San Francisco Real Estate: Here We Go Again?
Preliminary Indications Signal Another Feverish Spring Market
Overbidding & Inventory; Bay Area Home Price Map; Renting vs. Buying; Different Markets = Different Bubbles, Crashes & Recoveries
Preliminary statistics and, even more so, indications on the ground in the current hurly burly of deal-making are sending strong signals of another very competitive real estate market in San Francisco as we approach spring. If it continues to develop as it’s looking right now, this would make the 4th intense spring season since the market recovery began in early 2012.Once again, buyer demand has surged early in the new year without a corresponding increase in listing inventory: High demand meets low supply generates competitive bidding – sometimes fiercely so – and upward pressure on home prices. This doesn’t mean every listing is selling over asking price or even selling at all – even in a red hot market, 20% – 30% of homes are price reduced before selling or withdrawn from the market without a sale taking place (usually due to overpricing). There are also hotter and cooler pockets within the market: Right now, more affordable homes – for example, condos under $1 million – appear to be in particularly high demand.Sales volume in January and February was down 20% year over year, reflecting a market that pretty much shut down in the last two weeks in December, and then started the year with extremely low inventory.
Overbidding List Prices
This chart above illustrates seasonal trends in competitive bidding, which underlies the phenomenon of homes selling for over asking price. For the last few years, the average percentage of sales price to list price has been peaking in spring. But already in February, prices averaged a whopping 8% above asking – very few other markets in the country are seeing anything similar. Drilling down by property type, SF house sales in February averaged 12% over asking, condos averaged 7% over, and 2-4 unit buildings 2%. Houses are becoming a smaller and smaller percentage of city home sales (since virtually no new ones are being built), which has generally made them the most competitive market segment.
In recent years, the percentage over asking has hit its highest point in May, reflecting offers negotiated in late March, April and early May.
Bay Area Median House Prices
This map gives a very general idea of comparative home values around the Bay Area. Remember that median prices will often disguise enormous variety in the underlying individual home sales.
We’ve also updated our SF neighborhood map for house and condo prices, which can be found online here: San Francisco Median Home Price Map
Seasonality in the Bay Area often has more to do with winter and summer holidays than the actual weather since, unlike back east, January and February can seem more like spring here. New listings and overall inventory bottom out in December, and then slowly rise in the new year. What is super-charging the market is that buyers woke up after the holidays and jumped back in the market much earlier than sellers have put homes up for sale in quantity. For the past 3 years, this unbalanced dynamic between the high pressure of buyer demand pushing against an insufficient supply of listings continued through spring, causing dramatic home-price increases, until the market slowed during the summer. We shall soon see if prices can jump higher again in coming months.
Days on Market before Acceptance of Offer
Months Supply of Inventory
The greater the demand, the faster listings go into contract (i.e. accept offers), and the lower the average days on market (DOM) and months supply of inventory (MSI). Both these statistics are currently in deep “seller’s market” territory. Of course, this could change dramatically if we get a sudden tsunami of new listings or if a large, negative economic event happens, but right now, we don’t have any reason to expect either to occur in the next few months.
As points of comparison, the national average days-on-market is more than twice that of San Francisco’s (approximately 69 days vs. 30), and the national MSI figure is almost 3 times higher than the city’s (approximately 4.7 months of inventory vs. 1.6). Many new listings in San Francisco are going into contract within 7 to 14 days of coming on market, as eager buyers swarm over them.
Renting vs. Buying in San Francisco
Someone moving to or within San Francisco basically has 2 choices: Renting at market rate or buying at market rate. And rents have gone up so much locally that after accounting for multiple tax benefits, low interest rates, principal loan-balance pay-down (which adds to home equity) and estimated long-term appreciation, buying often looks like the financially attractive course. Above is one chart of a much more detailed analysis comparing the cost of renting a 2-bedroom San Francisco apartment at the current median asking rent, with the monthly cost of buying an SF home at the current median sales price after adjusting for tax deductions and principal pay-down. As seen above, the net monthly cost of buying can be less renting.
There are many personal and monetary issues that pertain to this decision and our analysis is based on a number of financial assumptions – interest, inflation, appreciation and tax rates; downpayment amount; maintenance and insurance costs – that you may not agree with or might not apply to you. You can review our full analysis and also perform your own calculations here: Renting vs. Buying in San Francisco
Chart courtesy of California Association of Realtors
Different Markets, Bubbles, Crashes & Recoveries
The real estate market is often spoken about as if it was a single monolithic entity performing in a consistent way – but nothing could be further from the truth. Markets vary enormously between states, cities, neighborhoods, property types and price segments. The S&P Case-Shiller Index looks at the Bay Area market* by breaking all house sales into 3 price segments – low, mid and high price tiers – each containing one third of the total number of sales. The exact price range of each tier changes as the market appreciates or depreciates, or more sales occur in one price range than another: Right now, the “high-price tier” starts at $872,000. In February of 2012, the high tier started at a threshold of $537,000.
Breaking down the market by price segment is a vast over-simplification – there are many other factors at play – but generally speaking, the lower the price range, the more the housing segment was impacted by subprime/ predatory lending in 2003 – 2006. In turn, that caused the larger price bubble, and then the bigger crash as the foreclosure/ distressed-property crisis took hold.
Most Bay Area counties are dominated by homes in 2 price tiers, low and mid, or mid and high, but there are pockets of homes in all tiers within most counties. The numbers in the 3 charts below all relate to a January 2000 value designated as 100. Thus a reading of 199 indicates a home price 99% above that of January 2000.
Bay Area Low-Price-Tier Houses – Currently under $542,000
Interestingly, this price segment was not impacted by the popping of the dot-com bubble, perhaps because these homeowners were less likely to be speculating in the technology stock market.
Bay Area High-Price Tier Houses – Currently over $872,000
Though the price tiers had radically different bubbles, crashes and recoveries, all 3 are now almost exactly the same in relation to the year 2000, showing appreciation of 97% to 99% over the past 15 years. This suggests equilibrium is once again being achieved between them.
* Technically the Case-Shiller San Francisco Metropolitan Statistical Area is comprised of San Francisco, Marin, San Mateo, Alameda and Contra Costa counties, but we believe its general trends apply to other Bay Area counties as well.