Newly Released Case-Shiller Index

The new S&P Case-Shiller Index for August was just released this week. The prices for homes in the upper third of prices – which dominate in most of San Francisco, central and southern Marin, and central Contra Costa – ticked down a tiny bit in summer, exactly as they did last summer. These short-term fluctuations are common and not particularly meaningful until substantiated by a longer-term trend.

Since Case-Shiller’s SF Metro Area covers 5 counties, it should be noted that not all the markets within the Area move in lockstep: activity and appreciation rates can vary significantly.

As is clearly illustrated below, for the past 4 years, spring has been the big driver of home-price appreciation. Prices generally plateau in subsequent seasons until the next spring arrives. For the past couple years, the spring selling season has started very early, in late January or early February, due to the incredible weather we’ve had in those months. El Niňo, if it arrives, might move the spring pick-up in sales back to mid-March/early April in 2016.

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This second chart illustrates the huge burst in prices this past spring. It’s not unusual for the market to slump a little during the summer holidays, almost in exhaustion after the spring frenzy. We’ll have more autumn statistics soon when October’s MLS data comes in, but Paragon has been experiencing its most active autumn selling season in its history in 2015.

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And here are 3 longer-term charts for each of the 3 Case-Shiller price tiers for the 5-county San Francisco metro statistical area. As can be seen, the different price tiers had bubbles and crashes of radically different magnitudes in 2006 – 2009, but as far as total appreciation since the year 2000, all of them display very similar appreciation rates.

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Oil, Europe, China, the High-Tech Boom & San Francisco Bay Area Real Estate

From a talk given by CEO Robert Dadurka
to Paragon agents on October 7, 2015

Current events happening in different parts of world and in different markets are impacting our local economy here in the Bay Area. Let’s take a look at some of the big ones: oil, Europe, China, the United States and technology.

For the past several years, oil has typically been selling for about $100 to $110 per barrel. In the past six months, it’s gone down to about $45 per barrel. That constitutes a crash in the petroleum industry. Generally speaking, it’s a great thing for consumers at the gas pumps and a great thing in terms of the delivery and manufacture of goods. For us as American consumers it’s like a huge tax break, but for the countries that are dependent upon oil revenues, it’s not a positive development. When the markets are looking at all this, they’re looking where the growth is in economies worldwide: Countries that are big oil producers aren’t doing so well.

Why does this matter? Well, it matters to Russia since a large proportion of Russia’s economic activity is through petrochemicals. It also matters to the Middle East, Canada, Mexico, Nigeria and Brazil. All of these economies will continue to have difficulties going forward – especially the Middle East. In the Middle East, 90% of Iran’s budget comes from oil revenues. With oil at $45 per barrel, they’re running a huge budget deficit and their economy is in dire straits. And low oil prices seem to be here to stay for quite some time, with some economists saying the price could drop as low as $25 or $35 per barrel because of oversupply. Other natural commodities, such as iron ore (Australia) and copper (Chile) have also been hit by huge drops in prices. The significant number of national economies with large vested interests in oil and other commodities in decline will almost certainly see increasing financial challenges in the near future. That has a global impact, which has implications for us as well.

Let’s talk about Europe. Europe did things very differently from what the United States did in 2008 and 2009. Back in 2008 – 2009, we had the huge stimulus package, which was very controversial at the time. It did create very significant deficits, but it was the right thing to do considering the extremely dangerous financial circumstances. The United States spent about $2 to $3 trillion dollars on stimulus projects, and then there was also the Federal Reserve Bank with its strategy of quantitative easing (QE1, QE2, QE3): The Fed basically bought assets worth another $4.5 trillion. Those two efforts got the US economy jumpstarted and it is now actually doing quite well.

Instead of stimulus and QE, Europe instead took a path of austerity because of its concern regarding budget deficits. It was worried about things that it shouldn’t have worried about considering the circumstances prevailing at the time, so it didn’t go and flood its markets with capital. Consequently, its economies never really recovered as well or as quickly as ours. Certain markets are doing better than others: Germany and England are doing better, but Europe as a whole isn’t doing so well. Europe’s annual GDP growth was running about 1% to 1.5% and it looked like it might be going in the right direction, but over the past several quarters it started to go in the opposite direction, 1% or less. But more importantly, deflation is beginning to take hold in Europe, which can be extremely dangerous for the economy. Our inflation rate is running about 1.5% to 2%, but Europe’s was negative for the past quarter and it’s expected to be negative this quarter as well. However, Europe is finally waking up and taking aggressive measures of the kind the United States did in 2008 and 2009. They’re flooding the markets with capital, and they have their own type of QE program. We’ll probably see a lot of that type of activity now in Europe.

