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.
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.
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.
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.
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.
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.
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.
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) .
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.
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.
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.
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:
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.
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
Bay Area 2017 Median Condo Sales 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
Average Dollar per Square Foot Values
& What You Get for $1 Million in the Bay Area
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.
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.
Market Dynamics Overviews
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.
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.)
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
Days on Market, Overbidding Asking Prices
& Months Supply of Inventory
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.
Bay Area Unemployment Rate Trends
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
The median SF house sales price in 2017 was $1,420,000 (up from $1,325,000 in 2016), and for condos, it was $1,150,000 (up from $1,095,000). Looking just at the 4th quarter, median prices were $1,500,000 for houses (up from $1,350,000 in Q4 2016) and $1,185,000 for condos (up from $1,078,000) respectively.
The chart below, based on S&P Case-Shiller Index data, tracks general price appreciation trends of homes in the upper third of prices in the 5-county SF Metro Area. Case-Shiller does not base their calculations on median sales price changes but uses its own proprietary algorithm. This chart has been simplified to only reflect percentage increases and decreases from various points in real estate cycles. Since it covers 5 counties, it is a very generalized illustration.
Moving into 2018, there are a lot of spinning plates in the air – local, state, national and international factors that could affect markets. 2017 saw real estate markets surge and financial markets soar. After some cooling from mid-2015 to mid-2016, the Bay Area high-tech economy surged back into high speed, with companies leasing enormous spaces in newly built office buildings – which they will presumably fill with new hires. Unemployment rates have flirted with historic lows, and 2018 may see some major local IPOs, which could create great quantities of new wealth. The Bay Area still has probably the most dynamic, innovation-fueled economy in the world and indisputably remains among the great metro areas on the planet – but there are also significant social, economic, political and environmental challenges looming.
Congress delivered an unpleasant holiday present to many Bay Area residents in the form of federal tax law changes limiting the deductibility of mortgage interest and state and local taxes. The effect of these changes make living in an already high cost-of-living area more costly for many residents, and also reduce some of the financial incentives of homeownership, especially for more expensive homes. Predictions on the effect of these tax changes on local housing markets and the business environment range from one extreme (economic devastation) to the other (shrug), and the state legislature is currently working on bills that might blunt the negative financial impacts. It is too early to guess how it will all play out. We live in interesting times.
This January 2018 report will range far and wide looking at real estate, and some economic and demographic issues that impact it. Most of the charts are self-explanatory, so we have kept the text to a minimum. A review of annual, year-over-year, real estate market trends in San Francisco are at the end of this report.
San Francisco Luxury Homes Market
SF Home Prices by Neighborhood
Annual Market Trends
Most of these annual trend charts show the market heating up again in 2017 after some cooling in 2016. Very generally speaking, since 2015, the house market has been hotter than the condo market, and the more affordable neighborhoods hotter than the more expensive. But 2017 was a strong year across virtually all market segments.
All our real estate analyses can be found here: Paragon Market Reports
Information on neighborhoods not included in this report is readily available.
If you will forgive a little celebration on our part: In 2017, Paragon became the largest brokerage in San Francisco by dollar volume sales of residential and multi-unit residential real estate (as reported to MLS, per Broker Metrics). We opened our doors in 2004.
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.
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 October 2017 Index was published at the end of December 2017. Much more information regarding the Index’s methodology can be found on its website.
The 5 counties in our Case-Shiller Metro Statistical Area are San Francisco, Marin, San Mateo, Alameda and Contra Costa. (And we believe the Index generally applies to the other Bay Area counties as well.) There are many, vastly different real estate markets found in such a broad region, moving at different speeds, sometimes moving in different directions. San Francisco’s single family dwelling (SFD) sales, which are what Case-Shiller measures, are only 7% to 8% of the total SFD sales in the 5-county metro area, while Alameda and Contra Costa make up over 70% of SFD sales.Therefore, the Index is always weighted much more to what is going on in those East Bay markets than in the city itself. (Marin’s percentage is about 7% and San Mateo’s about 14%.) SF makes up a much larger proportion of condo sales in the metro area, as condos are now the dominant type in home sales now in the city.
