A Hot Autumn Market in San Francisco? (Part 2)

September 06, 2017

Will the Fall Market Stay Hot or Shift Cooler?

September Typically Begins with Huge Surge in Listings

September 2017 Report (Cont.)

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Since the year began, preliminary data has been trickling in regarding the Bay Area and city economy, and the commercial and residential real estate markets in particular, that appears to indicate that things may be heating upagain after clearly cooling in late 2015 and 2016 (subsequent to the increasingly torrid conditions in the 4 years prior). It is far too early to come to any definitive conclusions regarding the long-term significance of recent local or national shifts: Some of the data is not always consistent with such a conclusion; some of the data may indicate over-exuberance in the markets. Though always hesitant to make too much of short-term trends, we will take a look at a few angles on current developments. A recent article in the San Francisco Business Times (of similar title) describes what is going on in commercial real estate, while this report will primarily focus on the SF residential market. 

Percentage of Home Listings Accepting Offers 
by Property Type & Price Segment 

Note: 12-month median sales prices in San Francisco are currently
approximately $1,350,000 for houses and $1,100,000 for condos 



One of the classic statistics of supply and demand is percentage-of-listings-accepting-offers: The higher the percentage, the hotter the market. In the chart above, we assessed San Francisco by property type and price segment, comparing this past April to the same months of 2015 and 2016. Note that spring 2015 was considered a particularly feverish market characterized by very high demand and very low inventory. Most of the segments saw a considerable cooling from April 2015 to April 2016. However, almost all the segments bounced back in April 2017, and, indeed, the lower price segments performed significantly better than 2 years ago. 

Other standard measures of market heat such as average-days-on-market, and months-supply-of-inventory saw similar changes (approaching all-time lows), though we did not chart them for this report. On the ground, increased buyer competition for an inadequate supply of houses under $2 million and condos under $1.5 million, dovetails with the statistics. We have also heard that new-project condo sales have seen a considerable surge in buyer demand, but we cannot verify that. 

It will be interesting to see if these dynamics continue through Q2, usually the most active selling season of the year, and, if so, how they will affect median sales prices: As seen in the second chart below, so far, there has been no appreciable year-over-year change. However, most listings accepting offers in April will not close sale until May, which will then be reflected in median sales price data available in June.



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Year-over-Year SF Median Sales Price Comparison 



Looking at 3-month rolling median sales prices in the chart above, comparing the February through April periods of 2015, 2016 and 2017, the SF median house price is relatively flat since last year, and the median condo price is relatively flat since 2015, after both saw rapid appreciation rates in the previous years. (At this point, the recent, minor percentage changes comparing 3-month periods should not be considered significant.) The flattening in condo median price for the additional year reflects the earlier and greater cooling that occurred in that market segment.

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Comparative Neighborhood Values & Appreciation Trends 

One of our readers suggested that it would be interesting to see multiple San Francisco neighborhoods illustrated on a single chart to compare home prices and appreciation rates. We got a little carried away and created more than 2 dozen graphs, of which 6 are below. 

The extremely affluent Presidio Heights neighborhood has the largest houses and highest prices in the city, with next door Pacific Heights right behind. 













All the charts in this series are here: San Francisco Neighborhood Comparisons, which also includes an SF neighborhood map. 

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San Francisco Luxury Home Pricing 



It has been clear over the past 2 years that the market for higher priced homes has cooled more than that for less expensive homes, and this is reflected in the first chart of this report. One of the big issues is that many luxury home sellers have simply been asking for more money than buyers are willing to pay: This is illustrated in the chart above which compares median sales prices with median asking prices, and then with the median prices of expired listings that were ultimately pulled from the market without selling.

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Various Economic Indicators 

Bay Area Employment & Unemployment Rates 

The lowest unemployment rates in 15 years, but the picture in hiring and
new high-tech hiring in particular, is a bit unclear with recent shifts up and down. 






S&P 500 Stock Index 

Maybe some irrational exuberance at play since the election? 




