Happy New Year everyone! It’s been nearly three years since the Covid pandemic hit the world. Back in March 2020, as San Francisco’s streets became eerily quiet, it might not have been wrong to predict an apocalyptic end to the modern world and city life in particular à la Station 11, ( I highly recommend the Amazon Prime series). As people fled the city and its density, predictions for SF’s real estate collapse propagated faster than new Covid variants.
Fast forward to mid-2022: both house and condo prices hit records of $2 and $1.3 million respectively. For the full year, the median house price ended down just 1% from the all-time high set in 2021; condos ended down just 2% from the previous year. Covid, Schmovid, you might say.
Unfortunately, there’s damn lies and then there’s statistics. The yearly numbers above belie the significant drop in the market that occurred after the Fed started raising interest rates in the summer. Despite a brief respite in Q3, the residential market stumbled badly in the second half of the year.
Let’s take a look at quarterly results. Q4 single family home prices tumbled a whopping 20% from Q2, and were 13% down from Q4 2021. Condos fell 13% from Q2 and ended down around 12% from a year earlier. They are basically at price levels last seen in 2015. (Houses are at around 2018 levels.)
While activity and prices always fall during the winter months, these kinds of drops clearly reflect more than a change in the weather.
Pretty much every metric tells the same story: Rapidly falling sales volume; increased days on market (DOM); fewer homes going into contract; lower absorption rates; lower sales to list price ratios. Here are just a few charts that show these trends.
The Ugly: Luxury Homes and Downtown/SOMA Condos
While no neighborhood or property type has been immune, homes and condos in luxury neighborhoods (think the Heights and the Hills) and condos in the broad South of Market (SOMA) area have been hit particularly hard.
Taking homes over $3 million and condos over $2 million as our definition of “luxury,” it’s fair to say that the number of sales of each fell off a cliff starting in the second half of the year. Twice as many luxury house sales occurred in the first 6 months of the year than in the second.
Let’s focus on MLS District 7, comprising swank neighborhoods like Pacific and Presidio Heights and the Marina. It holds a significant portion of the city’s luxury single family homes. Here are a few sobering stats:
District 7 Home Sales for December: Median price: $3.2 million, down 20% from 12/21; sales volume: down 86% from 12/21.
As for downtown/SOMA condos, they haven’t recovered from the mass exodus that occurred during COVID when everyone who could left for towns and suburbs where they could afford some outdoor space while working remotely. The hybrid work models ushered in with the COVID era, not to mention the general slowdown in the tech sector, mean that urban centers like San Francisco are likely to have high office vacancy rates for a while. The lack of office workers starves restaurants, bars and gyms of the lifeblood that keeps them going. And that, in turn, saps Downtown/SOMA of the energy that makes it an attractive place for young folks to live. We estimate that median condo prices for this area are down 19% for Q4 from a year earlier. Looking at 2BR condos alone, they’re back to January 2017 levels.
The Long View
Look, it’s not like other geographic areas, or the stock market for that matter, are not suffering as well right now. Clearly, San Francisco and the Greater Bay Area have been hit by inflation, higher mortgage interest rate, stock market declines, and tech layoffs – all of which have been sufficiently documented elsewhere. However, if you think the real estate market isn’t still moving you’d be wrong. As always, single family homes and condos (outside of Downtown/SOMA) that “check all the boxes” are still selling quickly and are still fetching premiums to list price – especially as listing agents are pricing more conservatively than before. The slightest breather in interest rates – and in the wet weather – also seems to stimulate interest from buyers. But if mortgage rates increase further due to the Fed’s fight against inflation, it seems inevitable to me that sellers may be in for some pain until that fight is won. At which point, I am absolutely sure that buyers will come rushing back in droves, as they always do.
And if you’re a buyer? If you’ve got cash or can afford the loan payments, this is probably your best opportunity to get into a home without the usual feeding frenzy since early 2012 when the market roared back after the Great Financial Crisis. Honestly, if you’re time horizon is a minimum of five years, I wouldn’t miss it.
As always, your comments, questions and referrals are much appreciated!