These first 2 charts below illustrate the price recovery of the Bay Area high-price-tier home market over the past year and since 2012 began, when the market recovery really started in earnest. In 2012 – 2015, home prices dramatically surged in the spring (often then plateauing or even ticking down a little in the following seasons). The surges in prices that have occurred in the spring selling seasons reflect frenzied markets of high buyer demand, low interest rates and extremely low inventory. In San Francisco itself, it was further exacerbated by a rapidly expanding population and the high-tech-fueled explosion of new, highly-paid employment and new wealth creation. The markets in the Bay Area are appreciating at somewhat different speeds, depending on the price segment. As clearly seen in the second chart above, the low-price tier has been seeing the most dramatic movement, but all 3 segments saw spikes in 2017.
For more regarding how seasonality affects real estate: Seasonality & the Real Estate Market .
This chart below highlights the highly seasonal nature of home price appreciation over the past 5 years.
Longer-Term Trends & Cycles
The next 4 charts below reflect what has occurred in the longer term (for the high-price tier that applies best to San Francisco, Marin, San Mateo and the most affluent portions of other counties), showing the cycle of recession, recovery, bubble, decline/recession since 1988. Note that, past cycle changes will always look smaller than more recent cycles because the prices are so much higher now; if the chart reflected only percentage changes between points, the difference in the scale of cycles would not look so dramatic (as seen in the third chart below).
Comparing San Francisco vs. U.S. Appreciation since 1987
Interesting divergences occurred after the 1989 earthquake, making the SF recession longer and deeper in the early 1990’s, during the dotcom spike and drop, and since the latest market recovery began in 2012, which in SF was supercharged by the local boom in high-tech.
Annual MEDIAN SALES PRICE Changes in San Francisco
As a point of comparison: NOT Case-Shiller data. First houses, then condos.
In the city, the house median sales price continued to appreciate in 2016, albeit at a much slower rate than the previous 4 years. The condo median sales price, impacted by both a cooling in the market and a surge in new-construction condo inventory, generally remained flat year over year in 2016. Both segments have seen new bursts of appreciation in 2017 (not charted below).
Different Bubbles, Crashes & Recoveries
This next 3 charts compare the 3 different price tiers since 1988. The low-price-tier’s bubble was much more inflated, fantastically inflated, by the subprime lending fiasco – an absurd 170% appreciation over 6 years – which led to a much greater crash (foreclosure/distressed property crisis) than the other two price tiers. All 3 tiers have been undergoing dramatic recoveries. The mid-price-tier is just now back to its previous peak values, but the low-price-tier is still below its artificially inflated peak value of 2006 (though recently, it has been appreciating quickly). It may be a while before the low-price-tier of houses regains its previous peak. The high-price-tier, with a much smaller bubble, and little affected by distressed property sales, has now significantly exceeded its previous peak values of 2007. All neighborhoods in the city of San Francisco itself have now surpassed previous peak values by very substantial, and sometimes astonishing margins.
Different counties, cities and neighborhoods in the Bay Area are dominated by different price tiers though, generally speaking, you will find all 3 tiers represented in different degrees in each county. Bay Area counties such as Alameda, non-Central Contra Costa, Napa, Sonoma and Solano have large percentages of their markets dominated by low-price tier homes (though, again, all tiers are represented to greater or lesser degrees). San Francisco, Marin, Central Contra Costa (Diablo Valley & Lamorinda), San Mateo and Santa Clara counties are generally mid and high-price tier markets, and sometimes very high priced indeed. Generally speaking, the higher the price, the smaller the bubble and crash, and the greater the recovery as compared to previous peak values.