Housing Affordability 

Perhaps the biggest social, economic and political issue
in the Bay Area right now: Remaining close to all-time lows 




San Francisco, Alameda & Marin Rents 

Rents in all 3 counties ticked back up in Q1 after recent declines, but too much 
should not be made of this until substantiated over a longer term than 1 quarter 




Mortgage Interest Rates 

Up after the election, down since the new year began,
rates remain extremely low by historical standards 




A growing factor in the inadequacy of listings on the market available to purchase, which adds competitive pressure on prices as buyers compete for very limited supply, is the fact that owners are simply moving much less often than historical norms. There was a very good overview of the pertinent issues to this profound demographic change in the May 14, 2017 New York Times. 

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S&P Case-Shiller House Price Index 

Another angle on Bay Area home price appreciation trends 

According to Case-Shiller, which divides sales into 3 price tiers and measures Bay Area home price appreciation using its own proprietary algorithm (instead of median sales prices): In the period from April 2016 through February 2017 (its most recent report), less expensive homes appreciated by 7% during the period; mid-priced homes appreciated by 3%; and high-priced homes remained flat over the 11 months. Over the last year or two, the greatest pressure of buyer demand in the Bay Area has shifted to the more affordable home segment. Again, the first chart in this report highlights this dynamic in San Francisco. 

C-S numbers all refer to a January 2000 home price set at 100. Thus, a reading of 249 signifies a price 149% over than of January 2000. 




Our full article on market cycles: 30+ Years of San Francisco Real Estate Cycles 

All our analyses can be found here: Paragon Market Reports 

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Gold, Google, Facebook & San Francisco Homes
Return on Investment Rates since 2011 

Penthouses, Probates, Fixer-Uppers & Panoramic Views
A Survey of the SF Real Estate Market in 2016

January 2017 Report

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This first chart is a somewhat lighthearted, but we believe accurate look at how various 2011 investments would have played out through 2016. (FB is dated from its 2012 IPO.) When calculating appreciation, purchase and sale dates are critical factors, and changing those can alter the results significantly: Using 2011, the last bottom of the real estate market, as the purchase date certainly plays to the advantage of home price increases. If you bought gold or soybeans in 2011, you really should have sold them a couple years ago at the height of the commodity price boom. 

Besides the appreciation percentage noted, buying a home in 2011 with all cash would have generated large, additional financial returns in the form of extremely low monthly housing costs. Buying it with 20% down supercharges the return on cash investment, and that is before adding in other advantages: Even with an 80% loan, by 2016 your monthly housing costs, with recent low interest rates and tax advantages, would be well below market rents. Then there is the huge capital gains exclusion on the sale of a primary residence, which would not apply to other investments. 

More Details: Since we initially published this report, we received a number of good questions regarding our calculations. Here are more details (but feel free to skip this to scroll down to other parts of the newsletter): 

2011 - $690,000 median San Francisco house sales price 

2016 - $1,325,000 median sales price 

For the 20% down investment return calculation: 

20% downpayment + 2% closing costs = $152,000 

Proceeds deducting 8% closing costs: 92% of $1,325,000 = $1,219,000, less $552,000 loan = $667,000 net proceeds. (We actually didn’t calculate the real, reduced, loan balance due on sale, which would be considerably lower, just used the original 80%, $552,000 loan amount.) 

$667,000 net proceeds = 339% return on the initial $152,000 cash investment. We tried to be conservative, i.e. using high buy and sell closing cost percentages and using the original loan balance instead of what would actually be due on sale in 2016. 

We also received this excellent question in response to the investment analysis: 

Shouldn't the 20% down-payment housing cost calculation also include monthly interest, property tax and insurance costs over the 5 years of the investment return calculation? 

Since comparing investment returns between radically different types of investments is challenging, the answer requires a somewhat complicated explanation, for those interested: 

To make the comparisons between the investment returns of buying a house with a 20% down payment and buying stocks or gold as close to apples to apples as possible, first of all we had to divide the house purchase into two distinct and even unrelated parts: 1) the investment part which pertains to the cash paid, the transaction costs incurred and the net cash proceeds on sale, and 2) the ongoing cost of housing, i.e. living in the house you purchased. Because if you purchase stock or gold, you still have housing costs. So you’re buying a house as an investment and you have housing costs, or you’re buying one of the alternative investments and you have housing costs. 

