Along with a shimmering new Bay Bridge, San Francisco is fast developing a brand new skyline. Driving in from the East Bay, one can’t help but be impressed by the new towers reaching skyward, many of them with arresting architecture. The twin towers of 1 Rincon Hill guards the entrance; the North tower, recently completed, offers luxury rental units but no condos. Meanwhile the curvaceous Infinity Towers ( mnemonic: ∞) has sprouted Lumina, two additional towers plus two mid-rises now nearing completion. Continue reading →
Last month’s newsletter mentioned anecdotal word on the street that the San Francisco market might be slowing down a bit – it appeared the frenzy had diminished somewhat and that fewer listings were selling instantly with ridiculous numbers of competing offers – and the question was whether this would soon show up in the statistics. It hasn’t. Though September did see a burst of new inventory that temporarily changed the equation between buyers and inventory, now with October’s statistics it’s clear the market is still dominated by a high demand/ low supply/ upward pressure on prices dynamic. However, it should be noted that there is a difference in market heat between a listing receiving 1 or 2 offers compared to it receiving 5 to 20 offers, however that difference might not show up in the statistics as long as one good offer is accepted.
Comparing September-October sales reported to MLS with the same two months in 2011, SF dollar volume home sales were up 41%; at Paragon, our sales were up over 109%. These are not the signs of an ebbing market, nor are the statistics illustrated below.
Typically, at this time of year, the number of new listings begins to markedly decline in preparation for the slowdown that usually begins at Thanksgiving and runs through mid-January. But we saw very little of the usual summer slowdown this year, so we will see how much market activity slackens during this year’s holiday season.
Median Sales Price Jumps in October The median home sales price is that price at which half the sales occurred for more and half for less. It is a very general statistic and big monthly fluctuations, such as seen in October, should be taken with a grain of salt until substantiated over the longer term. Still, October saw a very large increase over the relatively static median prices seen in the previous 6 months, which followed the big jump in early 2012. Remember that sales prices reflect accepted offer activity in the 4 to 10 weeks prior.
Average Sales Price Jumps The average price is simply the total dollar volume of sales divided by the number of sales. Like median price, it is a general statistic affected by a variety of factors and often fluctuates without great significance on a monthly basis. Among other factors, a decline in distressed home sales and/or an increase in high-end home sales, both of which are occurring now in SF, can have an outsized effect on average sales price. We will see if October’s big increase is sustained in future months or is simply one of those anomalous fluctuations which occur in real estate.
Buyer Demand Remains at Peak Level The percentage of listings accepting offers in October was probably about as high as it has ever been, close to twice the level of October 2011. The decline seen in September was the result of a large influx of new listings hitting the market in mid-month.
New Home Construction Blasting Off After crashing in 2008, developers are building again in a big way: over 4000 housing units are currently under construction in San Francisco, with many thousands more in the planning/permit phases. The lack of new homes on the market in the past few years has greatly impacted the supply side of the supply and demand equation. However, with the significant time lag between construction beginning on the larger projects and new condos arriving on market, the effects of this building surge will be a while before being felt.
Distressed Home Market Dwindling The city was never as hard hit as many other areas by distressed home sales (bank-owned and short sales), and now they are declining rapidly with the market recovery. The number of distressed home listings has declined by 80% since it peaked in November 2010. On this course, this segment will soon be only a negligible part of the SF market.
Listings for Sale Still Very Low After the spike in September from the large influx of new listings – September is typically the month with the greatest number of new listings – the number of homes for sale is declining again and will almost certainly continue to do so until early 2013.
Months’ Supply of Inventory (MSI) MSI is a measure of how long it would take to sell the current supply of listings at the existing rate of sales. In October, it was about as low as it has ever been.
Average Days on Market (DOM) Strong buyer demand plus low inventory typically leads to lower average days on market, and this is what occurred in October.
The Longer Term View Pulling back from monthly data to look at the longer term cycles of real estate gives greater context to what’s happening in our current recovery.
In October, we completed quarterly updates for San Francisco’s luxury home market, the SoMa-South Beach condo market, the Noe Valley-Castro-Cole Valley home market, as well as for many of the city’s other neighborhoods. If you would like to review these analyses, please reply to this email with your specific request and the information will be sent to you.
