New Case-Shiller Home Price Index Report

This chart gives an exceedingly clear illustration of the seasonality of home price appreciation over the past 4 years. Summer/autumn plateau in 2015? It’s happened to a large degree every year since 2012. We won’t really know where the market is headed next until we see what happens in early spring 2016. (Barring some large, negative economic event before then.) image001

The higher priced home segment led the way in 2012 recovery in Bay Area, while the lower priced segment lagged because of having to deal with the huge hangover of the distressed property crisis. That started to equalize in late 2013 and 2014, and in 2015, more affordable homes began to overtake higher priced homes in the rate of home-price appreciation (as measured against values in January 2000). Case-Shiller is just starting to reflect a Bay Area dynamic that we’ve clearly been seeing playing out on the ground over the past year in San Francisco.

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And one of our longer-term charts. Charts for the mid-priced and low-priced tiers can be found on our website. The high-price tier applies best to most of San Francisco and San Mateo, central/southern Marin, and central Contra Costa.

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San Francisco New-Home Construction

The SF Planning Department just released updated Q3 information regarding the new-housing development pipeline. San Francisco is in the midst of one of its biggest new-housing construction booms in history. (The same is occurring on the commercial development side, but this report won’t deal with that.) Indeed, it often seems that new projects of one kind or another are being announced on an almost daily basis, and a detailed map delineating all projects in some stage of the pipeline makes many city districts appear to have measles.

Q3-15_Pipeline-Net-New-Housing-Units_by-Stage Q3-15_San-Francisco_New-Housing_Pipeline-Map

New housing construction has lagged population pressures for decades – pressures which have soared during the current economic and employment boom – and now there is a scramble to address the inadequacy of housing supply, and, for developers/investors, to reap the rewards of a high demand/low supply dynamic in one of the most affluent and expensive housing markets in the world.

As of September 30th, there were approximately 59,000 housing units of all kinds – luxury condos, rental apartments, market rate and affordable units, and social project housing – in the relatively near-term pipeline (next 5 to 6 years). Most are in the Market Street corridor area, the Van Ness corridor just above Market Street, and in the districts to the southeast of Market Street (see map). If we add the mega-projects planned for Candlestick-Hunter’s Point, Treasure Island and Park Merced, which may take decades to become a reality, the number jumps to over 80,000. As a point of context, there are approximately 382,000 residential units in San Francisco currently. About 3500 new units were added in 2014.

Housing supply and affordability issues, strong feelings about neighborhood gentrification and tenants’ rights, and even simple NIMBYism (or in SF, NBMVism, “not blocking my view!”) make development the most contentious political topic in San Francisco. Furious battles are ongoing in the Board of Supervisors, the Mayor’s office and the Planning Department; with neighborhood associations and special interest groups; and at the ballot box. Development is not for the faint of heart or shallow of pocket: One cannot contemplate building virtually anything in the city without vehement opposition and sometimes a well-funded coalition in opposition. For developers, the equation to be penciled out includes high costs, enormous hassle-factor and extended project timelines on one side, and the potential for large financial returns on the other. In new San Francisco developments, condos often sell for $1250 per square foot and above, and 500 square foot studio apartments can rent for up to $3500 per month.

Of the units in the greater pipeline of 80,000 units, over 9000 units are designated as “affordable housing” – but about 5000 of those are in the long-term Candlestick-Hunter’s Point and Treasure Island projects. Because of the nature of the political environment, much to do with how much affordable housing will be built is in flux. Many developers are in intense negotiations with government agencies and neighborhood associations to find a workable compromise between return on investment on one hand, and unit mix and affordable housing requirements on the other. Said requirements may consist of a percentage of units in the project, building affordable units elsewhere in the city, or contributing substantial amounts to the city’s affordable housing fund in lieu of building.

New housing construction is very sensitive to major economic, political and even environmental events (i.e. natural disasters), so simply because something is in the pipeline doesn’t mean it will be completed as planned within the timeframe contemplated. First of all, plans are constantly being changed just in the normal course of things. And if a big financial or real estate market correction (or crash) occurs, as happened in late 2008, projects in process can come to a grinding halt, and new projects substantially altered, delayed or abandoned. Because the timeline in San Francisco can run 3 to 6+ years from initial filing with Planning to construction completion, developers and their lenders make enormous financial bets on what the future will look like. Timing is everything in real estate development, and can make the difference between large profits and bankruptcy. When the music stops – which it always does sooner or later, though the time range of opportunity can vary greatly – not everyone will find a chair to sit down in. That especially applies to those who over-leveraged their projects.

