Just a few days ago, The San Francisco Business Times reported that a third of the national housing experts surveyed by Zillow described the Bay Area’s housing market as being currently in a bubble. Here’s the table that shows how the experts came out on the “bubble” question, courtesy of Pulsenomics, who conducted the survey for Zillow.
“Months’ Supply of Inventory,” or MSI, shows the theoretical number of months needed to “absorb” available homes for sale in a given month based on the number of homes going into contract in a given month. The shorter the time period, the stronger the market for sellers, leading to upward pricing pressure. Longer time periods indicate slower absorption and a buyers’ market.
The chart below illustrates the dramatic difference in MSI for homes up to the median price ($1.3 million for houses, $1.1 million for condos) and in the next price segment higher, versus the luxury home segment, defined here as houses selling for $2,000,000+ and condos for $1,500,000+. (By this definition, luxury sales currently make up about 20% of San Francisco’s home sales.)
The other day I was talking to a business-savvy fellow who has been looking to get into the real estate market since 2009. Back then, he recounted, everyone thought he was crazy to want to buy something. Ultimately he didn’t. Recently I introduced him to some clients of mine who were looking to partner up with someone on a “fixer” project. Surveying the $1 million prices “fixers” seem to be going for, he used the words “bubble” and “frothy” to describe what’s going on in SF right now.
Is he right? Let’s leave aside the question of whether we should consider homes “investments,” as we do stocks. (In general, I don’t think we should: click here for U.S. long-term home appreciation stats prior to the housing recovery.) Instead, let’s simply focus on whether, after 18 months of breath-taking price increases here in SF, we are already in a new housing market bubble.
July 2013 San Francisco Market Report
If you prefer, you can skip the following analysis to go straight to the charts and maps following.
Many adjectives are used to describe San Francisco, but normal isn’t a common one – and the same can be said about our real estate market. Even taking into account its tendency to be unusual in one way or another, this past spring’s market was overheated by virtually any definition. Surging consumer confidence and huge buyer demand chased a deeply inadequate supply of homes for sale, abetted by interest rates so low that loans – factoring in inflation and mortgage interest deduction – were almost like free money. All this led to an extreme seller’s market, a feeding frenzy and dramatic price appreciation.
But not, in our opinion, a bubble. The Economist, one of the first to sound the alarm for the last bubble, sees no sign of a U.S. housing bubble, basing its conclusion upon historical comparisons of home prices with rents and incomes. Also, it is not unusual for the market to go somewhat crazy following a 4-5 year down cycle after all the repressed demand bursts forth – this happened in 1996-1997 too. Besides which, we are only about 18 months into the current recovery. Though real estate is susceptible to sudden economic and political shocks, in past cycles, recoveries have typically lasted at least 6-8 years before peaking. That doesn’t mean there won’t be any short-term market adjustments, up or down, for one reason or another, along the way.
There are some signs of a normalizing market. After a year of declines, the number of new listings in the 2nd quarter was a little higher than the 2nd quarter of 2012. Though this inventory was quickly gobbled up and overall supply remains very low, it’s a good sign more sellers are entering the market. Median prices may be leveling off after spring’s big pop – it’s still too soon to be sure, but summer often sees a cooling down. It’s not welcome news to buyers, but interest rates have increased from extreme lows – though remaining very low by any historical scale. (See below: The Sky is Not Falling.) The distressed home segment, which always distorts markets, is disappearing in the city and declining everywhere. And new-home construction continues to increase: even though we won’t see much of this new inventory until 2014 and later, it’s a very positive sign.
We have updated our home value maps to reflect spring’s recent sales:
San Francisco Neighborhood Values
San Francisco Median Home Prices
For both houses and condos, the second quarter saw jumps well above previous peak values. Median sales prices are affected by other factors besides changes in value – seasonality, inventory, buyer profile, big changes in the distressed and luxury home segments – but the dramatic increases do reflect rapidly climbing home values in the city. Though all SF neighborhoods have been experiencing striking appreciation, this does not mean that all have now exceeded previous peak values.
