable neighborhoods have seen the most competitive market dynamic, and most consistent appreciation, in recent years.

It can be challenging to measure appreciation in the most expensive price segments, because, firstly, there are not that many sales, and secondly, because of the huge range of sales prices within those segments ($3m to $30m for luxury houses in SF; $2m to $22m for condos and co-ops), but it may well be that their values have mostly plateaued since 2015, or in some instances, ticked down. This can be seen in the second chart below with average dollar per square foot values declining a little in the most expensive house district in the city, Pacific Heights-Marina. But, again, it all depends on the specific property, its location and circumstances.

Median House Sales Prices by District

Average Price per Square Foot House Values

Pacific Heights -Noe Valley- Sunset Average Dollar per Square Foot

We have hundreds of other analyses on San Francisco neighborhood house and condo prices and appreciation trends: SF Neighborhood Values & SF Neighborhood Appreciation Trends.

Or simply contact us regarding the neighborhoods you are specifically interested in.

San Francisco Luxury Home Market

Luxury home sales started off very strong in 2018, but the supply and demand dynamics are softer than in the general market. In the ultra-luxury condo market, in those neighborhoods where new, high-price condo construction is concentrated, supply is now outpacing demand. We just did a massive update of our luxury home analysis and it can be found in its entirety here: Paragon Luxury Market Report.

Below are a few samples of charts in the complete report.

Year-over-Year Sales Comparisons
First 6 Weeks of the Year

San Francisco Luxury Home Sales 2018 YTD

Active Luxury House Listings by District

San Francisco Luxury House Listings

SF Luxury House Sales by Era of Construction

San Francisco Luxury House Sales - Era of Construction

Active Luxury Condo & Co-op Listings by District

San Francisco Luxury Condo Listings

Supply & Demand: Ultra-Luxury Condos & Co-ops

San Francisco Ultra-luxury condo market

Long-Term Trends in Inventory

Only about 2% of house owners are putting their homes on the market each year, which is incredibly low by historical measures. About 5% of condo owners sell their homes each year, plus the new-construction condos that come on the market. This dynamic has made houses into the scarce commodity, and has fueled dramatic house price appreciation.

New Listings Coming on Market
Long-Term Trends

Active Listings on Market at End of Month
Long-Term Trends

Short-Term Trends: Seasonality

We are just heading now into the biggest sales season of the year, running from March through mid-June. The real estate market in the city is significantly affected by seasonality, and the luxury segment is even more fiercely affected. We shall also see if rising interest rates (if they continue to rise) or the changes in the federal tax law start to have any significant dampening effects on demand.

Listings Accepting Offers (Going into Contract)
General Market

New Listings Coming on Market
Luxury Home Market

Selected Supply & Demand Statistics

The following charts illustrate 3 of the classic indicators of market heat, and all of them speak to the feverish real estate market we have seen so far in 2018. However, the market is clearly hottest in the non-luxury price segment, and cooler in the highest price ranges, which is illustrated in the fourth chart below.

Average Days on Market
Year-over-Year Comparisons

Percentage of Listings Accepting Offers
by Month

Months Supply of Inventory (MSI)
Year-over-Year Comparisons

Months Supply of Inventory (MSI)
by Property Type & Price Segment

The market is softer in the highest price ranges especially for the most expensive condos

Average $/Sq.Ft. Value by House Size

All things being equal, house size and price per square foot go in opposite directions, i.e. a smaller house will sell for a lower sales price but a higher dollar per square foot value. This has to do with land value and the cost of systems, kitchens and baths. This is why, comparing two periods of time, it is possible that median sales prices can go up while dollar per square foot values go down, or there is a significant mismatch in the appreciation rates – the average size of the houses sold significantly changed between the periods, which happens sometimes. The charts below are of 2 districts with both a good number of sales and relatively homogenous values within the district.

In both the cases below, the difference in price per square foot between smaller houses and the largest houses runs about $200, or about a 15% to 20% difference.

The above effect does not always apply: For example, in Pacific Heights, the biggest houses are also often in the most prestigious locations with the best views, and so command a premium in price per square foot despite their size. And this often does not apply to condo sales, because bigger units are often built higher up in the building, with more expensive finishes, delivering better (or staggering) views, and thus selling for higher $/sq.ft. values.

Rising Mortgage Interest Rates
Short-Term Trends

Long-Term Trends

Long-Term Mortgage Interest Rate Trends

Debt in America

One of the macro-economic factors of concern is that debt levels, of virtually every kind, are hitting new highs in the country (and in the world). This has been heavily subsidized by the historically low interest rates prevailing in recent years, but rates appear to be headed upward, and increasing debt often plays a big role in market cycles.

Debt Taken On to Invest in Financial Markets
(Often a Sign of Investor Over-Exuberance)

Household Non-Housing Debt
Credit Cards, Student Loans, Car Financing

Household Mortgage Debt Service Ratio

The amount of total mortgage debt in the country is now about the same as at its last peak in 2008 (not illustrated on this chart), but because of the plunge in interest rates since then, the ratio of mortgage debt service to disposable income was close to an all-time low in mid-2017. Interest rates have been rising since then, but are still about 30% lower than in 2007. The good news is that so much of mortgage debt in America is now in fixed-rate loans at very low interest rates, which adds much stability to economic conditions, a stability grievously lacking at the time of the 2008 financial markets crash.