Remember that if a price drops by 50%, then it must go up by 100% to make up the loss: loss percentages and gain percentages are not created equal.
The price thresholds for the different tiers changes every month, based upon the prices of the homes that sell in that month, so you may see small variations on various charts. For example, in the past year, the threshold for the Bay Area high-tier house price segment has ranged from $956,000 to $1,087,500 (in October 2017). We don’t always adjust these figures in every monthly chart.
Mid-Price Tier Homes: $676,000 to $1,087,500 as of 10/17
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: Over $1,087,500 as of 10/17
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
High Price Tier vs. Low Price Tier Appreciation
2012 to Present
The more affluent neighborhoods led the city and the Bay Area out of recession in 2012, surging quickly, while the lower priced tier, still trying to recover from the huge distressed property/foreclosure crisis, lagged well behind. That dynamic shifted: the low-price tier caught up in 2014, and lately, as affordability has become an ever more pressing concern, it has become the greatest focus of buyer demand and has been appreciating significantly more quickly than than more expensive home segments. (Even though many of the more affordable houses in San Francisco, Marin, San Mateo and Lamorinda/Diablo Valley would actually qualify as high-price tier houses by overall Bay Area standards, the underlying dynamics are similar to Bay Area low-price tier homes, i.e. each market area’s dynamics reflect its own division into most affordable (low), mid-price, and more expensive (high) home segments).
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
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.
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:
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.
We just crunched the numbers on a recent U.S. census report tracking population migration to and from California in 2016, and illustrated them in the chart above. Though this chart refers specifically to state data, the trends illustrated almost certainly apply to the Bay Area to a large extent as well. The census report highlights two issues: 1) More CA residents are moving out to other states than residents of other states are moving into California, and 2) Foreign immigration into California has more than made up this deficit, to continue an overall increase in the population.
The chart is based on 2016 data, and there are now two big wild cards in play which may significantly affect these migration trends.
Firstly, the U.S. government in power now has radically different philosophies and policies regarding foreign immigration than previous administrations, which may dramatically curtail foreign influx numbers into California and the Bay Area in 2017 and subsequent years.
Secondly, changes to the tax code currently contemplated by the Republican dominated congress – the deductibility of mortgage interest costs and local/state taxes in particular – would not only make living in the Bay Area, which already has either the highest or close to highest cost of living in the country (especially vis a vis housing costs), more expensive for many residents, but also substantially increase the difference in living costs between it and other parts of the country. Depending on what legislation is finally put into place, this could exacerbate the outflow of companies (concerned, among other reasons, about competing for employees) and residents to lower-cost states. As an example, Texas has been actively trying to recruit CA companies to relocate for years, and often crows about its success in doing so. The Texas pitch revolves around its much lower housing costs and the absence of state income taxes – the proposed changes to federal income tax law would only widen the already wide cost-of-living differential between the two states as they compete for businesses.
The Bay Area has competed, for years extremely successfully, on the basis of quality of living and its situation as the nexus of high-tech, bio-tech and fin-tech industry and innovation. However, other metro areas, such as Austin, are increasingly attempting to compete on these bases as well.
[Resident outflow from California can be broken into 2 main groups: Those relocating for jobs in lower cost states, and those moving subsequent to retirement, which often involves cashing out of a higher-cost housing market to maximize proceeds and retirement income in lower-cost, lower-tax regions. Looking at the chart above, as pertaining to the outward migration of CA residents, Texas, Washington and to a lesser degree, Oregon and Colorado dominate for the first group, and Arizona, Nevada, Florida and Oregon probably dominate as locations for retiree relocation. It’s interesting to note that 5 of these states also top the list for states whose residents relocate to California, though in lesser numbers.]