The only reason why we would change the investment scenario to account for ongoing housing costs (mortgage interest, property taxes, insurance, home maintenance) would be if such housing costs were higher for the house buyer than they would be for a stock or gold buyer who, also needing housing, rents at market rates a house of similar size and location. 

So to compare the housing costs between the buyer and the renter: 

If someone bought a median priced San Francisco house in 2011, for $690,000, with an 80% loan ($552,000) at the prevailing 30-year mortgage rate of 4.5%, the monthly principal, interest, tax and insurance (PITI) cost plus $300 in monthly repair and maintenance expenses would be approximately $3925. The principal repayment portion should be stripped out because it’s not really an expense – one is paying down their loan amount and it will be recovered on sale – which brings the monthly cost down to about $3225 before income tax deductions (of interest and property taxes). Conservatively, tax savings should equal about $500, bringing the cost down to $2725 per month, which was probably about the same as the corresponding market rent, or a little bit higher. If one refinanced the loan in 2013 for 3.5%, the next cost would drop to around $2350 per month, which would basically become fixed, with small increases in property taxes and insurance, for the 30 years of the loan. 

From 2014 onward, for which we have data from Zillow, the median rent for a San Francisco house ranged between $3800 and $5000, for which there are no significant tax deductions. So, in fact, the person who purchased the median priced SF house in 2011, by 2014 would be paying significantly less for their ongoing monthly cost of housing than the person who invested in stock or gold and rented the median SF house at steadily increasing market rents. 

These are rough and very approximate calculations – they should not be relied upon for financial decision-making (consult your own accountant or financial planner) – but buying the median priced SF house in 2011 with 20% down would not only reap huge returns on the cash initially invested upon its sale in 2016, but the investor who lived in the house purchased would eventually have saved many thousands of additional dollars in monthly housing costs over paying market rate rents. Which would continue if the house was not sold. 

As noted above, the calculation comparing home purchase to gold or Google stock purchase was meant to be somewhat light-hearted. However, it is certainly true that 2011 would have been an extraordinarily good time to buy a house in San Francisco with a long-term, fixed rate loan. Refinancing as interest rates dropped would only add to the financial benefit. That was really the only point we were trying to make. Which, of course, doesn’t guarantee where the real estate market will go in the future. Needless to say, as with any investment, if you have to sell during a down market, the effects can be quite painful.

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Sales of Probates, Penthouses, Fixer-Uppers, Lofts; 
Homes with Views, Elevators & Wine Cellars 





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Long-term San Francisco 
Median Home Price Appreciation 





San Francisco median house prices continued to appreciate in 2016, albeit, at 6%, at a considerably slower rate than the previous 4 years, while condo prices basically plateaued (and indeed dipped in some neighborhoods). As with almost everything to do with real estate values, it boils down mostly to supply and demand, as discussed below. 





In 2016, the supply (and sales) of house listings in the city continued to dwindle, while a surge of new-construction condo projects hitting the market appreciably increased the inventory of condos available to purchase. In 2003, house sales in San Francisco were over 50% higher than in 2016. According to a study by the National Association of Realtors, the median time house owners are staying in their homes has jumped from an average of 6 years in 1987-2008 to 9 years since: Owners are getting older, not changing jobs as often, and baby boomers are aging in place as NAR put it. House owners sell their homes much less frequently than condo owners, who tend to be younger. In SF, there is also the factor of a reluctance to sell when that means facing a very challenging market for buyers. And with very low interest rates, and very high rents, some owners are renting out their houses instead of selling. 

It all boils down to a continuing strong demand for houses meeting a steadily declining supply: Even with a market that cooled somewhat in 2016, competition between buyers continues to push house prices up, especially in more affordable neighborhoods. The equation is different for condos, which has become the dominant property-sales type in the city: A cooling market is meeting increased supply. There has been no crash in condo prices, but areas with the greatest quantity of new condo construction have seen small declines. 