Link to additional charts on debt

Additional reading for those interested:

Paragon Main Real Estate Reports Page
Positive & Negative Factors in Bay Area Markets
Survey of Bay Area Real Estate Markets
San Francisco & Bay Area Demographics

Please let us know if you have questions or we can be of assistance in any other way.
Information on neighborhoods not included in this report is readily available.

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. Late-reported MLS activity may change certain statistics to some small degree.

© 2018 Paragon Real Estate Group

San Francisco Bay Area S&P Case-Shiller Home Price Index

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 .

Short-Term Trend: Past 12 Months 

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.

Low-Price Tier Homes: Under approximately $685,000 
Huge subprime bubble (170% appreciation, 2000 – 2006) & huge crash (60% decline, 2008 – 2011). Strong recovery and has just recently popped a tad above 2006-07 peak values. Currently appreciating more quickly than other price tiers.

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.

San Francisco, Marin and Central Contra Costa
Median Sales Price Trends
Looking just at the city of San Francisco itself, which has, generally speaking, among the highest home prices in the 5-county metro area (and the country): many of its neighborhoods are now blowing past previous peak values. This chart shows both house and condo values, while the C-S charts used above are for house sales only. Median prices are affected by other factors besides changes in values, including seasonality, new construction projects hitting the market, inventory available to purchase, and significant changes in the distressed and luxury home segments.

Marin County

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

San Francisco Luxury Home Market Report

After cooling somewhat in late 2015 and 2016, the San Francisco luxury home market bounced back in 2017 to hit new highs in the number of sales.

Note: Our report online contains several dozen updated analyses of the San Francisco luxury and ultra-luxury house and condo markets, of which this newsletter contains a relatively small sample. The full report is here: Paragon SF Luxury Home Report.

Increasing Sales Volumes
in 2017 and in 2018 YTD

Lux-SFD-3m_Condo-etc-1850_Sales_12-Month-Rolling.jpgLuxHome_YoY_Sales-Comp_first-6-weeks_since-2013.jpg

So far in 2018, SF luxury home sales have been quite strong, higher than in any previous year since the recovery began in 2012. The recent stock market volatility notwithstanding, the economic confidence that has been sweeping the nation is also showing up in our luxury home markets. For example, as of February 16th, the sales of condos, co-ops and TICs at prices of $2m and above has jumped 55% in the city, year over year, and luxury houses by 19%. However, year-to-date data is very preliminary and much more will be known once the spring selling season really gets started in earnest. Also, if the recent financial market volatility continues and becomes even more dramatic, that may cool high-end home markets (and IPO activity) as it has in the past.

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Supply Growing Faster than Demand

Ultra-Lux-SFD-Avgs_Active-vs-Sales_since-2005_12-month-rolling.jpgUltra-Lux-Condo-etc-Avgs_Active-vs-Sales_since-2005_12-month-rolling.jpgExpired-to-Sales-Ratio_by-Prop-Type_Price-Segment.jpg

However, behind the positive sales statistics, inventory statistics provide a note of caution, especially for what we call the ultra-luxury home segments: houses selling for $5m+ and condos and co-ops selling for $3m+. In those segments, the supply of listings has been surging beyond demand, and many of these listings are expiring without selling. As an example of the supply and demand disconnect, ultra-luxury home sales make up about 2.5% of total MLS sales, but as of late February, they made up 12% of active SF MLS home listings (no offer yet accepted).

A big wildcard in this dynamic is the new luxury condo projects currently on market, under construction and planned. They dramatically swell supply in those areas where they are concentrated. It will be interesting to see if there is enough inherent demand to absorb, in the near future, the increasing supply of $3m, $5m and sometimes $10m+ condos. There have even been recent attempts to sell new penthouse condos in the $40 million price range. (Note: New-project marketing companies often try to keep their sales activity confidential, which can make it difficult to know exactly how well their most expensive units are selling.)

This does not mean that some very expensive houses and condos are not selling very quickly for well over asking price, as some certainly are. It all depends on the property, its specific location, appeal, preparation, marketing and, of course, pricing. Different neighborhoods are often experiencing different market conditions, some much stronger than others. This is discussed in much greater detail in the full report online.

Market Seasonality

The luxury real estate market in San Francisco is intensely seasonal. As illustrated by the 2 charts below, the high-price market wakes up and heats up as the new year gets going, with spring typically being the most active season overall for sales. It then slows way down in mid-summer, spikes back up dramatically for the short autumn selling season, and then plunges for the mid-winter holiday period.

Note the delay between new listings coming on market and listings accepting offers: For example, September is typically the single month with the highest number of new listings, leading to the big October spike of listings going into contract. Sales then usually close 3 to 5 weeks after going into contract. Right now is the period when new luxury listings start pouring on the market for the spring season.

LuxHome_2500-Plus_SFD-Condo_Co-op_New-Listings_by-Month.jpgLuxHome_Units-UC_by-Month-V2-Area-Chart.jpg

New Listings Coming on Market
Long-Term Trends since 2005, 12-Month Rolling Figures

The supply of luxury homes available to purchase plays a huge roll in market dynamics. Supply is affected by 3 large factors: 1) the number of new listings coming on market, 2) how quickly these new listings sell, and 3) how many listings are taken off the market because they cannot find buyers (expired and withdrawn listings). The chart below looks at longer term trends for new listing activity: The number of new listings hitting the market accelerated in early 2016 as the luxury segment was cooling due to financial market volatility (Chinese stock market crash, oil price crash, Brexit vote).