The net result could be an reduced inflow of new foreign residents and residents relocating from other states, coupled with an increased outflow of existing residents – especially the more affluent residents most affected by proposed tax law changes – which together might have substantial ramifications for state and local economies and housing markets. It is unknown at this point what scale of change may occur and how significant the ramifications might be – we honestly do not know how this will all play out. However, there have been a number of governors from high-immigration/high-cost-of-living (blue) states, which levy state income taxes, voicing major concerns regarding possibly severe economic effects. Of course, their desire to alter proposed changes to tax law before they come into effect is certainly a motivation in these statements.
The chart at the top of this article has been posted to our new analysis on San Francisco and Bay Area demographic trends: Paragon Demographics Report
All our reports and articles can be found here: Paragon Market Reports
The data herein is from a wide variety of third party sources deemed reliable – much of it from national, state and local government data sources – but it may contain errors, and is subject to revision.
Below is a look at the past 30+ years of San Francisco Bay Area real estate boom and bust cycles. Financial-market cycles have been around for hundreds of years, all the way back to the Dutch tulip mania of the 1600’s. While future cycles will vary in their details, the causes, effects and trend lines are often quite similar. Looking at cycles gives us more context to how the market works over time and where it may be going — much more than dwelling in the immediacy of the present with excitable pronouncements of “The market’s crashing and won’t recover in our lifetimes!” or “The market’s crazy hot and the only place it can go is up!”
Note: Most of these charts generally apply to higher-priced Bay Area housing markets, such as those found in much of San Francisco, Marin, Central Contra Costa (Lamorinda & Diablo Valley) and San Mateo Counties. (Different market price segments had bubbles, crashes – or adjustments – and recoveries of differing magnitudes in the last cycle, which is addressed at the end of this report.)
Regardless of how recent cycles have played out, it is vital to understand how extremely difficult it is to predict, with any accuracy, when different parts of a cycle will begin or end. Boom times can go on much longer than expected, or get second winds; recessions or crashes can appear with startling suddenness. It should also be noted that all of the major down cycles in the Bay Area in recent decades have been tied to national or international economic factors, i.e. our cycles aren’t simply local events, separated from the rest of the state or country. However, it is true that local factors sometime exacerbate a downturn (the earthquake of 1989; our greater exposure to the dotcom bubble), or supercharge a recovery (the Bay Area high-tech boom of recent years).
It’s not unusual for a big surge in values to occur in the first couple of years after a recovery begins, often quickly exceeding the previous peak value.
All bubbles are ultimately based on irrational exuberance and/or criminal behavior, whether exemplified by junk bonds, Savings & Loan frauds, dotcom stock hysteria, “Dow 30,000” insanity, “the end of the business cycle” nonsense, gorging on unsustainable debt, runaway greed (without any corresponding desire to produce anything of value), predatory lending, or dishonest financial engineering.
However, it should be noted that the most recent subprime-financing/ loan-fraud bubble was truly abnormal in its scale, and its crash was much greater than other “market adjustments” going back many decades. The pre-2008 bubble was fueled by tens of millions of buyers purchasing (or owners refinancing) homes with loans that they clearly couldn’t afford right from the get go: Liar loans, deceptive teaser rates, promises of non-stop appreciation, and the abysmal decline in underwriting standards. (Since lenders were simply selling the loans, they didn’t care about qualifying buyers anymore.) Sometimes there was no actual investment in the properties being bought, i.e. no down payment, 100%+ loans. Many lenders and mortgage brokers clearly engaged in criminally predatory behavior, convincing people to overload themselves with unsustainable, impossible-to-pay-back levels of debt. (Sadly, something similar has been going on in recent years with college loans.)
The market adjustments of the early 1990’s and that subsequent to the dotcom bubble saw declines in home values in the range of 10% to 11%, which is of a completely different scale from the recent 2008 – 2011 crash and decline, when values plunged by up to 60% around the state and country, depending on area and price segment. The previous crash of a similar magnitude was during the Great Depression of the 1930’s.