ROUGHLY two decades ago, during an earlier Internet start-up boom, many entrepreneurs and fast-typing coders and engineers set up shop in a still-gritty area of this city: South of Market Street.
The young tech crowd rented — and sometimes bought — in commercial buildings in this former warehouse area, converting them into “work-live” spaces where they operated their nascent companies and slept (once in awhile).
“San Francisco was rated first for investment, development and home building in the 2013 “Emerging Trends in Real Estate” report by the Urban Land Institute and PwC. The report says: “In 2013, San Francisco steals the triple crown from Washington, D.C., receiving top billing in the Emerging Trends investment, development, and housing categories. ‘San Francisco is driven by growth and a strong jobs outlook, led by technology and a structural change away from suburban and toward downtown.’”
30 Years of Housing Market Cycles in San Francisco
Below is a look at the past 30 years of 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.
In the first 2 charts below, tracking the Case-Shiller Home Price Index for the San Francisco 5-County Metro Statistical Area (MSA), the data points are for January of each year and 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.
1983 through 1995
(After recession) Boom, Decline, Doldrums
In the above chart, the country is just coming out of the late seventies, early eighties recession – huge 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 almost 100%. Finally, the eighties 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, sales activity plunged and the market stayed flat for 4 years. Still, even after the decline, home values were 70% higher than when the boom began in 1984.
1996 through 2011
(After Recession) Boom, Bubble, Crash, Doldrums
This next cycle looks similar but elongated. In 1996, after years of recession, the market suddenly took off and became frenzied — similar to what we’re experiencing today. The dotcom bubble pop and September 2001 attacks created a market hiccup, but then the subprime and refinance insanity, CDOs and derivatives, Ponzi schemes, books titled “Dow 30,000″ and claims that real estate never declines, super-charged a housing bubble. From 1996 to 2006/2008, the market went through an astounding period of appreciation. (Different areas hit peak values at different times from 2006 to early 2008.) In September 2008 came the market crash.
Across the country, home values fell 15% to 60%, peak to bottom, depending on the area and how badly it was affected by foreclosures — most of San Francisco 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 typically least affected. Then the market stayed flat for more than 3 years, albeit with a few short-term fluctuations.
San Francisco in 2012
A Strong but Young Recovery
In 2011, San Francisco began to show signs of perking up. An improving economy 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 is now experiencing a high demand-low supply dynamic.
The SF median house sales price has increased dramatically in 2012, though varying widely by neighborhood. But it’s still a baby recovery — though seemingly a healthy one — and the economy remains susceptible to big financial/political crises. However, the greater Bay Area, the state and the country are ALL beginning to show signs of a housing recovery. New home construction is rising, distressed sales are declining, the rent vs. buy equation has turned favorable to buying, and values are ticking up again.
The 1983 – 2012 Overview
Up, Down, Flat, Up, Down, Flat (Repeat?)
Smoothing out the bumps delivers this overview for the past 30 years. Whatever the phase of the cycle, up or down, while it’s going on people think it will last forever: Every time the market crashes, the consensus becomes that real estate won’t recover for decades. But the economy mends, the population grows, people start families, and repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and now in 2012, after 3-4 years of a recessionary housing market, this repressed demand jumps back in and prices start to rise again.
Bay Area Price Declines by Price Range
This chart illustrates the huge differences in the degree of value declines suffered by different price segments of single-family housing in the Bay Area: The lower the price range, the greater the percentage of distressed sales and the larger the declines in values. San Francisco, with its expensive housing, suffered less than most places, though it still certainly suffered. Distressed sales never made up the huge percentage of sales they reached in other counties, and now, with the market rebound, distressed-home listings in SF are rapidly declining.
Very generally speaking, the more affluent areas of the city saw a peak-to-bottom decline in the 15% to 20% range; the city’s middle price range saw 15% to 25% declines; and its lowest price segment went down 25% to 40%. Some neighborhoods are now seeing a rapid reversal of those declines.
Is San Francisco an Exceptional Market?