LuxHome_New-Listings_2500-Plus_SFD-Condo_Co-op_12-month-rolling.jpg

Sales & Average Dollar per Sq.Ft. Values

Luxury House Market by District

Sales of houses $3 million and above have soared in the central Noe, Eureka & Cole Valleys district (red line in first chart below) in recent years, to jump ahead of, by a tad, the wealthy, old-prestige, Pacific Heights-Marina district (blue line). These rapidly increasing sales have been fueled by younger, very affluent, high-tech industry buyers, who prefer the lower-key neighborhood ambiance, as well as the proximity to the hot Mission district and to highways south to the peninsula. However, the Pacific Heights district still utterly dominates house sales of $5 million and above – that chart can be found in the full report online – and its houses achieve by far the highest average dollar per square foot values, as illustrated by the blue line in the second chart below.

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Luxury Condo Market by District

The older, high-prestige neighborhoods running across the north of the city from Pacific & Presidio Heights-Marina through Russian, Nob and Telegraph Hills have been dominating the sales of luxury and ultra-luxury condos and co-ops (the top 2 lines in the next chart). The greater South Beach, SoMa, Yerba Buena, Potrero Hill and Mission district (the third, red line) saw its sales plunge from mid-2016 to mid-2017, but has had a significant recovery since. All three of these districts see very high dollar per square foot values (second chart below). And of course, some individual sales see much higher values than the averages.

LuxCondo_Sales-Vol_Top-Districts_12-Month-Rolling.jpgLuxCondo_AvgDolSqFt_Top-Districts_12-Month-Rolling.jpg

How the 2018 market plays out depends on a number of factors that are susceptible to change: financial markets, interest rates, the course of the high-tech boom, whether our big, local start-ups proceed with IPOs, political developments, and so on. (Positive & Negative Factors in Bay Area Markets) For the time being, the San Francisco market appears to be off to a heated start characterized by robust demand. Here at Paragon, our 2018 SF sales volume is up 30% year over year, though admittedly we are outperforming the general market, which is up about 5%.

Again, the full report online contains many more analyses: Paragon SF Luxury Home Report.

All our reports and articles are available here: Paragon Main Reports Page

Please contact us if you have any questions, or we can be of assistance in any other way.

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. Late-reported MLS activity may change certain statistics to some small degree.

© 2018 Paragon Real Estate Group

SF Spring Events Calendar

There are plenty of fun things to enjoy in the city this Spring. Take a peek at these events in our Spring 2018 events guide.

Housing Affordability in the San Francisco Bay Area

The California Association of Realtors recently released its Housing Affordability Index (HAI) for the 4th quarter of 2017, which measures the percentage of households that can afford to buy the median priced single family dwelling (house).

In this analysis, affordability is affected by 3 major factors: county median house price, mortgage interest rates, and the distribution of household incomes within the county. (Housing Affordability Index Methodology). The HAI uses house prices exclusively and if condos were included in the calculation, median home prices would decline, affordability would increase and income requirements and PITI costs would be reduced as well. (SF now has more condo sales than house sales, but that is not the case in other Bay Area counties.)

If the HAI Index incorporates changes to the federal tax code (effective 1/1/18) limiting the deductibility of interest expenses and property taxes, it will presumably have a negative effect on affordability percentages in 2018. By definition, half the homes sold in any given county were at prices below the median sales price, i.e. there were numerous homes that were more affordable than the median prices used in this analysis. However, any way one slices it, the Bay Area has one of the most expensive – if not the most expensive – and least affordable housing markets in the country. That impacts our society and economy in a number of important ways.

Since many of the figures don’t change that much quarter to quarter, we’ve only updated some of the charts in this report with Q4 2017 data.

Link to our Survey of Bay Area County Markets, Trends & Demographics

Link to our Main Reports Page

Long-term Bay Area Housing Affordability Trends

Affordability Percentage by Bay Area County

Note that extremely low affordability readings converged across Bay Area counties at the top of the bubble in 2006-2007. So far, there has not been a similar convergence in our current market, though affordability is generally dropping as prices increase.

Having dropped approximately 40% from 2007 to mid-2016, extremely low interest rates have subsidized increasing home prices to a large degree in recent years – but they’ve begun to rise in early 2018.

San Francisco is still 4 percentage points above its all-time affordability low of 8%, last reached in Q3 2007 (even though its median house price has increased about 50% during that period). Other Bay Area counties (except for Silicon Valley) have appreciably higher affordability percentages, for the time being. Generally speaking, as one moves farther away from the heart of the high-tech boom, San Francisco and Silicon Valley, affordability increases.

Monthly Ownership Cost at Median Sales Price

Minimum Qualifying Income to Buy Median Priced House

Assumes 20% downpayment and including principal, interest,
property tax and insurance costs.

Bay Area Median House Prices

San Francisco-Only Median House Price Appreciation
by Quarter since 2012

Before the high-tech boom, Marin, a famously affluent county for long time, had the highest median house price. But the high-tech boom accelerated median home prices in San Francisco and San Mateo faster and higher.

Additional chart: Median condo sales prices by county

San Francisco has a much larger and more expensive condo market than other local counties, and is the only county with a very substantial luxury condo market – one that is growing significantly with recent new-condo project construction.

U.S. Metro Area Housing Affordability
by the National Association of Realtors
This national affordability chart above employs a different methodology than the CA county charts above: The graphed chart values (percentages) have totally different meanings. The two metro areas at the bottom of the rankings make up 7 counties around the Bay Area.