This is important context when contemplating the next adjustment: It doesn’t have to be a devastating crash. It can be more like some air being let out of an over-pressurized tire instead of a blowout on the highway at high speed. As of early-2017, it appears that the SF economy and housing market have cooled to some degree after 4 years of feverish appreciation. But the change varies by segment: The affordable house segment remains quite hot; more expensive house prices have generally plateaued; the condo market has cooled much more and seen price declines, and the luxury condo market has cooled the most. The condo market has been affected by the surge of new-construction condos hitting the market recently. We will have to wait and see the scale and speed of any further adjustment, but so far, we don’t see local or macro-economic conditions for a 2008-like crash. Adjustment, yes; devastating crash, no. (Our updated overview report: Annual Trends in San Francisco Real Estate Market Statistics
The light blue columns in the above chart graph the home-value appreciation that occurred in the first three years of each recovery – our latest rebound has been somewhat quicker than other recoveries, probably due to 1) the depth of the previous market decline, and 2) the huge, high-tech employment, population and wealth boom that has played out in San Francisco and nearby counties. The gray columns chart the appreciation of past recoveries from the beginning to peak value for each cycle (except for the latest cycle, for which the peak has not yet been defined), and the red bars delineate the percentage declines from those peaks, pursuant to the market adjustments that occurred. As always, note that market appreciation and depreciation rates can vary widely by county, community and neighborhood.
Over the past 30+ years, the period between a recovery beginning and a bubble popping (or a lesser adjustment occurring) has run 5 to 7 years. We are currently about 5 years into the current recovery, which started in early 2012 (in San Francisco; later in outlying Bay Area counties). Periods of market recession/doldrums following the popping of a bubble have typically lasted about 3-4 years. (The 2001 dotcom bubble/ 9-11 crisis drop being the exception.) Generally speaking, within about 2-3 years of a new recovery commencing, previous peak values (i.e. those at the height of the previous bubble) are re-attained — among other reasons, there is the recapture of inflation during the doldrums years. In this current recovery, those homes hit hardest by the subprime loan crisis — typically housing at the lowest end of the price scale in the less affluent neighborhoods, which experienced by far the biggest bubble and biggest crash — are appreciating quickly now, but taking longer to re-attain peak values. However, communities with higher priced homes — such as in San Francisco, Marin, San Mateo and Central Contra Costa Counties (Diablo Valley & Lamorinda) — have surged well past their previous peaks.
This does not mean that these recently recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future. Real estate markets can be affected by a bewildering number of local, national and international economic, political and even natural-event factors that are exceedingly difficult or even impossible to predict with any accuracy.
In the 2 charts below tracking the S&P Case-Shiller Home Price Index for the 5-County San Francisco Metro Area, the data points refer to home values as a percentage of those in January 2000. January 2000 equals 100 on the trend line: 66 means prices were 66% of those in January 2000; 175 signifies prices 75% higher.
In the above chart, the country is just coming out of the late seventies, early eighties recession featuring terrible inflation, stagnant economy (“stagflation”) and incredibly high interest rates (hitting 18%). As the economy recovered, the housing market started to appreciate and this surge in values began to accelerate deeper into the decade. Over 6 years, the market appreciated about 100%. Finally, the late eighties “Greed is good!” version of irrational exuberance — junk bonds, stock market swindles, the Savings & Loan implosion, as well as the late 1989 earthquake here in the Bay Area — ended the party.
Recession arrived, home prices sank about 11%, sales activity plunged and the market stayed basically flat for 4 to 5 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.
1996 to Present
(After Recession) Boom, Bubble, Crash, Doldrums, Recovery
This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and continued to accelerate til 2001. The dotcom bubble pop and September 2001 attacks created a market hiccup (a short-term 10% decline, but only for high-price tier houses, and for condos), but then the subprime and refinance insanity, degraded loan underwriting standards, mortgage securitization, and claims that real estate values never decline, super-charged a housing bubble. Overall, from 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at times from 2006 to early 2008.) The air started to go out of some markets in 2006-2007, and in September 2008 came the financial markets crash.
