The 2023 Real Estate Wrap-Up: Down from the Heights!

Before we get deep into the numbers, let’s review some of the year’s milestones and, um, millstones.

  • Rosalyn Carter, Henry Kissinger, Dianne Feinstein, Harry Belafonte, Jimmy Buffett and Tina Turner all died.
  • Between March and May, Silicon Valley Bank, Signature Bank and First Republic Bank all failed.
  • In the summer, Hollywood went on strike and in September tens of thousands of United Autoworkers followed suit.  
  • Also in the summer, Nvidia joined Apple, Microsoft, Amazon and Alphabet with a market cap of 1 trillion on the basis of its being the leading supplier of chips for the new high tech darling, AI, whose breakout star, Open AI, just happens to be headquartered in SF.
  • The Fed Reserve raised the fed funds rate five times, on top of the six increases that occurred in 2022, to around 5.25%  — a rate last seen in 2007 just prior to the Great Recession. 
  • Four major insurance companies announced they would stop or limit writing new insurance policies on residential property in California.

Home Sales Plummeted

Except for a temporary drop in mortgage interest rates at the beginning of 2023, the Fed’s relentless rate increases had their inevitable effect: with 30 year mortgage rates topping out near 8% (chart below), residential sales slowed to a crawl.

Let’s be clear:  it was a horrible year financially speaking for most real estate agents.  San Francisco residential sales volume, the lifeblood of real estate agents, was absolutely hammered. Throw in the difficulty of finding casualty insurance on most of the older housing stock that graces our charming city  – without which lenders will not lend – and it would be fair to say that describing 2023 as a “challenging” year is like us real estate agents saying that a fixer in need of everything has “charming period details.”

The first chart below shows all residential sales including multi-tenant properties, with sales way down to levels last seen, well, never.  The second chart shows just homes, condos, and TIC’s for the last three years as well as dollar volume.  At around $6.2 billion, dollar volume was down 31% from the previous year and was half that of 2021. (Admittedly, 2021 was when the market hit its all-time high.)  Unit sales showed similar declines. Demonstrating the “lock in effect” of high interest rates on existing owners, the number of new listings was “the lowest in decades” (third chart below).  

House Prices Are Down but Not Out

So how does all this translate into prices?  Here, the time periods you choose to compare really make a difference.  Comparing Q4 2023 to a year earlier, the median house price of $1.55 million is down a mere 1% (first chart below).  Hogwash!  If we instead choose to compare a full year of data, prices are down 13% from a year earlier (second chart).  Worth noting is that prices fell slightly below the median price we hit way back in 2018 before the post-pandemic runup.

And for a more general perspective on house price appreciation, here’s a chart from Spring 2023 that shows appreciation over various time periods.  Since the quarterly median hasn’t changed much since then, it’s still relevant.

Condominiums still in the Doldruminiums

Looking at condos across all neighborhoods, the story is surprisingly similar to that for houses, if less dramatic.  Surprising, because I’ve always believed that condos react more dramatically to downturns.  Comparing Q4 2023 to the year earlier, the median condo price of $1.1 million is down just 1% (first chart below).  For the full year, prices are down just 6% (second chart).  While astute observers will note that the quarterly data shows a steep decline from the all-time high of $1.3 million reached in Q2 2022, seasonal effects are responsible for some of that decline.

I think the reason for the less dramatic decline for condos is that they’ve seen less dramatic price growth in recent years than was the case with single family homes.  

But I think my conclusion also squares with the after-effects of the pandemic.  Those condo owners or renters who could afford to leave the city for areas where they could have some outdoor space did so.  Especially dense areas like downtown and South of Market emptied out as tech workers and companies adapted to “remote work.”  Although the pendulum is swinging back, experts think the new normal may be a hybrid model.

Not All Condominiums Are Created Equal

Indeed, condos in those dense areas fared much worse than those in SF’s more residential neighborhoods, as the next chart shows.

Condos in Downtown/SoMa/Civic Center reached their all-time high of $1,080,000 in 2019 – the year prior to the COVID pandemic — and sold for a median price of $865,000 last year. That’s a whopping 20% down in 4 years.* Condos outside of those areas reached their all-time high of $1,350,000 in 2021 and were down 8.5% to $1,235,000.  Wow! If you’re a contrarian and believe, as I do, that SF will recover, I’d be looking for a condo with some quality that sets it apart – views, location, a balcony – in Downtown/SoMa/Civic Center.  Just understand that the recovery in that area may take a while.

The Future

Or not.  There have been increasing signs that the market is already coming back.  If October 2023 represented the nadir of market activity last year, things noticeably started to improve as mortgage interest rates fell precipitously in the last two months of the year (go back and look at the first chart). Many agents, myself included, remarked on an uptick in activity and that appears to be accelerating as the new year gets underway.  Positive signs include a big recovery in the stock market, optimism – whether or not misguided – about further interest rate cuts, and fewer “doom loop” articles about poor San Francisco.  The venerable Economist’s recent headline offers hope:  “How San Francisco staged a surprising comeback: Forget the controversy. America’s high-tech capital is building the future.”  My next newsletter will discuss these promising signs in more detail.

And on a Personal Note

Speaking of my next newsletter, I’ve repeatedly fallen short of getting these out as often as I would like to.  I ask your patience with that.  I write these “from scratch” – no AI! – and they typically take me 7-10 hours.  Often work and life get in the way.  Do know that the appreciation you have shown over 10+ years really does sustain me!

And, as always, your comments, questions and referrals are also much appreciated!

* Note: An earlier version of this newsletter misstated the all-time high as occurring in 2020.

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