Mortgage Interest Rates since 1981

Short-Term Changes in Mortgage Interest Rates

Interest rates play an enormous role in affordability via ongoing monthly housing costs, and interest rates, after their recent post-election jump are about 35% lower than in 2007. To a large degree this has subsidized the increase in home prices for many home buyers. It is famously difficult to predict interest rate movements, though there is general agreement. Any substantial increase in interest rates would severely negatively impact already low housing affordability rates.

Income, Affluence & Poverty

Santa Clara, San Mateo and Marin Counties have the highest median household (HH) income in the Bay Area. Though the median HH income figures of these 3 counties are almost double the national figure, their median house prices are 4 to 5 times higher, an indication that income dollars can go a lot farther in other parts of the country than they do here. Indeed an income that in other places puts you close to the top of the local register of affluence, living grandly in a 6-bedroom mansion, in the Bay Area might qualify you as perhaps slightly-upper-middle class, living in an attractive but unostentatious, moderate-sized home that costs twice what the mansion did (though, this being the Bay Area, you are probably still driving a very expensive car).

On the other hand, you live in one of the most beautiful, highly educated, culturally rich, economically dynamic, and open-minded metropolitan areas in the world.

Behind median HH incomes, each county also has enclaves of both extreme wealth and poverty within its borders.

Very generally speaking, in the Bay Area counties, renters typically have a median household income about half that of homeowners. In San Francisco, where the majority of residents are in tenant households, that significantly reduces the overall median HH income figure. The picture of housing affordability for renters in the city is ameliorated or complicated by its strong rent control laws (which, however, don’t impact extremely high market rents for someone newly renting an apartment) .

Additional chart: Homeownership Rates by County

Additional chart: Population Demographics – Children & Residents Living Alone

San Francisco has the lowest percentage of residents under 18 of any major city in the U.S. (It is famously said that there are more dogs in the city than there are children.) It also has an extremely high percentage of residents who live in single-person households – 39% – which is a further factor depressing median household income below markets with similar housing costs.

The Bay Area has approximately 2.8 million households. Of those, approximately 124,000 households have incomes of $500,000 and above, which would generally be considered to place them in the top 1% in the country by annual income. At 7.5%, Marin has the highest percentage of top 1% households, followed by San Mateo at 6.2%. With approximately 38,000 top 1% households, Santa Clara, the Bay Area’s most populous county, has by far the largest number of these very affluent households, while San Francisco has about 22,000.

It should be noted that besides high incomes per se, another factor in the Bay Area housing boom of recent years has been the stupendous generation of trillions of dollars in brand new wealth from soaring high-tech stock market values, stock options and IPOs. Thousands of sudden new millionaires, as well as many more who didn’t quite hit that level, supercharged real estate markets (especially those in the heart of the high-tech boom) as these newly affluent residents looked to buy their first homes, perhaps with all cash, or upgrade from existing ones. That is something not seen in most other areas of the country, certainly not to the degree experienced locally, and is a dynamic outside typical affordability calculations. This increase in new wealth has slowed or even declined in the past 12 months as the high-tech boom has cooled (temporarily or not, as time will tell). Still, there are dozens of local private companies, usually start-ups, some of them very large – such as Uber, Airbnb and Palantir – which are considered to be in the possible-IPO pipeline. If the IPO climate improves and successful IPOs follow, a new surge of newly affluent home buyers may follow.

Additional chart: Bay Area Populations by County

A look at two very different income segments in the Bay Area, those households making less than $35,000 and those making more than $200,000. The $35,000 threshold is not an ironclad definition of poverty, especially since housing costs (by area, and whether market rate, subsidized or rent-controlled), household sizes and personal circumstances vary widely, though it is clearly difficult for most area families trying to live on that income. At over 25%, San Francisco has the highest percentage of households with incomes under $35,000 and, at 22%, Marin has the highest percentage making $200,000 and above.

Amid all the staggering affluence in the Bay Area, and huge amounts of new wealth generated by our recent high-tech boom, very significant percentages of the population still live in poverty, especially if our extremely high housing costs are factored into the calculation. (The above chart calculates poverty rates by different criteria, the higher one factoring in local costs of living.) The economic boom has helped them if it resulted in new, better paying jobs, unfortunately not as common a phenomenon as one would wish for the least affluent. It hurt them, sometimes harshly, if their housing costs escalated with the increase in market rates.

Longer-Term Trends in Prices and Rents
The same economic and demographic forces have been putting
pressure on both home prices and apartment rents.

Bay Area Median House Prices since 1990

If one looks at charts graphing affordability percentages, home prices, market rents, hiring/employment trends and to some degree even stock market trends, one sees how often major economic indicators move up or down in parallel.

Monthly Rental Housing Costs

The recent economic boom has added approximately 600,000 new jobs in the Bay Area over the past 6 years, with about 100,000 in San Francisco alone – with a corresponding surge in county populations. Most new arrivals look to rent before considering the possibility of buying. The affordability challenges for renters (unless ameliorated by rent control or subsidized rates) has probably been even greater than that for buyers, since renters don’t benefit from any significant tax benefits, from the extremely low, long-term interest rates, or by home-price appreciation trends increasing the value of their homes (and their net worth). In fact, housing-price appreciation usually only increases rents without any corresponding financial advantage to the tenant. Rents in the city have been plateauing in recent quarters and may even be beginning to decline as the hiring frenzy has slowed and an influx of new apartment buildings have come onto the market – but they are still the highest in the country.