Comparing Rates of Appreciation & Decline with Other Market Areas
Every market is different, and San Francisco is very different from the rest of the state and country, even from counties across the bay: Demographically, economically, culturally, in its severe limitations on growth — we can’t expand like Las Vegas or Phoenix or most counties — and in its overall desirability as a place to live and work.
The above charts illustrate how that translates into home values. Comparing the city, Bay Area, California and United States over the past 20 years, San Francisco home values appreciated more, declined less after the crash, and now appear to be recovering more quickly.
****************************** Note on Methods and Data Sets
Calculating home price percentage changes, such as increases to or declines from peak value, are notoriously variable. The most dramatic results — and most often quoted in the media — come from picking the absolute highest value or lowest value month as the point of comparison. But monthly data often fluctuates dramatically without great significance, and we typically prefer quarterly or annual statistics if available. However, if a market is changing quickly, then monthly data must be used to illuminate the incipient trend. Still, sustained longer-term trends are always the most meaningful.
The above charts use a variety of data sets: S&P Case-Shiller Indices, San Francisco MLS sales and median sales prices from state and national Realtor Associations. Each has its own specific market area, property types and time period tracked, and methodology. These analyses were performed in good faith to create what we believe are true, if only approximate, reflections of market trends over time.
Percentage increases and declines are not created equal: A price jump from $500,000 to $1,000,000 equals a 100% increase, but falling back from $1,000,000 to $500,000, the same dollar change equals only a 50% decline.
I’ve been itching to do some posts and I have some interesting info coming on TICS (Tenancy-In-Common Interests) vs. condos. However, the last few weeks have been taken up readying my development project, Windsor Live+Work, for a major re-submission to the Town of Windsor (we’re talking just north of Santa Rosa, folks, not the seat of the British Monarch). Windsor Live+Work is a 12 unit live/work project that combines some beautiful and innovative architectural design with forward-thinking urban planning ideas and “green” construction standards. Here’s the 3D rendering, which I received just last week (click — it looks really good big!).
Stay tuned for new posts and charts in the next few days.
Ever wonder how much that would cost you in San Francisco? Ever think it might make sense to buy your own little piece of heaven and build the house of your dreams on it rather than pay through the nose for an old Victorian lady wearing a lot of make-up and suffering from 100 year-old plumbing?
First off, you may spend a lot of time looking. Since 2005, there have only been 216 undeveloped land sales in San Francisco. I’ve tabulated the results by ZIP code for the 208 for which there was sufficient information to calculate the price per square foot.
With so few data points available, one should be careful drawing conclusions. For example, $673 per square foot for land in Hayes Valley and/or the tenderloin? I don’t think so. With only two data points for that zip, who knows why?
Still, the numbers make an overall kind of sense. Zip 94109 (Nob Hill, Russian Hill) is at the top end at $495 per foot; zip 94124 (Bayview) is at the bottom. Most of the zips line up more or less where you’d expect them to.
A quick recent case study: a 1900 foot “view lot” on Diamond St in Noe Valley, heading up towards Diamond Heights sold in June 08 for $1,052,000 — a cool $100,000 over the asking price. That’s $550 bucks a foot. That price included approved construction plans and permits for a 3100 square foot 4BR/4BA home, complete with elevator. Construction costs can obviously vary widely, but my insurance broker quotes an insurance industry “replacement cost” range of $300 to $500 per square foot for San Francisco/Marin. That includes architectural fees, etc.
Take the low end of that range and you get a construction cost on that house of $930,000. So you’re in for $2 million before you spend a dime for financing charges, delays, cost over-runs, law-suits from disgruntled neighbors, seeing your shrink, costs of divorce, etc.
This confirms my view that the only people who can really make money developing residential property in San Francisco are the ones who can do big multi-unit projects and contractors who don’t have to pay retail to build or fix something. The market’s too efficient to leave any fat for people just looking to build and spin. Same thing’s true for the mythical “fixer-upper.”
On the other hand, if you’re still one of the happy few who don’t feel beaten down by the daily economic news, perhaps you should go ahead and build that dream-house. There’s always slim pickings for 3,000 square foot homes in San Francisco, let alone ones equipped with an elevator. And if you do find one, you’ll be paying north of $2 million anyway.
Just be sure to budget extra for the shrink and the divorce attorney.