Across the country, home values typically fell 20% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures — most of San Francisco, with relatively few foreclosures, got off comparatively lightly with declines in the 15% to 25% range. The least affluent areas got hammered hardest by distressed sales and price declines; the most affluent were usually least affected. Then the market stayed flat for about 4 years, albeit with a few short-term fluctuations. Tied to a rapidly recovering economy, supply and demand dynamics began to significantly change in San Francisco in mid-2011, leading to the market recovery of 2012.
The Recovery since 2012 (Case-Shiller)
This chart above looks specifically at home price appreciation since 2012 when the current market recovery began. Generally speaking, the spring selling seasons have seen the most dramatic surges in appreciation. It’s not unusual for appreciation to slow or flatten in the second half of the year. This chart below illustrates the connection between seasonality and appreciation over the past 4 years. The market in San Francisco was definitely cooler in Spring 2016 than in the previous 4 spring selling seasons, and we are now waiting to see how the Spring 2017 market develops.
Short-Term Trends by Price Segment/Property Type
In late 2015 and 2016, the greatest pressure of buyer demand started moving to more affordable home segments, as seen in this following chart. The highest price tier has generally plateaued; condo prices appear to be declining with the surge of new-construction condo projects hitting the market; and the lowest priced tier continues to appreciate as buyers search for affordable housing options. But remember that short-term trends sometimes fluctuate without great meaningfulness.
The Panorama: From the late 1980’s to Present
S&P Case-Shiller Index, 5-County SF Metro Area
In the chart below showing percentage year-over-year changes, each January percentage change mostly reflects the market in the previous year, i.e. the January 2002 percentage decline reflects the change in 2001 after the dotcom bubble popped.
Comparing San Francisco vs. United States
Home Price Appreciation Trends since 1987
Really quite similar except for the 1989 earthquake, the dotcom phenomenon, and the recent Bay Area high-tech boom. Of course, the huge difference is in the median house sales prices: The city’s is now over 5 times higher than the national median price.
FHFA Home Price Index
San Francisco & San Mateo Counties
The Federal Housing Finance Agency also has its own home price index using repeat sales information on houses whose loans were purchased or securitized by Fannie Mae or Freddie Mac. Since the allowable loan thresholds are relatively low compared to SF house prices, it is not tracking the entire market, but it provides another angle on appreciation going back to 1975 (further than other data sources we have) – and its analysis generally parallels Case-Shiller and median sales price trends. The FHFA uses a metro area comprised of SF and San Mateo Counties.
San Francisco Median Sales Price Appreciation
The charts below look at median sales price movements in San Francisco County itself over the shorter and longer terms. These do not correlate exactly with Case-Shiller – firstly because C-S tracks a “metro area” of 5 Bay Area counties, and secondly, because C-S uses its own proprietary algorithm and not median sales prices. Median sales prices are often affected by other factors besides changes in fair market value (such as significant changes in the distressed, luxury and new-construction market segments; seasonality; buyer profile; and so on).
In 2011, San Francisco began to show signs of perking up. An improving economy, soaring rents, low interest rates and growing buyer demand coupled with a low inventory of listings began to put upward pressure on prices. In 2012, as in 1996, the market abruptly grew frenzied with competitive bidding. The city’s affluent neighborhoods led the recovery, and those considered particularly desirable by newly wealthy, high-tech workers showed the largest gains. However, virtually the entire city soon followed to experience similar rapid price appreciation.
San Francisco median home sales prices increased dramatically in 2012, 2013, 2014, and then again in the first half of 2015. In 2016, the SF market clearly cooled compared to the competitive frenzies of previous spring selling seasons, and home prices appear to be plateauing in year-over-year comparisons. But different markets within the city are experiencing different dynamics – the more affordable house segments, for example, are still extremely competitive. Again, you might want to review some of our most recent analyses by clicking on our Trends & Analysis link at the top of this webpage. As spring 2017 begins, initial indications point to a strong demand, low inventory dynamic – but it is too early to come to any definitive conclusions.