Bay Area Rent Report

Affordable Housing Stock & Construction in San Francisco

Additional Chart: Affordable Housing Construction Trends in San Francisco

There may be no bigger political and social issue in San Francisco right now than the supply (or lack) of affordable housing: Battles are being fought, continuously and furiously, in the Board of Supervisors, at the ballot box and the Planning Department by a wide variety of highly-committed interests, from tenants’ rights and neighborhood groups to anti-growth factions and developers (to name a few). It is an extremely complicated and difficult-to-resolve issue, especially exacerbated by nimby-ism and the high cost of construction in the city. SPUR, a local non-profit dedicated to Bay Area civic planning policy, estimated in 2014 that the cost to build an 800 square foot, below-market-rate unit in a 100-unit project in San Francisco was $469,800 – and we have seen higher estimates as well.

This fascinating graphic above, based on SF Controller’s Office estimates from late 2013, breaks down SF housing supply by rental and ownership units, and further divides rental by those under rent control. All the units labeled supportive, deed restricted and public housing could be considered affordable housing to one degree or another, i.e. by their fundamental nature their residents are not paying and will never pay market-rate housing costs. (Units under rent control will typically go to market rate upon vacancy and re-rental, though rent increases will then be limited going forward.) Adjusted for recent construction, there are roughly 34,500 of these units out of the city total of about 382,500, or a little over 9% of housing stock. Section 8 subsidized housing would add another 9,000 units.

There are currently many thousands of affordable housing units, of all kinds, somewhere in the long-term SF Planning Department pipeline of new construction, though many of them are in giant projects like Treasure Island and Candlestick Park/Hunter’s Point, which may be decades in the building. But it is generally agreed that new supply will never come close to meeting the massive demand for affordable housing, further complicated by the question of what exactly affordable means in a city with a median home price 5 times the national median, typically well beyond the means of people such as teachers and members of the police force. One corollary of increasing affordable housing contribution requirements for developers and extremely high building costs is that developers are concentrating on building very expensive market-rate units – luxury and ultra-luxury condos and apartments – to make up the difference.

Other reports you might find interesting:

Survey of SF Bay Area Real Estate Markets

10 Factors behind the San Francisco Real Estate Market

30+ Years of San Francisco Bay Area Real Estate Cycles

San Francisco Neighborhood Affordability

All our analyses can be found here: Paragon Market Reports 

Our sincere gratitude to Leslie Appleton-Young, VP & Chief Economist, Oscar Wei, Senior Economist, and Azad Amir-Ghassemi, research analyst, of the California Association of Realtors, for their gracious assistance in supplying underlying data for the CAR Housing Affordability Index calculations.

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 general estimates and approximations.

© 2018 Paragon Real Estate Group  

A Survey of San Francisco Bay Area Real Estate Markets

Our newly updated median home price maps for the entire Bay Area by city, for San Francisco by neighborhood, and then specifically for the Marin, Diablo Valley & Lamorinda, and Wine Country markets. To access them, click on the map image below and then roll your cursor over the maps on the webpage.

Bay Area Q4 2017 Median House Sales Prices

San Francisco Bay Area Median Home Sales Prices

Bay Area 2017 Median Condo Sales Prices

San Francisco Bay Area Condo Median Prices

One cannot draw many conclusions regarding the new year market by looking at January data, whose low volume of sales mostly reflects offers accepted in December, however, so far, it appears that the low-inventory/ strong-buyer-demand dynamic is continuing in 2018. One recurring situation in recent years is that buyers jump back into the market in January in larger numbers than sellers getting their homes listed to sell – setting up a mismatch between supply and demand. Typically, many more listings will start pouring onto the market in February and March, and a much better idea regarding where the market is heading in 2018 will be possible once spring selling season data starts coming in.

Since questions constantly arise as to how one development or another is affecting or may affect Bay Area real estate markets – new tax laws, the high-tech boom, interest rates, financial markets, new home construction, climate change, and so on – our chief market analyst has made an attempt to identify and quantify the factors currently at play: Positive & Negative Factors in Bay Area Real Estate Markets

This report will focus on Bay Area trends, but if you are more interested in the San Francisco market specifically, analysis is available via these links: SF Neighborhood Affordability *** SF Neighborhood Price Trends *** Our Latest SF Market Report

Year-over-Year Home Price Appreciation Rates
Comparing 2017 Median Sales Prices to 2016 Prices

San Francisco Bay Area Home Price Appreciation

Additional chart: Bay Area Median Home Price Appreciation since 1990

Average Dollar per Square Foot Values
& What You Get for $1 Million in the Bay Area

San Francisco Bay Area Dollar per square foot values

Your great aunt gives you a check for a million dollars to buy a home, so you go down to the real estate store to fill your cart. Below are some examples of how much home you would get for your money at 2017 average dollar per square foot rates: In Palo Alto, you could buy 626 square feet of home, and in Vallejo, 3817 square feet, with many other options in between.

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Bay Area Luxury Home Markets

Though San Francisco is a major player in luxury home sales, Silicon Valley – Santa Clara & San Mateo Counties together – has over 3.5 times as many homes selling for $2m and above. All 3 counties have similar average dollar per square foot house values in this high-price category. SF dominates the luxury condo market, and these condos, on average, sell at the highest per square foot values in the Bay Area. Marin, Alameda and central Contra Costa Counties have smaller luxury home segments, but you start to get more for your money.

Bay-Area_LuxHome-Sales_2m-plus_by-County.jpg

Market Dynamics Overviews

Bay-Area-All-Home-Sales-by-County.jpg

The decline in active listings available to purchase has played a significant role in pressurizing the market in recent years, especially as buyer demand has increased over the same period during which supply has dropped.