Another issue for Europe is the huge migration of immigrants from Syria, elsewhere in the Middle East, Afghanistan and Africa. Most are heading to Europe, looking for new homes. Where are they going to live? Who is going to feed them? What about jobs? Those matters are going to weigh on the governments where these immigrants land, and will raise some very significant political and economic issues for the EU.

Moving on from oil and Europe, let’s talk about the biggest issue here in the Bay Area, which is China, the 2nd largest economy in the world. China is the issue that economists and investors are looking at most carefully. After many years of torrid growth, China started going into a financial bubble, even as many aspects of its economy – construction and manufacturing in particular – began to slow. This past summer, China’s stock market dropped about 40% virtually overnight, after a massive surge in the previous year (a surge that had little basis in economic fundamentals). This sudden, dramatic drop hit consumer psychology hard, and many investors were wiped out. The Chinese stock market is 98% owned by individual, “mom and pop” Chinese investors. China doesn’t have the large financial institutions that the United States does, such as the hedge funds and large mutual funds that dominate the market here. Instead, its stock market is owned by ordinary people, who are even more inexperienced financially than ordinary people here. They began to panic and sell their stocks, and this created a huge, plunging, downward spiral.

In response to this, China did two things: 1) it ceased the trading of all small- and mid-cap stocks (about 60% of their market), and 2) it began buying assets in great quantities. While the Chinese economy has stabilized as a result, it’s created somewhat of a false stabilization instead of letting the market go down and hit bottom and then be rebuilt. So there’s more to play out with the Chinese market – it doesn’t have the systems or institutions that we have in the United States, and the stock market collapse has changed the way people perceive China. We’re seeing a significant flight of capital from Asian consumers – the United States being a beneficiary of that. San Francisco and other US markets that the Chinese know are probably going to see more of that capital coming in the short term.

The other part of the bubble we’re seeing in China is in its residential and commercial real estate markets, as this video from the Financial Times illustrates. (You’ll want to click on “Skip Ad” quickly.)

Concerns Grow over China’s Property Market

What does all this mean to the United States? Of the S&P 500, only 10% of those companies get a significant portion of their revenue from China. So the actual impact here may not be that great in terms of fiscal impact or jobs, but there’s a psychological impact that could occur and we’ll see where that goes.

Now to the good news!

In the United States, we’re doing really quite well and headed in the right direction. Our inflation is very low – we’re running around 1.5% to 2%. Our GDP is on the upswing – this year we’re looking at about 2.5% GDP growth for the year following a slow (negative) first quarter of 2015 and a very healthy fourth quarter (projected around 3%). Some economists are saying we could see as high as 3.5% GDP growth next year. Unemployment: we’re at 5.1% – in most markets over the past couple decades that would be considered full employment. As mentioned earlier, low oil prices are a bonus to us and will add some grease to our engine. Additionally, interest rates remain very low. The United States is experiencing very strong household formation – we have 1.5 million new households and only 1.2 million new homes being built, so supply is not meeting demand. Real estate will be a shining part of our economy going forward. 65 million households in the US are making $100,000 per year or more – what’s even more interesting is that two thirds of those individuals are Generation X, Generation Y and Millennial. So there is now a transfer of wealth from Baby Boomers to these younger populations. Lastly, nine of the top 10 companies in the world are US based. We have Apple, we have Google – virtually all of the biggest, most successful and dynamic companies are here.

The San Francisco Bay Area is at the center of much of the United States’ growth. Two thirds of the jobs now in San Francisco are tech related. That’s a huge change from 10 or 20 years ago. We used to have textiles, Levi and Gap. We used to have Chevron, PacTel and Bank of America headquartered here. Now, tech is the big driver of our economy in San Francisco. It’s projected that the Bay Area’s population will grow by 30% by the year 2040. That’s about another million people – and where they’re going to live is a really good question. We’re seeing a lot of high-rise development in San Francisco and a lot of infill development in some other markets. The venture capital put into the United States’ economy in 2015 is estimated at $45 Billion. Of that $45 Billion, $26 Billion is in California, and 46% of that is specifically here in San Francisco. Why is all of this happening here? It’s the culture of innovation:

Silicon Valley’s Innovation Secret

When we’re talking about technology, there’s a misnomer that we’re just talking about Silicon Valley. But Silicon Valley is really the entire Bay Area now. High-tech is spreading throughout the city and around the bay. For example, Uber just bought the Sears building in downtown Oakland; PeopleSoft and Oracle are in Contra Costa. And if GDP growth was measured just in the Bay Area counties, it would probably be 5.5% to 6% per year, a cracking fast pace. Though there will continue to be challenges, all this is certainly going to benefit our economy and our real estate market.