As a side note, big Chinese developers have been investing in both large residential and commercial real estate development projects in the Bay Area, and, according to reports, continue to aggressively seek additional opportunities. Though significant – constituting billions of dollars in investment – these projects do not constitute the greater part of Bay Area development.

Housing Affordability and Market Corrections – Paragon Report

A look at San Francisco Bay Area housing affordability trends over time and how they intersect with real estate market corrections:

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The 2008 San Francisco Bay Area real estate crash was not caused just by a local affordability crisis: It was triggered by macro-economic events in financial markets which affected real estate markets across the country. It’s important to note that in the past, major corrections to Bay Area home prices did not occur in isolation, but parallel to national economic events. Ongoing speculation onlocal “bubbles” often neglect to remember this.

Still, dwindling affordability is certainly a symptom of overheating, of a market being pushed perhaps too high. Looking at the chart above, it’s interesting to note that the markets of all Bay Area counties hit similar and historic lows at previous market peaks in 2006-2007, i.e. the pressure that began in the San Francisco market spread out to pressurize surrounding markets until all the areas bottomed out in affordability. This suggests that one factor or symptom of a correction, is not just a feverish San Francisco market, but that buyers can’t find affordable options anywhere in the area. We are certainly seeing that radiating pressure on home prices occurring now, starting in San Francisco and San Mateo (Silicon Valley) and surging out to all points of the compass.

San Francisco, with a Housing Affordability Index (HAI) reading of 10% is about 2% above its all-time historic low in Q3 2007, but affordability in most other Bay Area counties, while generally declining, still remain significantly above their previous lows. By this measure, the situation we saw in 2007-2008 has not yet been replicated.

Significant increases in mortgage interest rates would affect affordability quickly and dramatically, as interest rates along with, of course, housing prices and household incomes, play the dominant roles in this calculation.

Note that Affordability ratios are just one relatively blunt measuring tool, and there are certainly other factors at play affecting our real estate market: local (high-tech boom; surging population, employment and wealth; inadequate housing supply, rental rates, etc.), national (financial markets, unemployment rates, consumer confidence, etc.) and, nowadays, even international economic factors (such as recent events in the Chinese stock markets and the EU).

Information on the methodology behind the California Association of Realtors’ HAI can be found here: www.car.org/marketdata/data/haimethodology/

Speaking of financial markets, we decided to take a look at how the recent volatility played out in the S&P 500 and the Shanghai stock indices. These indices are constantly fluctuating, but the general picture has not altered significantly since we graphed this in early November:

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Interest Rates & Affordability

Interest rates have ticked up a little bit and are now just below 4%.

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The Q3 CAR Affordability Index just came out: Q2 to Q3, San Francisco remained the same, at a very low 10% Index reading; Marin ticked up from 17% to 19%; Sonoma went down from 25% to 24%; and Central Contra Costa remained the same, with an Affordability Index reading of 19%.

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S&P … China … Bay Area Real Estate Market

Not so long ago, grave concern regarding the Chinese stock market decline and its effect on the U.S. economy filled the media and blogs. The words “bubble” and “crash” were used a few million times in regards to the U.S. stock market and the Bay Area real estate market. Wouldn’t it be interesting to revisit the issue to double-check how it all turned out (so far)?

The S&P has made up all the losses it sustained in the late August-September timeframe, and is now about 1.3% down from its peak in May 2015. Please note that the last three points on the first chart below are out of synch with the time scale of the rest of the chart, since they cover a period of 6 months instead of a period of 3 years (as annual data points would).

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Many comparisons were made between the Shanghai stock market and the U.S. stock market. This chart below gives a little more context to exactly how similar their movements have been.

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Luxury Home Segment Cools Down “Affordable” Homes Market Remains Competitive

San Francisco led the Bay Area and the nation when its real estate recovery began in early 2012. Within the city itself, the more affluent neighborhoods led the rebound from the 2008 – 2011 recession and saw the highest rates of home price appreciation. That dynamic began to shift in 2014, when the more affordable neighborhoods began to take the lead in demand and in appreciation. All price segments in San Francisco have cooled off from the overheated frenzy of the spring 2015 selling season – this cooling is a common seasonal phenomenon – but while lower and mid-priced homes in the city have continued to remain solidly in “seller’s market” territory, in the luxury home segment, the dynamic between buyers and sellers has fundamentally shifted, at least for the time being.