Bay-Area_Active-Listings_since-2012_NAR.jpg

Since median sales prices are so often quoted and compared, it adds context to look at the average size of houses in the different markets. (Comparing median prices to average sizes is not ideal, but you get the idea.)

Bay-Area_Avg-House-Size_by-County.jpg

New Housing Construction

This chart below from the November 2017 Housing Inventory Report issued by the SF Planning Department is for 2016, but illustrates how new housing construction in Alameda County has recently accelerated ahead of San Francisco and Santa Clara. Our larger analysis of this report, which focuses mostly on San Francisco, can be found here: SF New Home Construction Report

New-Construction_by-County.jpg

Days on Market, Overbidding Asking Prices
& Months Supply of Inventory

Bay-Area_Days-on-Market_by-County.jpg

Bay-Area_SP-OP-without-price-reduction.jpg

Bay-Area_MSI-Trends_SFD-Condo.jpg

Interest Rate Trends

Interest rate changes will certainly be one of the main factors to keep an eye on in 2018, as they play a huge role in housing affordability.

Short-term_30-Year-Rate-Trends.jpg

Bay Area Unemployment Rate Trends

Bay-Area_Unemployment-Rates.jpg

Bay Area Housing Affordability Trends

The CAR Housing Affordability Index, of which the trend lines since 1991 are charted below, estimates the percentage of households who can afford to purchase a median priced house in their county, based on a 20% downpayment. The big factors in this analysis are prevailing household incomes, interest rates, and, of course, quarterly median house sales prices. It should be noted that half of home sales are, by definition, below the median sales price, and that if one included condos in the equation, that would add substantially to affordability percentages.

For Q1 2018, the Index will attempt to factor in the effects of the new federal income tax law limiting mortgage interest, property tax and state income tax deductions, which will presumably reduce affordability percentages further. As seen below, many Bay Area counties are already getting close to historic lows, clearly one of our biggest social and economic challenges.

Affordability_Bay-Area-Counties_Chart.jpg

County to County, Metro Area to Metro Area
& State to State Migration Trends
Bay Area County-to-County Migration

Though people from all over the country and world migrate to and from the Bay Area, the greatest flow is actually between the local counties themselves. In net migration numbers, amid all the back and forth, people are, generally speaking, flowing from the core, most expensive counties to adjacent, somewhat less expensive counties, and then to even more affordable counties outside the inner Bay Area. However, the inner core counties, where the high-tech boom has been most concentrated, attract significant immigration from outside the Bay Area, state and U.S., which is why their population numbers have continued to grow. Note: This chart does not include Santa Clara County, though much of its migration patterns can be seen in the data of the other counties.

Bay-Area_County-to-County_Annual-Migration.jpg

U.S. Metro Area to Metro Area Migration

This chart pertains to immigration in and out of the 5-county San Francisco metro area, which does not include Santa Clara to its south. Between U.S. metro areas, more people are leaving the SF metro than arriving, but that deficit has been more than made up for by substantial numbers of foreign immigrants. These numbers, however, pre-date the much more hostile view of immigration by the current administration, so we will have to wait and see what effects derive from that change. Looking at net metro-area migration, more people come to the SF metro area from Santa Clara County, Southern California, New York, Chicago and Boston. And more people leave the SF metro area to go to other (less expensive) CA counties east and north of the Bay Area, and to metro areas in Texas, Nevada, Oregon and Washington State. The exodus is made up of both people changing jobs, and retirees, though they tend to go to different places.

Bay-Area-Migration-Trends.jpg

If you want to read about state to state migration patterns, our recent article is here: California Migration Trends

All our Bay Area reports and articles can be found here: Market Trends & Analysis

One of our recent and popular reports: San Francisco & Bay Area Demographics

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 the Bay Area, each with its own unique dynamics. Median prices can be and often are affected by other factors besides changes in fair market value, and longer term trends are much more meaningful than short-term. It is impossible to know how median prices apply to any particular home without a specific comparative market analysis. All numbers in this report are to be considered approximate.

© 2018 Paragon Real Estate Group

Positive & Negative Factors in Bay Area Real Estate Markets

I am often asked how one development or another might affect SF and Bay Area real estate markets – tax law changes, interest rates, soaring stock markets, foreign buyers, migration trends, housing affordability, climate change, new home construction, and so on – but trying to evaluate one factor in isolation is often misleading because multiple factors often gang up to trigger a change, or 1 factor counteracts or ameliorates the effect of another. Or a single development has both positive and negative influences. I created this analysis in an attempt to organize my own thoughts on the possible impact of various factors on the market, and it is very much a work in progress.

I do not know how these factors will ultimately play out, which factors will become dominant and which will fade into irrelevance, or what new factors will arise. Circumstances will change, requiring re-evaluation of the thoughts below. As to market cycles, I have learned over the past 30+ years that booms can go on much longer than one would expect, or get second winds, and negative adjustments can arrive suddenly from unexpected directions. These adjustments can be of varying scale, in the nature of a dramatic crash (or bubble popping), the slow deflation of an over-pumped football, or a combination of the two. In periods of irrational exuberance – and I am not saying we are in one (though a review of history implies its inevitable arrival someday) – there are always many who insist it is not irrational (this time). One thing is clear from multiple studies on forecasting: Most predictions made by analysts, economists and other “experts” turn out to be off the mark, get the timing wrong, or are fundamentally mistaken. There are just too many moving parts in the world today – economic, political, social, technological and ecological, many of which are not even on our radar screens – for any reasonable claims to certainty.