In the chart above looking at overall median price changes for all SF house price segments, there wasn’t a decline after the dotcom bubble, but which does show up in the Case-Shiller charts for the high-price house segment and the condo segment. Overall median sales prices for condos, seen in the chart below, did fall in 2001. The condo segment (and apartment rents) seems more affected by changes in the high-tech economy than the overall house market.
Comparing San Francisco, California & National
Median Price Appreciation
2012 through 2016, San Francisco has been out-performing the overall state and national markets.
San Francisco Rents
Besides, home prices, home rental rates are major indicators of what is occurring with housing costs and the local economy. If anything, rents have appreciated even more extremely than home prices in San Francisco (and other areas of the Bay Area) – and, of course, renters get no advantages from low interest rates, multiple tax deductions and advantages, or home-price appreciation over time. One classic indicator of an overpriced home market is when prices outpace rents. So far, this has not happened in San Francisco: Both types of housing costs have soared in recent years.
It’s interesting to note that SF rents actually dropped much further after the dotcom bubble burst than after the 2008 financial markets crash, though the latter was a much more destructive economic event. It suggests that local rents may be more affected by the simple ebb and flow of high-tech hiring and employment than by other macro-economic issues, such as stock market changes. If one loses one’s job and the likelihood of finding another in the area plunges, it may be an immediate imperative to move to a less expensive rental area (pressuring rents lower); if one’s net worth plunges with a stock market crash, one may no longer afford to buy a home (pressuring home prices lower). This is an oversimplification, but may still go some ways to explaining the different scale of reaction by purchase and rental markets to different macro-economic events.
As of mid-2016, the SF rental market has definitely cooled, with supply increasing significantly with new construction, demand softening, and rents beginning to decline, especially at the high end. According the the latest data, as of Q1 2017, SF average asking rents have dropped around 8 – 10% from their peaks in 2015.
The monthly fluctuations in consumer confidence reported on in the media are relatively meaningless and without context, but longer-term movements are much more meaningful to overall economic trends. Psychology – confidence, optimism, fear, pessimism – often plays a huge role in financial and real estate markets. And events can sometimes turn consumer confidence one way or another very rapidly, whether such movements are rational or not.
Mortgage Interest Rates since 1981
It’s much harder to decipher any cycles in 30-year mortgage rates. Rates remain very low by any historical measure, but have risen since the 2016 election. Interest rates play a huge role in the ongoing cost of homeownership (affordability) and the real estate market. The substantial decline in interest rates since 2007 has in effect subsidized much of the price increases that have occurred since 2011.
Real estate market cycles have a symbiotic relationship to other economic cycles, such as illustrated in the employment charts above.
Housing Affordability by U.S. Metro Statistical Area
per National Association of Realtors
Housing Affordability Index (HAI) Cycles, 1991 – Present
by Bay Area County, per CA Association of Realtors
Unsurprisingly, there is a reverse correlation between the trend lines for housing affordability rates and those of real estate price cycles (above). HAI rates jump higher in market recessions, peaking at the bottom of the market, and then decline as the market recovers, bottoming out when peak prices are hit. The lowest Bay Area housing affordability housing index rates (probably in history) were hit in 2007 right before the 2008 market crash. The Bay Area overall is still above those lows in its current recovery.
The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It is important to note that in the past (certainly going back at least 50 years), major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events (though the 1989 earthquake, which occurred just before the national recession began, certainly exacerbated the local downturn). Ongoing speculation on local bubbles (and predictions of awful upcoming local crashes) often neglect to remember this.
Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it is interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers cannot find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.
San Francisco’s Housing Affordability Index (HAI) has been running about 3%-5% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.
Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.
