San Francisco Mid-Year Real Estate Report:
It’s Not Just the Weather That’s Gloomy

(Photo courtesy of Henri Borius @ IG_Henri_Borius_Photos)

Noe Valley, where I live, is supposed to be sunny.  But I can tell you that – until this July 4 week-end’s delightful respite  — I was getting tired of waking every morning to another milky white sky and a temperature reading that seemed stuck on 50º. It’s not just the weather that’s been gloomy. One article after another seems to take delight in enumerating San Francisco’s travails.  The Economist, among other magazines, opines that downtown San Francisco may risk falling into a “doom loop.”  The San Francisco Chronicle followed up with a list of major retail vacancies after Westfield gave up its flagship property on Market Street.  And the Financial Times, in an article titled “Defaults Raise Alarm Over Stability of San Francisco’s Commercial Property,” quoted the chief executive of the company that owned two major hotels given back to their lenders as saying “San Francisco’s path to recovery remains clouded and elongated by major challenges” including “concerns over street conditions”.

Indeed.  Downtown San Francisco resembles what I remember it looking like in 2001 after the bust.   More broadly throughout the city, you’re lucky if you can find a restaurant whose kitchen stays open after 9:00 pm.  And homelessness continues to plague the city, just as it does the state more generally.  The Benioff Homelessness and Housing Initiative’s recently released report found that over 171,000 people experienced homelessness daily in California.  That’s more than 30% of the nation’s homeless population.

Shall we talk about interest rates (see below)? With 30 year fixed mortgages going for around 6.5%, we are back at rates last seen right before the 2007/2008 Financial Crisis brought the party to a close.  For anyone who’s counting, that was fifteen years ago.  And the speed of the increase has been breathtaking:  rates were at 3.25% just 18 months ago (second chart). Fed policy may not have succeeded in taming inflation yet, but it’s certainly had its effect on the housing market.  No one should be surprised.

House Prices – Down, but Maybe Don’t Believe the Headlines

Let’s just get this out of the way:  As of May, the median house price was $1.626 m, down around 19% from a year earlier.  But: May 2022 happens to be when the median house price hit its all-time high (just over $2 m).  You could say that was the market’s last gasp before everyone realized that the Fed was serious. Compared to May 2021, prices are down a little less than 10% (first chart, below).

And not all segments of the market fell equally.  Higher priced homes have been hit particularly hard; monthly sales of homes over $3 million are at half the levels they were a year ago, magnifying the median price decline (second chart).  There’s some evidence that both prices and sales have ticked up recently, but it’s too soon to say whether this is just seasonal or a trend.

Condominiums: A Tale of Two Cities.

Why? Because condominiums in the urban core part of San Francisco – what we’ve dubbed the Greater Downtown/South of Market area (first chart below) are doing decidedly worse than condos in city’s more residential neighborhoods.

This makes sense.  Greater Downtown/SOMA was the epicenter of the exodus from San Francisco during COVID as young tech employees fled the city for the suburbs and other areas where the outdoors are accessible (Tahoe/Hawaii/Colorado) but they could still work remotely.    While there are signs that tech and other companies are increasingly requiring employees to go back to the office in person,  layoffs in tech, together with downtown SF’s other challenges –  moribund retail, restaurants, bars, homelessness – may continue to inhibit recovery for some time.

The median sales price for condos in Greater Downtown/SOMA were around $900,000 in May, down 18% from their all-time high of just over $1.1 million in 2019.  Prices are back down to levels last seen in 2015 and appear to be continuing to fall (chart below).

Condos in the rest of the city are just doing ok.  The median price in May was about $1.23 m., down 12% from a high of $1.4m set in 2022.  Prices are down to levels last seen in 2018.  As with single family home sales, there’s been an uptick in values in recent months, but it’s too soon to say whether this is the start of a recovery.

Houses vs Condos:  Apple Pie

For those that can afford it, a single family home is still the American Dream.  Hence, across the board, houses are doing better than condos, as the next two charts show.  Both Days on Market (DOM) and Percentage Sales Price to List Price favor houses by a long stretch.  Note, though, that DOM for homes has increased significantly since the “height” of the market in 2022. (Longer DOM signifies a slowing and/or buyer market).

Longer term trends show two things:  First, both condos and homes have appreciated over the long term, despite some significant setbacks.  Second, houses have increased in value significantly more than condos – yet more proof that scarcity buttresses value:  while, as Mark Twain said, “they’re not making any more land,” SF’s transformed skyline proves there’s always room for more condos.

The Long View

Below is a photo I took with my phone over July 4 week-end when the sun finally came out.  Admittedly, the views from Pacific Heights where this was taken ain’t bad.  But really, between San Francisco’s natural beauty, its thriving medical and biotech scene, its continuing allure for tech of all sorts including that sector’s most recent darling, Open AI (HQ on 18th Street), its proximity to some of the finest universities in the world, its progressive and inclusive culture, and – at least for now – a climate that affords some protection against climate change, I continue to think – as I always have – that San Francisco is as well placed as any city on the globe – and better placed than most – to thrive over the long term.

So, for all those delighting in predicting San Francisco’s descent into a “doom loop”?  We’ve heard that song before.  I, for one, wouldn’t bet on it.

As always, your comments, questions, and referrals are much appreciated!

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