The order in which these factors are discussed do not necessarily reflect an opinion of their importance.

– by Patrick Carlisle, Chief Market Analyst

The Bay Area Economy

Positive angles: The Bay Area economy is probably stronger than it has ever been, and is possibly the most innovative and dynamic economy in the world. It is the high-tech (bio-tech, fin-tech) capital of the world, as well as being a major financial center. It is home to some of the biggest and most fabulously profitable companies on the planet. Employment and affluence have soared stupendously in past 7 years. In many Bay Area counties, unemployment rates hit historic lows at the end of 2017.

Negative: Not all Bay Area residents have participated in the benefits of the economic boom; income inequality is increasing; and over-exuberance in the local economy could be subject to correction – this could reverse employment gains, as occurred 2001 – 2005, during which SF employment declined by 70,000. I am not implying the situation today is parallel: There are material differences between the dotcom boom and the current high-tech boom, but, of course, there are also similarities. (There is nothing like sudden, spectacular wealth to generate hubris of similar proportions.)

Start-Ups & Possible Future IPOs

Positive: New start-up companies seem to open every week and start-ups add fantastic dynamism to the local economy. The potential for dozens of large, local companies to go public could inject enormous amounts of new wealth into the economy and housing markets. New wealth creation over the past 6-7 years has been one of the decisive factors in the Bay Area economy.

Negative: If investor and venture capitalist confidence suddenly collapses due to national or international events, as has occurred in the past, it will have adverse effects on currently unprofitable start-ups with negative cash flows and insufficient reserves.

Financial Markets

Positive angles: Soaring stock markets have been substantially increasing wealth and the sense of affluence, which fuels consumer confidence and housing markets.

Negative: Some analysts see dangerous signs of rational confidence tipping into irrational exuberance, which can have severely negative economic and social ramifications.* Even financial market volatility can have a chilling effect on real estate markets, especially at the high-end since the affluent are generally much more invested in, and sensitive to, financial markets.

* Note: It can be very challenging to determine the point at which rational confidence shifts into irrational exuberance. And in retrospect, the duration of the period of irrational market exuberance, when gains often accelerate into the stratosphere, typically seems utterly incomprehensible: “How could anyone have thought that this made sense?” Such are the pleasures of hindsight.

Interest Rates

Positive: Rates dropped 40% to 45% from 2007 to mid-2016, and remain very low today when compared to historical norms over the past 40 years. Interest rates play a critical role in the ongoing cost of housing and housing-purchase affordability, and lower rates have subsidized much of the home price increases since 2011.

Negative: As of early February, rates have been recently increasing and may be poised for further increases – potentially, a major impact on housing affordability at a time when affordability is already flirting with historic lows. (Fear of impending increases can motivate buyers to act now, which played a role in early 2017 market dynamics.) Per Freddie Mac, as of 2/1/18, the average rate for conforming 30-year loans was 4.22%, and it currently forecasts that interest rates for 2018 shall average 4.5%. This would be almost 30% higher than in mid-2016 and about 15% higher than in mid-2017. As points of reference, rates averaged 6.3% in 2007, 8% in 2000, and 10% in 1990.

Note that interest rate changes are extremely hard to predict, and forecasts have been more frequently wrong than right over the past 10 years.

Low & Diminishing Housing Affordability

Negative: A huge social and economic problem that increases poverty levels, puts terrible stress on many normal working people and families, and encourages resident and business relocation. It also discourages relocation into the area by job seekers evaluating options in other locations, and puts local business at a competitive disadvantage when recruiting talent. It can also discourage start-ups from starting up here. There are many other areas of North America, with less expensive housing costs, actively soliciting both start-ups and established businesses to locate there, or relocate there from the Bay Area.

Migration Trends

Positive: The Bay Area has become a magnet for the best and the brightest from all over the world. Local employment growth in the past 7 years (600,000+), generally of high-skill, high-pay jobs, has been nothing short of staggering. This has played a definitive role in the economy and in home price appreciation experienced since the recovery began in 2012.

Negative: More people are now moving out of California to other states than moving into CA from other states, per U.S. census data for 2016 (which is before new federal tax law changes discussed further below). The scale of foreignimmigration into the state and Bay Area in recent years has far exceeded the state-to-state deficit – but that was before federal policy turned distinctly hostile to immigration in 2017. As much of the Bay Area’s population growth, and economic and cultural dynamism has been fueled by immigration – currently about a third of Bay Area residents are foreign born – a reversal would certainly be an adverse factor.

Link to our article on migration trends

New Federal Income Tax Law

Positive: Residents who have not itemized mortgage interest or state income and local property tax deductions in the past, will probably see reductions in their federal income taxes. New corporate tax law may make local businesses more profitable and more valuable, which might lead to income and/or wealth gains for their employees – which would then feed into the local economy. Heightened corporate profitability might also fuel further technological innovation and increase investment in local communities, both business related and in charitable and social improvement efforts.

The new tax law also has substantial benefits for some real estate investors, depending on their legal structure.

Negative: New federal tax law limiting the deductibility of mortgage interest and state and local taxes appreciably reduces some of the financial incentives of homeownership, and for for many Bay Area residents will raise the cost of living, and specifically the cost of housing. Making the most expensive U.S. metro area to live in more expensive – and specifically, more expensive in comparison to other places – discourages immigration into the area and encourages resident and business relocation to more affordable metro areas. Note: the CA legislature is looking for ways to blunt the effect of these federal income tax changes, however it is unknown to what degree they will succeed in light of the antagonism of the political party in power in Washington.