A number of reasons may explain this: Firstly, the affluent are much more invested in the stock market than other groups, and the volatility of late August, early September may have encouraged more wealthy homeowners to sell (before things might possibly get worse), and more wealthy homebuyers to postpone buying until things clarified.As of very early November, the S&P 500 has regained its lost ground from August, so this effect may fade. Secondly, it’s certainly possible that sellers and listing agents have finally pushed the envelope on prices a little too far: San Francisco’s high prices have clearly motivated some buyers to look at options outside the city (which has helped pressurize the markets of other counties). Last but not least, more and more luxury condos are being built in San Francisco: Growing supply not only gives buyers more options and more negotiating room, but it decreases the urgency to write strong offers quickly and the motivation to compete with other buyers.

However, the luxury home market hasn’t “crashed”: there are still high-end homes selling very quickly for very high prices amid competitive bidding.But it has markedly cooled and the number of luxury home listings in San Francisco hit a new high in October, so correct pricing has becomes increasingly vital. It remains to see if this change is just a transitory market blip – such blips are not uncommon in financial or real estate markets – or the beginning of a longer term reality.

Median Sales Price by Month

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Even with the general cooling in the market since spring and the significant slowdown in higher end home sales, the overall median sales price for houses and condos bounced back up to $1,200,000 in October. Median prices are impacted by seasonal trends: typically peaking in the spring, dropping in the summer, up again in the autumn and then plunging during the winter holidays. This has more to do with inventory than with changes in fair market value. Short-term fluctuations are not particularly meaningful: It is the longer-term trend that gives a sense of what’s going on in the market.

For houses alone, the median sales price in October was $1,300,000 and for condos, it was $1,100,000.

Supply & Demand Statistics
by Price Segment, October 2015

Oct-15_MSI_SFD-Condo_by_Price-Segment

Months Supply of Inventory (MSI) is a classic measurement of supply and demand, calculating the time it would take to sell the existing inventory of homes for sale at the current rate of market activity. The lower the MSI, the greater the demand as compared to the supply, i.e. the hotter the market. The house market in San Francisco has been stronger than the condo market since the recovery began – though the condo market has been crazy hot as well – because the supply of houses is more limited and is dwindling as a percentage of sales because virtually no new houses are being added to inventory. However, new condos are being built in quantity. This chart above illustrates the dramatic difference in the markets for homes up to the median price ($1.3 million for houses, $1.1 million for condos) and in the next price segment higher, versus the luxury home segment, defined here as houses selling for $2,000,000+ and condos for $1,500,000+. (By this definition, luxury sales currently make up about 20% of San Francisco’s home sales.)

Because SF has been so hot for so long, we’ve adjusted the thresholds for what MSI readings define “seller’s market” and “buyer’s market” to better reflect the psychology of the current market.

Luxury Home Listings for Sale

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As mentioned earlier, the number of high-end house and condo listings hit all-time highs in October, while sales numbers are well below levels hit in the previous 2 years. Even more so than the general market, the luxury segment is dramatically affected by seasonality and typically goes into deep hibernation from Thanksgiving to mid-January. Having so many active listings on the market just prior to the winter holiday doldrums is one of the reasons why we designate the luxury-home segment as currently having moved into “buyer’s market” territory.

The Luxury Home Market: Months Supply of Inventory
Year over Year over Year Comparisons

LuxHome_MSI_YoY-Comparisons

This chart above illustrates the change in the luxury home market supply and demand balance over the past three Octobers. As a further point of context to what has happened in the past year, during the feverish market of this past spring, the MSI for luxury houses hit a low of 1.6 months of inventory and the MSI for luxury condos hit a low of 1.7 months. Since 2012, spring has consistently been the hottest, most competitive, selling season of the year and most home price appreciation has occurred during that time.

4 Neighborhood Snapshots

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Marina-SFD-Condo_Median-Sales-Prices

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Much more information regarding SF neighborhood prices and trends can be found here: San Francisco Neighborhood Values

Average Asking Rents in San Francisco

Rents_Avg-SF_by-year

The real estate market has been challenging for homebuyers these past few years, but for anyone looking to rent a home in the city, it has been distinctly more difficult financially. Homebuyers have the benefit of historically low interest rates, multiple tax advantages and, hopefully, substantial appreciation gains over time; renters enjoy none of those advantages (though admittedly there can be long-term benefits to rent control for renters that qualify). Even with the big jump in home prices over the past 4 years, factoring in the 35% – 40% decline in interest rates and adjusting for inflation, the ongoing monthly cost of homeownership (for someone putting 20% down) is roughly the same as it was in 2007. But average monthly asking rents in the city have surged over 50% during the same period.

This has made rental property ownership an increasingly lucrative proposition, which we discuss in more detail in our last Commercial Brokerage report: Bay Area Apartment Building Market

Median Household Incomes
In Selected San Francisco Zip Codes

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By Bay Area County

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Additional demographic analyses from previous reports can be found here: San Francisco & Bay Area Demographics andBay Area Affordability