This analysis was made in good faith with data from sources deemed reliable, but international, national and local, political and economic trends are subjects of great, subtle and ever-changing complexity. This is simply an expression of one viewpoint, and opinions vary widely between various economists and analysts.

© 2015 Paragon Real Estate Group

S&P Case-Shiller Home Price Index for San Francisco Metro Area

The S&P Case-Shiller Index for the San Francisco Metro Area covers the house markets of 5 Bay Area counties, divided into 3 price tiers, each constituting one third of unit sales. Most of San Francisco’s, Marin’s and Central Contra Costa’s house sales are in the “high price tier”, so that is where we focus most of our attention.” The Index is published 2 months after the month in question and reflects a 3-month rolling average, so it will always reflect the market of some months ago. The Index for July 2015 was released on the last Tuesday of September. In 2014, after a torrid spring selling season, the market plateaued during the summer and autumn, and a similar trend seems to be developing in 2015 as well, after its own white hot spring.

The 5 counties in our Case-Shiller Metro Statistical Area are San Francisco, Marin, San Mateo, Alameda and Contra Costa. Needless to say, there are many different real estate markets found in such a broad region, and it’s fair to say that the city of San Francisco’s market has generally out-performed the general metro-area market.

The first two charts illustrate the price recovery of the Bay Area high-price-tier home market over the past year and since 2012 began, when the market recovery really started in earnest. In 2012, 2013, 2014 and now 2015, home prices have dramatically surged in the spring (often then plateauing or even ticking down a little in the following seasons). The surges in prices that have occurred in the spring selling seasons reflect frenzied markets of huge buyer demand, historically low interest rates and extremely low inventory. In San Francisco itself, it was further exacerbated by a rapidly expanding population and the high-tech-fueled explosion of new, highly-paid employment and new wealth creation.

For more regarding how seasonality affects real estate: Seasonality & the Real Estate Market

Case-Shiller Index numbers all reflect home prices as compared to the home price of January 2000, which has been designated with a value of 100. Thus, a reading of 218 signifies home prices 118% above the price of January 2000.

Short-Term Trends: 12 Months & Since Market Recovery Began in 2012

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Longer-Term Trends & Cycles

The third and fourths charts below reflect what has occurred in the longer term (for the high-price tier that applies best to San Francisco and Marin counties), showing the cycle of recession, recovery, bubble, decline/recession since 1996, and since 1988. Note that, past cycle changes will always look smaller than more recent cycles because the prices are so much higher now; if the chart reflected only percentage changes between points, the difference in the scale of cycles would not look so dramatic.

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Different Bubbles, Crashes & Recoveries

This next 3 charts compare the 3 different price tiers since 1988. The low-price-tier’s bubble was much more inflated, fantastically inflated, by the subprime lending fiasco – an absurd 170% appreciation over 6 years – which led to a much greater crash (foreclosure/distressed property crisis) than the other two price tiers. All 3 tiers have been undergoing dramatic recoveries, but because the bubbles of the low and middle tiers were greater, their recoveries leave them below – a little bit for the mid-price-tier and well below for the low-price-tier – their artificially inflated peak values of 2006. It may be a long time before the low-price-tier of houses regains its previous peak values. The high-price-tier, with a much smaller bubble, and little affected by distressed property sales, has now significantly exceeded its previous peak values of 2007. Most neighborhoods in the city of San Francisco itself have now surpassed previous peak values by very substantial margins.

It’s interesting to note that despite the different scales of their bubbles, crashes and recoveries, all three price tiers now basically show the same overall appreciation rate when compared to year 2000. As of July 2015, Case-Shiller puts all 3 price tiers at 118% – 119% over year 2000 prices. This suggests an equilibrium is being achieved across the general real estate market.

Different counties, cities and neighborhoods in the Bay Area are dominated by different price tiers though, generally speaking, you will find all 3 tiers represented in different degrees in each county. Bay Area counties such as Alameda, Contra Costa, Napa, Sonoma and Solano have large percentages of their markets dominated by low-price tier homes (though, again, all tiers are represented to greater or lesser degrees). San Francisco, Marin, Central Contra Costa, San Mateo and Santa Clara counties are generally mid and high-price tier markets, and sometimes very high priced indeed. Generally speaking, the higher the price, the smaller the bubble and crash, and the greater the recovery as compared to previous peak values.