The new tax law will reduce the financial incentive to make charitable donations for many residents, which may reduce social services to those in need. It is uncertain how this will play out.

New Construction Boom

Positive: Accelerating residential and commercial construction in the Bay Area adds employment, investment, and business expansion potential, and, if it continues at the current pace, should improve housing affordability: Indeed, the recent boom in apartment construction in the city has already led to an 8-10% drop in rental rates since they peaked in 2015 (though our rents are still the highest in the nation).

Negative: There continue to be high hurdles for developers to get approvals to build, and already high construction costs are increasing: A recent report, by the UC Berkeley Terner Center, said SF had the 2nd highest building costs in the world (after NYC), much of that due to local resistance to and governmental regulation of development, as well as to labor and land costs. New construction is also historically subject to very dramatic boom and bust cycles. Last but not least, some residents believe that further development itself is a negative factor in quality of living.

Infrastructure

Negative: Upgrades in infrastructure have not kept up with the considerable growth in population. This is especially apparent in transportation and the subsequent increase in the time and aggravation related to commuting.

Debt

Positive: Interest rates remain historically low, making debt service less onerous to individuals and businesses.

Negative: In an environment of low interest rates, swelling consumer and business confidence and surging asset values, household debt (mortgage, car, credit card, educational), corporate debt, governmental debt and stock market margin-loan debt are all increasing, while economic optimism and a search for yield has weakened underwriting (risk assessment) standards. Sudden asset-price declines or economic turbulence wreak much greater havoc amid high debt levels. Debt played either a significant or dominant role In the last 3 financial crises: 1989-1990 – junk bonds, S&L crisis, bad commercial-loan underwriting; 2001-2002 – high rates of margin lending coupled with extreme, irrational financial-market exuberance; 2007-2008 – a total abrogation of underwriting standards, debt securitized and widely sold under defective ratings, widespread predatory lending and loan fraud, extreme use of leverage in financial institution investments.

Note that debt and debt levels, and when they reach dangerous levels, are a complex subject on which the writer is very much a layman analyst. Debt levels that seem tenable can abruptly become untenable if asset values suddenly plunge or interest rates jump. Federal governments (or an organization of federal governments like the EU) will sometimes step in to relieve or guarantee corporate or local government debt if default risks destabilizing the general economy.

General International Factors

Positive: The world economy and international financial markets are probably their strongest since 2007 and appear to be improving – with generally positive ramifications for the Bay Area economy.

Negative: International economic and political factors have an increasing impact on national and local conditions, and such factors appear to be becoming more volatile and, recently, antagonistic. Examples of recent negative, but manageable, international events before the new presidency, include the Chinese stock market drop in summer-autumn 2015, the oil-price crash of early 2016, and the Brexit vote in spring 2016, all of which caused significant, though temporary, drops in U.S. financial markets – and led to the SF luxury home market abruptly cooling, venture capitalist confidence and funding dropping, the number of local IPOs plunging, and a decline in local hiring during that period.

Examples of possible future international influences are virtually limitless, from political, social or financial instability in other major economies, to trade wars; technological attacks against our financial, communications, infrastructure and political/election systems; and, worst of all, real wars.

Ecological Factors

Negative: Impossible to predict speed or scale of effects from climate change, but increasing state and local potential for drought, fires and sea level change offers only unhappy longer-term ramifications. Current federal administration maintains policies that will almost certainly exacerbate the problem. And, of course, earthquakes are always a wild-card factor in the state and Bay Area.

Diminishing Frequency of Home Selling

Positive: For existing homeowners: limited supply encourages price appreciation and increases their net worth.

Negative: The considerably reduced supply of homes available to purchase has undesirable ramifications for housing affordability and also dramatically adds to the stress of home buying.

General Local Conditions

Positive: The Bay Area is one of the great economic, social and cultural metro areas of the world, located in a gorgeous setting surrounded by water and park lands, with generally moderate weather, a low nasty-insect ratio, and home to the world-champion Warriors basketball franchise. A great proportion of residents and businesses feel its benefits far outweigh its negatives, and they’re not moving to Texas despite the allure of lower home prices, no state income taxes, a world-class fossil-fuels industry, the right to carry assault rifles in public, and the pleasure of being represented by Senator Ted Cruz in Congress (a lighthearted jab in a longstanding interstate rivalry).

Negative: Significant social and economic changes, including the cost of housing, have, according to several recent polls, increased the percentage of Bay Area residents and businesses considering or willing to consider relocation (though not necessarily in the immediate future). It would be arrogant to argue that other states, and other metro areas such as Seattle, Denver, Portland and Austin, don’t have their own legitimate appeal to businesses, working people, and retirees. (As a matter of fact, according to census figures, more Californians and Bay Area residents are moving to Texas than vice versa – a wake-up call against complacency.)

Other articles or reports you might find interesting:

Economic Context to the SF Real Estate Market – Illustrated
30+ Years of San Francisco Real Estate Cycles
San Francisco & Bay Area Demographics
Is Now a Good Time to Buy?
Paragon Main Market Reports Page

The writer of this analysis is not an economist and some readers may believe him unqualified to comment on some of these topics. This report reflects the opinions of its author, and does not necessarily reflect the opinions of the agents, other managers or principals at Paragon. 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.

© 2018 Paragon Real Estate Group