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As can be seen above, two of the most affordable districts for houses, Districts 10 and 2, also provide 37% of all the house sales in the city. Generally speaking, they have continued to experience very strong buyer demand in 2016.




District 9, a large district that stretches from SoMa, South Beach and Mission Bay to Potrero Hill, Dogpatch and Inner Mission, is increasingly dominating condo sales in the city. The great majority of new condo construction, especially of the largest projects, has been occurring in this district. 


All our breakdowns by neighborhood and home size are here: SF Home Price Tables 


Our complete collection of district analyses: SF District & Neighborhood Sales Breakdowns

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San Francisco Overview Market Statistics 

The following classic measures of market heat all tell the same story: Coming out of the recession in 2011, the San Francisco market became increasingly frenzied through the spring of 2015. In late 2015, as housing affordability became a critical issue, and the local high-tech economy saw some cooling, and financial markets worldwide experienced increasing volatility, the SF real estate market began to cool and normalize. Buyer competition for new listings softened, overbidding declined, days-on-market increased, appreciation declined or plateaued, and so on. And the condo market cooled more than the house market due to issues discussed above. 

2016 saw a reasonable adjustment to a desperately overheated market, but nothing that suggests, so far, an imminent, dramatic downturn. Indeed, by national standards, most of our current statistics still define a relatively robust market. In a recent interview, Ted Egan, chief economist of the City of San Francisco, put the odds of a new recession at 10% or less.











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Real Estate Market Seasonality 

Listing and sales activity builds from early January, the nadir of the market, into spring, typically the most active season. Accepted-offer activity provides an excellent illustration of the heat of the market during different times of the year. 



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3 Important Economic Indicators 

San Francisco & Bay Area Employment Trends 

After dropping a little in the first half of 2016, SF and Bay Area employment numbers jumped back up in the second half, an encouraging sign for the local economy. 






Mortgage Interest Rates in 2016 

Interest rates popped 22% higher since the election, though they still remain very low by any historical measure. Where they will go now is a subject of intense speculation since they are a critical component of housing affordability. 




The S&P 500 Stock Index since 1994 

To the surprise of many, U.S. stock markets also popped after the election to their highest points ever. 



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SAN FRANCISCO REALTOR DISTRICTS 

District 1 (Northwest): Sea Cliff, Lake Street, Richmond (Inner, Central, Outer), Jordan Park/Laurel Heights, Lone Mountain 

District 2 (West): Sunset & Parkside (Inner, Central, Outer), Golden Gate Heights 

District 3 (Southwest): Lake Shore, Lakeside, Merced Manor, Merced Heights, Ingleside, Ingleside Heights, Oceanview 

District 4 (Central SW): St. Francis Wood, Forest Hill, West Portal, Forest Knolls, Diamond Heights, Midtown Terrace, Miraloma Park, Sunnyside, Balboa Terrace, Ingleside Terrace, Mt. Davidson Manor, Sherwood Forest, Monterey Heights, Westwood Highlands 

District 5 (Central): Noe Valley, Eureka Valley/Dolores Heights (Castro, Liberty Hill), Cole Valley, Glen Park, Corona Heights, Clarendon Heights, Ashbury Heights, Buena Vista Park, Haight Ashbury, Duboce Triangle, Twin Peaks, Mission Dolores, Parnassus Heights 

District 6 (Central North): Hayes Valley, North of Panhandle (NOPA), Alamo Square, Western Addition, Anza Vista, Lower Pacific Heights 

District 7 (North): Pacific Heights, Presidio Heights, Cow Hollow, Marina 

District 8 (Northeast): Russian Hill, Nob Hill, Telegraph Hill, North Beach, Financial District, North Waterfront, Downtown, Van Ness/ Civic Center, Tenderloin 

District 9 (East): SoMa, South Beach, Mission Bay, Potrero Hill, Dogpatch, Bernal Heights, Inner Mission, Yerba Buena 

District 10 (Southeast): Bayview, Bayview Heights, Excelsior, Portola, Visitacion Valley, Silver Terrace, Mission Terrace, Crocker Amazon, Outer Mission