Remember that if a price drops by 50%, then it must go up by 100% to make up the loss: loss percentages and gain percentages are not created equal.

The numbers in the charts refer to January Case-Shiller Index readings, except for the last as labeled..

Low-Price Tier Homes: Under $579,500 as of 7/15

Huge subprime bubble (170% appreciation, 2000 – 2006) & huge crash (60% decline, 2008 – 2011). Strong recovery but still well below 2006-07 peak values.

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Mid-Price Tier Homes: $579,500 to $949,000 as of 7/15

Smaller bubble (119% appreciation, 2000 – 2006) and crash (42% decline) than low-price tier. As of July 2015, a strong recovery has put it back up to its previous 2006 peak.

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High-Price Tier Homes: Over $949,000 as of 7/15

84% appreciation, 2000 – 2007, and 25% decline, peak to bottom.
Now climbing well above previous 2007 peak values.

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In San Francisco, where many neighborhoods vastly exceed the initial price threshold for the high-price tier, declines from peak values in 2007 in those more expensive neighborhoods typically ran 15% – 20%, and appreciation over previous peak value has also exceeded the high-price tier norm.

San Francisco, Marin and Central Contra Costa

And then looking just at the city of San Francisco itself, which has, generally speaking, among the highest home prices in the 5-county metro area (and the country): many of its neighborhoods are now blowing past previous peak values. Note that this chart has more recent price appreciation data than available in the Case-Shiller Indices. This chart shows both house and condo values, while the C-S charts used above are for house sales only. Median prices are affected by other factors besides changes in values, including seasonality, new construction projects hitting the market, inventory available to purchase, and significant changes in the distressed and luxury home segments.

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Marin County

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Central Contra Costa County

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And this chart for the Noe and Eureka Valleys neighborhoods of San Francisco shows the explosive recovery seen in many of the city’s neighborhoods, pushing home values far above those of 2007. Noe and Eureka Valleys have become particularly prized by the high-tech buyer segment and the effect on prices has been astonishing.

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All data from sources deemed reliable, but may contain errors and is subject to revision. Statistics are generalities and how they apply to any specific property is unknown. Short-term fluctuations are less meaningful than longer term trends. All numbers should be considered approximate.

© 2015 Paragon Real Estate Group

The San Francisco Fall Antiques Show // Benefiting Enterprise for High School Students

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The San Francisco Fall Antiques Show, now in its 34th year, is the oldest and most prestigious art and antiques fair on the West Coast. Held at Fort Mason each fall, the FAS presents 60 of the finest art and antiques dealers from around the world and is fully vetted by the vetting committee, organized in cooperation with the Antiques Dealers Association of California (ADAC). It is a must-see destination show for collectors and enthusiasts of art, antiques and design.

Objects exhibited and sold on the show floor span the ages, from antiquity through the 20th Century, covering genres including Fine Art, Modern Art, Furniture, Textiles, Photography, Asian Art, Carpets, Ceramics, Porcelain, Sculpture, Rare Books, Works on Paper, Objets d’art, Jewelry and Metals.

The 4-day show offers the opportunity to immerse yourself in the world of great art and antiques with programming each day, including The Lecture Series, featuring 6 prominent speakers over 3 days, show tours, talks, designer events and the Young Collectors Evening.

The Fall Antiques Show opening night Preview Gala has been called “the highlight of the San Francisco Social Season” and opens the show with live music, caviar and vodka bars, flowing champagne, sumptuous buffets and the first glimpse of the best art and antiques from around the world, all available for purchase.

Please Visit Eventbrite for More Details

October 2015 San Francisco Real Estate Report

The autumn selling season started with a large surge of new listings right after Labor Day, but it will be another month or so before preliminary statistical data is available on home sales negotiated since then. However, it is clear that the recent volatility in national and international financial markets has not so far caused a severe adjustment to local home prices. While we wait for early autumn sales to close in quantity, we’ll review the market from a variety of angles.

A wide range of other reports pertinent to SF real estate values and trends can be found here: San Francisco Market Reports and San Francisco Neighborhood Values

Short-Term & Long-Term
San Francisco Home Price Appreciation

2011 – 2015, by Quarter
Median-Price_Bar-Chart_Qtr_SFD-Condo-Combined

It’s not unusual for median prices to drop in the 3rd quarter, which happened this year as well. This has less to do with fair market value, than with the fact that the market for higher priced homes slows down much more than that of the general market in summer.

