Real Data SF – July 2013 Newsletter: Of Bubbles and Froth

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.

Huge Price Increases, but Stabilization Underway?

We’ve published a series of articles recently that suggest we are still in the early stages of a recovery. While I feel for my buyer-clients who are facing stiff competition and “teaser” list prices well below what properties will end up selling for, I believe that prices are not heading down anytime soon. Rather, I think that the rate of increase in home prices is likely to flatten as interest rates rise (reducing purchasing power and the number of buyers) and inventory increases relative to demand. Bearing in mind that our stats reflect transactions that occurred 30-60 days ago, I think there may already be some stabilization underway.

To be sure, prices have continued their rapid rise since the beginning of 2012 and there were huge increases in home prices in the second quarter of 2013. City-wide prices for both homes and condos now exceed their pre-bust peaks, and that’s true for most but not all SF neighborhoods individually too.

It’s no wonder, then, that a huge number of properties are selling for well over asking price. Fully 54% of homes sold for 10% or more over asking price (25% sold for 20% or more over asking!) For condos, over 36% sold for 10% or more over asking price.

Both these charts come from our July newsletter, which also argues that we are not in a bubble though things may be stabilizing a little. Click on the link for more charts.

No Bubble Yet

As august a publication as The Economist also sees no bubble in “San Francisco” prices. “San Francisco” is in quotes because the data includes five of the inner Bay Area Counties that comprise the San Francisco MSA on which the well-known Case Shiller Index bases its data. Here’s a screenshot from The Economist’s really cool interactive chart (you can find our post on The Economist’s conclusions here:

This suggests that in real terms home prices have not appreciated that much since 2000. Again, the big caveat is that the City of San Francisco is not broken out separately. I’d caution that the index is still reflecting the pain being felt in hard-hit areas like Contra Costa County that still haven’t fully recovered. Still, The Economist’s takeaway should provide some comfort:

”The verdict: in most markets houses are near or above their long-run values, but none looks bubbly. “

The Cyclical Perspective

And even when we focus on San Francisco proper, our data suggests that we are still at the relatively early stages of a recovery. Here’s my favorite chart:

It’s not unusual for prices to increase rapidly in the early stages of a recovery, reflecting pent-up demand. In fact, in my 25 odd years in this business, my impression has been that long periods of flat to moderate prices tend to follow short periods of rapid increases. I believe that will be the case this time round too.

So for my business-savvy friend, as well as my frustrated buyer clients, here’s my advice:

  • It’s not “too late” to get into this market assuming you’re buying for the long-term.
  • Take advantage of low interest rates while they last.
  • Be willing to compromise: there’s no such thing as the perfect home – at any price.

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