Sales Over & Under Asking Price
This chart illustrates the enormous percentage of listings selling for over – and sometimes far over – asking price. 25% of house sales in June sold for 20% or more above list price: At San Francisco prices, 20% above asking often equals hundreds of thousands of dollars.
Price reductions: 89% of second quarter sales sold quickly without price reductions at an overall average of 8% over list price – a clear indication of overheating. Still, not every listing sold without a price reduction and some didn’t sell at all, but ended up withdrawn from the market:
Price Reduction Chart
San Francisco Luxury Home Sales
No market segment has been affected more dramatically by the recovery than luxury homes. In an inventory constrained environment, it has far out-performed the general market in unit sales.
This link goes to our luxury market report that also delineates the neighborhoods which dominate high-end house and condo sales in San Francisco:
Paragon Luxury Report
Interest Rates: The Sky Is Not Falling
Not to diminish legitimate concerns regarding rising mortgage rates and their effects on housing costs, but this graph puts recent increases in context. At any time before 2011, the current interest rates, even after their recent big percentage jump, would be reason for conga lines of celebration in the streets. Rates had to rise from their historic and artificial lows – how far and fast this may continue is unknown to us, but we don’t presently expect big shocks to the real estate market in the near future.
Distressed Home Sales: this link goes to a chart illustrating the rapidly dwindling distressed home market in San Francisco. In most neighborhoods, the effect of these sales has disappeared altogether.
Distressed Home Sales
Average Days on Market (DOM) have also hit historic lows for virtually every property type in the city:
Average Days on Market
Paragon Market Report, June 2013
New highs in home prices have not yet been reached in every San Francisco neighborhood, but the majority has either regained the value lost since the 2008 market meltdown, or now exceeded the previous high points of 2006-early 2008. (Different neighborhoods peaked at different times, just as they are now recovering at different speeds). This does not mean that every property bought at the height of the bubble in feverish multiple-offer bidding wars has now regained peak value. Nor does it mean that values might not fluctuate or drop in future months due to seasonal and/or other economic factors.
Though virtually every market in the country is now on a similar upward trajectory, San Francisco’s has recovered more quickly than most in the Bay Area, state and country. The city’s neighborhoods, with a few exceptions, were never hit as hard as most other areas by the tsunami of distressed property sales: our home values generally fell in the 15-25% range compared to huge declines of 40-60% elsewhere and so we have had less ground to recover. That said, the city has always been an exceptional real estate market and the confluence of economic factors both general (such as the lowest interest rates in history) and unique (such as the local, high-tech boom) jumpstarted and supercharged our recovery beyond most others.
It should be noted that, looking at past recoveries in the early eighties and mid-nineties, it is not unusual once a recovery gets underway after years of recession and repressed demand, for the market to regain previous peak values within a couple years of the turnaround beginning. Recoveries often start with a dramatic surge and that is what has happened with this one.
City, State & National Long-Term Overview
In this chart, one can see the recovery occurring everywhere, but most dramatically in San Francisco. For this analysis, we’ve calculated the 2013 SF median house sales price for the 5 months since the year began; if we looked at just the last 3 months (reflecting offers accepted in 2013, when the market accelerated further), the SF median house price jumps to about $1,000,000. (Note: State and national data sources are behind those we can access for the city, and the last median prices reflect that disparity.)
SF Houses: Previous Peak Values to Present
In this chart, since we’re also calculating average statistics, we’ve capped the sales price at $3,000,000 because ultra-high-end sales usually distort averages. We see the previous peak value in 2007 (for SF houses in general), the drop to the bottom of the market in 2011, and the rebound starting in 2012 and accelerating in 2013. By all 3 main statistical measures of value, San Francisco houses have met or exceeded previous peak values. To adjust for seasonality, the comparisons are for the spring months of each year.