1994 – 2015, by Year
1993-2010_SF_Median_Sales_Prices_Cycle-Labels

Return on Cash Investment
Comparing Buying a Home in San Francisco
to Inflation, Gold, the S&P 500 & Apple Stock

10-15_ROI-on-Cash-Invest_Comp-RE-Gold-Apple-SP500

For the purposes of this analysis, we’ve broken home ownership into 2 aspects, the first being ongoing housingcosts – mortgage interest, home insurance, property taxes, maintenance – which after tax deductions could be compared to the cost of renting a similar home. The second aspect, illustrated in the chart above, is the cash investment side of buying a home and the compound annual return on that investment, after closing costs and loan principal repayment are deducted, if one had purchased a median SF house in 1994.

For the San Francisco Median House calculation, we used the 1994 median price ($265,000), with a 20% downpayment ($53,000) and paying 1.5% in buy-side closing costs ($3975) for a total cash investment of $56,975. Net proceeds were calculated using the 2015 YTD median sales price ($1,250,000), deducting 6% in sell-side closing costs ($75,000) and the original 80% mortgage balance ($212,000), which equals $963,000. This equals an annual compound return on investment of 14.4% over the 21-year period.

All of us should have put every penny we had into Apple stock in 1994, but barring that, purchasing a home in San Francisco would have been a decent alternative – particularly if you’d bought in Noe Valley or the Mission. Three factors not included in the above analysis further increase the financial benefits of home purchase over the other investments graphed: 1) the $250,000/$500,000 capital gains tax exclusion on the sale of a primary residence (potentially saving up to $75,000 in taxes), 2) the “forced savings” effect of gradually paying off one’s mortgage (if one resists refinancing out growing home equity), which has a substantial wealth-building effect, and 3) over time, the ongoing cost of housing with a fixed rate loan, strategically refinanced when rates go significantly lower, will usually fall well below rental costs that continue to rise with inflation.

With financial assets subject to market cycles, changing the buy or sell dates in this analysis can dramatically affect the return. We picked 1994, because of the availability of MLS median price data going back to then.

Median Sales Prices by Neighborhood

2-Bedroom Condos in San Francisco

Median_Price-2BR_Condos_by-Neighborhood

3-Bedroom Houses in San Francisco

Median_Price-3-4BR-SFD_Comp

Market Dynamics

Sales Price to List Price Percentages
& Average Days on Market

DOM_by-Price-Reduction_by-Qtr SP-OP_Comp-by-Price-Reduction_by-Qtr

These two charts above illustrate both how competitive the market has been – the average SF home selling without a price reduction sold very quickly for 13.5% over asking price in the 3rd quarter – and the significant difference between homes that get an immediate market response and thosethat have to go through one or more price reductions before selling.

Months Supply of Inventory

Seasonality, Luxury and Non-Luxury Homes

MSI_Luxury-Homes_vs_Non-Lux

The lower the Months Supply of Inventory, the stronger the buyer demand as compared to the supply of homes available to purchase. This chart illustrates the seasonality of the real estate market – typically strongest in spring (especially) and autumn, and slowing down during the summer and especially the winter holidays. It also shows that the lower-priced home segment is generally hotter than the higher priced – as shown by the lower MSI readings – and finally, how much more the luxury home segment is affected by seasonality. The dramatic slowdown in the highest-priced segment during summer and winter is one of the big reasons why median home prices usually drop during those seasons.

Condo Average-Dollar-per-Square-Foot Values
by Era of Construction

AvgDolSqFt_Condo-by-Era-Built

The Most Expensive Condo Buildings in San Francisco
Condos_Most-Expensive-Buildings

This doesn’t include brand new luxury condo developments – some of which are selling at very high prices – nor many very expensive and very prestigious condo and co-op buildings which simply have too few sales for meaningful statistical analysis.

3rd Quarter Market Snapshot
New-UC-Expired-DOM-Median_by-Property-Type

These analyses were made in good faith with data from sources deemed reliable, but they may contain errors and are subject to revision. Statistics are generalities and all numbers should be considered approximate. How any median or average statistic applies to a particular home is unknown without a specific comparative market analysis. We are not qualified to render legal or tax advice of any kind. Sales statistics of one month generally reflect offers negotiated 4 – 6 weeks earlier.

© 2015 Paragon Real Estate Group