April Newsletter: A Hot Market Getting Hotter

San Francisco: A Hot Market Getting Hotter

1st Quarter 2013 Market Report

In 2012, the market turned with a vengeance and grew very hot very quickly. Now in 2013 it has grown even hotter. Recent deal-making stories almost make the seemingly crazy, multiple-offer tales of last year appear sedate. The supply of listings is drastically low against buyer demand, and the pace of price appreciation looks to be accelerating. Some city neighborhoods appear to be surpassing the previous peak values reached in 2007-2008. As seen below, the first quarter’s numbers reveal big increases in home values year over year. And the month of March alone saw a particularly big jump of almost 9% above February’s median price.

March sales prices reflect the heat of the market 4-8 weeks earlier, when the offers were actually negotiated. Much of the first quarter’s sales data reflects offers negotiated in late 2012. In a rapidly changing market, we’re always looking in the rearview mirror.

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N2How Does Supply & Demand Affect Prices?
The past 18 months give a text book example of how the supply and demand dynamic affects home values. Months supply of inventory (MSI) measures the strength of buyer demand against the available inventory of homes to purchase: the lower the MSI, the hotter the market. The hotter the market, the greater the upward pressure on prices.

This link shows the details of the recent increases in median sales price:
SF Median Home Price by Month

N3Sales Prices Over & Under List Price
As the market has strengthened, the percentage of SF homes selling for over — and sometimes far over — list price, has soared to almost unbelievable levels. In the last 2 months, 30% of SF house sales have sold for 15% or more above asking price.

This link shows the huge decline in inventory since the market turnaround began. Typically, we see a surge in early spring. Not this year, at least not so far:
Inventory of Listings for Sale

N4Percentage of Listings Accepting Offers
This is another excellent indicator of demand vs. supply, and it is now at the highest levels in memory for virtually all property types.

This link goes to our chart on average days on market. Generally speaking, the hotter the market, the faster listings go into contract and that is what we are indeed seeing now:
Average Days on Market

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The Crunch in San Francisco’s Real Estate Market

Over the last 13 months, for a variety of compelling economic reasons, home-buyer demand in San Francisco has continued to grow ever stronger, while the inventory of homes available to purchase has only become tighter. This is the classic supply and demand dynamic — increased competition for a scarce commodity — that leads to increasing prices. Our inventory crunch, at least so far in 2013, is not easing. This situation is advantageous to sellers, and difficult and aggravating for buyers (and their agents): the time, effort, emotional energy and money that it takes to find and buy a home have all been increasing.

However, if buyers can summon the patience and endurance to see the process through, they might take some solace in the last 2 real estate recoveries, in the eighties and nineties. As can be seen on charts further down, it’s not unusual for repressed buyer demand to explode after a long down market, creating the same rapid appreciation situation we are experiencing now. But even with increasing competition and rising prices, those who purchased in the first few years of the past 2 turnarounds ended up doing very well with their investments. We don’t know if this recovery will continue to follow the same trend lines as past market cycles, but it has thus far.

Below are analyses that look at both short-term and long-term trends from a variety of angles.

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Is Everything Selling Over the Asking Price?
No, of course not: not all listings are selling for over list price. Some homes still go through price reductions and some don’t sell at all, but it is true that a large percentage of SF listings is now selling for over asking price and sometimes far over. This is especially the case with houses, where 1 in 4 sold in the past 2 months went 10% or more over the list price. (Note: Homes selling for within a quarter percent of the list price were considered to have sold AT asking price.) And this link shows the dramatic increase in median home prices in 2012:
Median House & Condo Prices

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New Listings vs. Accepted Offers
There are two issues behind the current low inventory crunch: firstly, there’s the simple matter of fewer listings coming on market, and secondly, that the listings that do arrive are being snatched up very quickly. This chart compares the influx of inventory and buyer demand in January of the last 4 years. Currently, on any given day, the choice of listings available to purchase is far below that of previous years — which fuels fierce competition between buyers. This link illustrates that fact and the overall decline in listings for sale:
Listings for Sale

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Ratio of Expired Listings to Sold Listings
Even in a hot market, not every listing sells: some listings viewed as overpriced end up expiring or being withdrawn. However, the ratio of expired and withdrawn listings to sales declines significantly in a strong market, which is what happened last year. Typically, the fourth quarter is marked by a very high rate of expired and withdrawn listings due to the holiday season and end of the year, but in the last quarter of 2012, buyers continued to aggressively snap up listings. And this link goes to a days-on-market chart illustrating the increasing speed with which buyers are snapping up listings:
Average Days on Market

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Perspective on 3 Recoveries
This Case-Shiller chart for the 5-county SF Metro Area begins with the recovery following the market recession/ doldrums of 1991 – 1995. The market of 1996 and 1997 had basically the same dynamic of repressed demand exploding alongside a recovering economy that we’re experiencing today. (All chart numbers reflect a percentage of the home values in January 2000.) There followed a 100% increase in values over the next 5 years, even before the inflation of the big bubble of 2004-2008. Buyers who bought in the mid-late nineties ended up doing quite well. This link shows the same dynamic in the transition from the late seventies/ early eighties recession to the mid-eighties rebound. Those buying in the early years of that recovery also did pretty well, even factoring in the following recession and market correction:
Market Recovery in the 1980′s

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Supply & Demand
The chart and the one in the following link are two classic measures of supply and demand. The lower the months supply of inventory and the higher the percentage of listings accepting offers, the stronger the demand when compared to the supply of homes available to purchase.
Percentage of Listings Accepting Offers

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Buying vs. Renting in San Francisco
This analysis (just 1 part of a full report) compares buying a 2-bedroom SF home at the current median price of $775,000 to renting a 2-BR at the current average asking rent of $3800. It illustrates how buying can make excellent financial sense after tax benefits and principal pay-down are factored in, much less building substantial home equity over time. In this analysis, the “net” house payment comes out well below the rent. However, these scenarios depend on many assumptions such as interest, appreciation, inflation and income-tax rates. It depends on the rent one is paying and having the 20% down payment and closing cost monies available. Still, there’s no doubt that with current interest rates and rents, the equation is much more favorable to buying than it has been for a very long time. Feel free to perform your own analyses using our Rent vs. Buy calculator, which can be accessed using this link. After putting in your numbers, be sure to click on Calculate and View Report:
Calculators

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