This link goes to the same analysis for SF condos except it starts in 2008 when condo values peaked and sales are capped at $2m:
Condos: Previous Peak Values to Present
Short-Term Appreciation Trends
This chart breaks down the rise in SF home values occurring over the past 2.5 years. Though it appears that 2013 prices surged after the first quarter, the surge actually started in March, which is when the market really started to reflect offers negotiated in 2013. January and February sales mostly reflect the holiday season market, when the higher-end home market typically checks out. We prefer quarterly or longer time periods because they make for more reliable statistics: monthly statistics often fluctuate without great meaning. The high overall median prices achieved in March-May may drop somewhat during the summer due to seasonal and other factors.
This link goes to an overview of the past 30 years: it helps give context to what we’re experiencing today:
30 Years of SF Real Estate Cycles
2006-Present: House Values by Neighborhood
These 4 SF Realtor districts generate a lot of house sales, so they’re good for statistical analysis. For 2013, this chart looks at the last 5 months of sales-if assessing just the last 3 months, 2013 numbers would typically be higher. The central Noe-Eureka-Cole Valleys district, a hot bed of high-tech buyer demand, has soared well beyond its previous peak value in 2008. The very affluent northern district of Pacific Heights-Marina has also exceeded its previous peak. Sunset-Parkside in the southwest has regained its 2007 peak, and the southeast Bayview-Portola-Excelsior district, which was hit hardest by distressed sales, while recovering rapidly, has not yet made up the value lost since its 2006 peak. This district, with more house sales than any other, lost more percentage value in the downturn (25-45% depending on neighborhood) and so has more ground to make up. But it’s well on its way.
2006-Present: SF Condo Values by Neighborhood
These 6 areas of the city generate high numbers of condo sales, which is why we chose them for this analysis. Condos in all these areas have increased in value beyond their previous peaks in 2006-2008; some of them, such as South Beach, dramatically so.
This link illustrates how, over the past 5 years, the SF market has switched from being dominated by house sales to condo sales; with the continuing construction of large condo projects, we expect this trend to continue. TIC sales have dropped significantly, both as a percentage of sales and in actual unit sales: This is due to a number of complex issues such as changes in city condo conversion and tenant protection regulations.
Sales by Property Type
Price Range Dynamics
There are 3 main underlying currents occurring in San Francisco. First is the rapid dwindling of distressed property sales: Thus, sales under $500,000, the price range of most distressed sales, have dropped by 62% since last year. This segment is on the verge of disappearing completely in SF. Second is the dramatic resurgence in luxury home sales: the affluent have profited most from the economic recovery and the city also has large numbers of the newly affluent (often high-tech) who wish to buy homes. So, sales of homes costing $1,500,000 plus have surged by 76%. The third dynamic is simply the general appreciation of home values. All 3 factors add up to a large migration from lower-priced to higher-priced sales. Note: The medians quoted on this chart are for many different property types combined.
May Listings/Sales Snapshot
A clear indication of the red-hot heat of our market: 90% of SF home sales closing in May sold without going through any price reductions, at an average sales price 7% higher than the asking price and a very low average days-on-market of 29 days. These are very dramatic statistics illustrating the high demand/low supply situation here in the city.
The pundits are making dramatic, even doom-laden pronouncements about what is going to happen with interest rates (and the housing market), though they’ve been wrong so many times over the past few years, these “expert” predictions might be taken with salt-shaker’s worth of salt, perhaps with lemon and a nice shot of tequila.
Obviously, interest rates are an important component of the real estate market. But this chart gives a little context to what has occurred recently: the blue column is the average 30-year interest rate for the first 5 months of 2013, when everyone was dancing with glee at how low the rates were; the black line at the end represents the interest rate on Friday, June 6th, though it is true that it briefly hit 2 tenths of a percentage point higher earlier in the week (so if you like, add the tiniest smidgeon more to the black line).
I don’t know where interest rates will go, though they will probably rise over time—and perhaps there will be an upcoming interest-rate shock. But terror seems a bit premature.
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.