Here We Go Again?: Signs Point to Another Feverish Spring Market

Spring-shoots-dollars

It’s easy to sympathize with potential buyers who are sitting the market out in the hope that … “sanity will prevail” …”…the market will stabilize…” “…prices have to come down sooner or later….” Alas, for buyers at least, our analysis indicates the contrary: 2015 looks like it’s getting off to a very strong start.

Below are key takeaways from our recent analysis of sales trends over the last few months, which include the seasonally quiet year-end holiday period, along with what we’ve been seeing since the start of the year. These preliminary statistics, and, even more so, reports “from the trenches,” suggest that we may well be looking at the fourth 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asking price or even selling at all – even in a red hot market, 20% – 30% of homes are price reduced before selling or withdrawn from the market without a sale taking place (usually due to overpricing).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.

It’s worth remembering that sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier, i.e. they are a month or so behind what’s actually occurring in the market as buyers and sellers make deals. 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.


Prices Averaging 8% Above Asking — Already

SP-OP_All-SF-Sales-Combined_by-Month

The 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.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 previous years, the percentage over asking has peaked in May, reflecting offers negotiated in late March, April and early May.

Low Inventory Getting Lower

Seasonality_Listings-For-Sale

Seasonality in the Bay Area often has more to do with summer and winter holidays than the actual weather since, unlike back east, January and February often look 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 once again in coming months.

MSI-SFD-Condo-Co-op

The greater the demand, the faster listings go into contract 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. Currently, 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 Isn’t Necessarily a Happier Option

With San Francisco topping the nation’s (and possibly the world’s) charts as one of the most expensive city to rent an apartment, those potential buyers who are sitting this market out may not be doing themselves a favor either.

Rents_by-City_CAR

Our analysis suggests that 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. Below 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 you can see, the net monthly cost of buying can be less than 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; down payment 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.

2-15_Rent-vs-Buy_Medians-Comp_C

As always, comments, questions, suggestions for future newsletter topics, and referrals to those who might be considering buying or selling a home are much appreciated!


These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and how they apply to any specific property is unknown without a tailored comparative market analysis. All numbers should be considered approximate. Please contact us with any questions or concerns.

© Misha Weidman, RealDataSF.com, and Paragon Real Estate Group

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