Inflation & Interested Rate-Adjusted Housing Cost (since 1993)
The Home Cost Trends chart below (a little out of date as of early 2017) reflects a very approximate calculation of monthly home payment costs (principal, interest, property tax and insurance) adjusted for inflation, i.e. in 1993 dollars, using annual median house sales prices, average annual 30-year interest rates, and assuming a 20% downpayment. The average annual compounding CPI inflation rate fluctuated, but averaged approximately 2.4% over the period, and average annual mortgage rates fluctuated from 8.4% to 3.7% (see mortgage interest rate charts earlier in this report), which, as mentioned before, had a huge impact on financing costs.
Adjusting for inflation and interest rate changes means that though the median sales price is now far above that of 2007, the monthly housing cost is still a little bit below then. This isn’t a perfect apples-to-apples comparison because it doesn’t take into account that the amount of the 20% downpayment increased significantly over the time period. Still, since ongoing cost is typically an important factor for homebuyers (at least those getting financing), this affords another angle on our market.
Different Bay Area Market Segments:
Different Bubbles, Crashes & Recoveries
The comparison composite chart dramatically illustrates the radically different market movements of different Bay Area housing price segments since 2000. Farther below are updated individual price charts for each price segment.
Again, all numbers in the Case-Shiller chart relate to a January 2000 value of 100: A reading of 220 signifies a home value 120% above that of January 2000. The chart above illustrate how different market segments in the 5-county SF metro area had bubbles, crashes and now recoveries of enormously different magnitudes, mostly depending on the impact of subprime lending. The lower the price range, the bigger the bubble and crash. In the city itself, where many of our home sales would constitute an ultra-high price segment, if Case-Shiller broke it out, many of our neighborhoods have risen to new peak values. The lowest price segment, more prevalent in other counties, may not recover peak values for some time to come. Updated C-S charts for each price segment are below.
Since mid-2016, the low-price tier has begun taking the lead in home price appreciation (though, again, it remains below its previous peak value).
Mid-Price Tier Homes: $620,00 to $985,000 as of 11/16
Smaller bubble (119% appreciation, 2000 – 2006) and crash (42% decline)
than low-price tier. Strong recovery has put it over its 2006 peak.
It is interesting to note that the low and mid-price house tiers basically shrugged off the dotcom bubble popping in 2001, while the high-price house tier and condos (and apartment rents) saw significant declines. This is another example of how difficult it can be to make big, general pronouncements regarding the entire Bay Area market. center>
High-Price Tier Homes: Over $985,000 as of 11/16
84% appreciation, 2000 – 2007, and 25% decline, peak to bottom. Now well above previous 2007 peak values.
Bay Area Condo Values
After a strong recovery, recently seeing a dip in median sales prices, estimated in San Francisco itself (as opposed to the 5-county metro area) to be in the 4% – 5% range over the past year.
These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. All numbers are approximate and percentage changes will vary slightly depending on the exact begin and end dates used for recoveries, peak prices and bottom-of-market values.
There is no city on the planet quite like ours, and here are some of the details. Compiled by Paragon Real Estate for your entertainment and, perhaps, mild edification.
Ancestry, Age, Religion, Education, Employment,
Language & Politics
A Miscellaneous Selection of Diverse Statistics
Selected Statistics by San Francisco Zip Code:
Income, Education, Foreign Birth & Homeownership
All our reports and analyses can be found here: Paragon Market Reports
San Francisco Real Estate Market Report
Bay Area County Markets & Demographics
SF Neighborhood Home Price Tables
SF Luxury House Market Update
SF Luxury Condo Market Update
Bay Area Apartment Building Market Report
All data herein is from a wide variety of third party sources deemed reliable – much of it from the U.S. Census American Community Survey, 2011-2015 – but it may contain errors, and is subject to revision. All data should be considered approximate or good-faith estimates.
© 2017 Paragon Real Estate Group