30+ Years of Bay Area Real Estate Cycles

The CoreLogic S&P Case-Shiller high-price-tier Home Price Index for the 5- county San Francisco Metro Area, illustrated above by the blue line, applies best to more expensive Bay Area housing markets such as most of San Francisco, Marin, San Mateo and Diablo Valley/Lamorinda. The SF Metro low- and mid-price tiers had much more dramatic bubbles and crashes in 2005-2011, but as of December 2017, have ended up at points a bit higher than the high-price tier. The green line tracks home price appreciation for the United States as a whole. The Case-Shiller Index is predicated on a January 2000 price of 100. “250” signifies a price that has appreciated 150% since January 2000.

Financial-market cycles have been around for hundreds of years, from the 1600’s Dutch tulip mania through our recent speculative frenzy in crypto-currencies. Though cycles vary in their details, their causes, effects and trend lines are often similar, providing more context as to how the market works over time.

Human beings have always been worried about (or terrified of) the future, and going back many thousands of years, we have constantly attempted to predict what it holds. However, 2018 © Compass whether using priests, oracles, astrologers, economists, analysts or media pundits, we show no aptitude as a species for having the ability to do so with any accuracy. In 2012, a NobelPrize-winning economist, famous for housing market analysis, said that the U.S. real estate market might not recover “in our lifetimes.” In hindsight, we now know that the recovery had already begun in some markets such as San Francisco. In 2015, during a period of financial market fluctuations and a slowdown in our local high-tech boom, a very well-respected Bay Area economist predicted that there would soon be “blood in the streets of San Francisco.” But then housing and stock markets soared higher and the high-tech boom dramatically strengthened again. (He has since postponed the arrival of blood until 1919 or 1920.)

Our smartest experts can’t get it right, much less the thousands of glib, confident forecasts by utterly unqualified individuals reported on in the media every month. We can’t even remember the mistakes of the recent past – one reason why we don’t seem to be able to escape the curse of recurring cycles – much less foretell what’s going to happen tomorrow. Which leads to the next point.

It is extremely difficult to predict when different parts of a cycle will begin or end. There is no rule regarding how long the different parts of a market cycle will last. Boom times, even periods of “irrational exuberance,” can go on much longer than expected, or get second winds, with huge jumps in values. On the other hand, negative shocks can appear with startling suddenness out of nowhere, often triggered by unexpected economic or political events that hammer confidence, adversely affect a wide variety of market dominos, and then balloon into periods of decline and stagnation. These negative adjustments can be in the nature of a bubble popping, the slow deflation of a punctured tire, or some combination of the two.

Going back many decades, all the major Bay Area recessions have been tied to national or international economic crises. Considering the fundamental strengths of the local economy, absent a major natural disaster, it is unlikely that a major downturn would occur due simply to local issues. However, local issues can exacerbate a cycle: The 1989 earthquake intensified the effects of the national recession in the early 1990’s; our greater exposure to dotcom businesses produced a spike up and down with the NASDAQ bubble & 2000-2001 crash; and our current, raging high-tech boom has poured fuel on our up-cycle during the current recovery.

All bubbles are ultimately based on irrational exuberance, runaway greed, criminal behavior, or all three mashed up together. Whether exemplified by junk bonds, stock market hysteria, gorging on debt, a corporate Ponzi-scheme mentality, an abandonment of reasonable risk assessment, and/or incomprehensible and dishonest financial engineering, the bubble is relentlessly pumped bigger and tighter.

However, it should be noted that the 2008 crash was abnormal in its scale, and much greater than other downturns going back to the Great Depression. The 2005-2007 bubble was fueled by home buying and refinancing with exorbitant, unaffordable levels of debt, promoted by predatory lending practices such as deceptive teaser rates, no-down-payment loans and an abysmal decline in underwriting standards. The market adjustments of the early 1990’s and early-2000’s saw declines in Bay Area home values in the range of 10% to 11%, as compared to the terrible 2008 – 2011 declines of 20% to 60%. (Bay Area prices are now above their 2007 peaks.)

Whatever the phase of the cycle, many people think it will last forever. Going up: “The world is different now, profits don’t matter, and there’s no reason why the upward trend can’t continue indefinitely.” And when the market turns: “Homeownership has always been a terrible investment and the market will not recover for decades.” But the economy mends, the population grows, people start families, inflation accumulates over the years, and the repressed demand of those who want to own their own homes builds up. In the early eighties, mid-nineties and in 2012, after about 4 years of a recessionary housing market, this repressed demand jumped back in – or “exploded” might be a better description – and home prices started to rise again. Then kept rising as consumer confidence returned; ultimately moving into over-confidence and irrational exuberance. The nature of cycles is to keep turning.

As long as one doesn’t have to sell during a down cycle, Bay Area homeownership has almost always been a good or even spectacular investment (though admittedly if one does have to sell at the bottom of the market, the results can be painful). This is due to the ability to finance one’s purchase (and refinance when rates drop), certain tax benefits, the gradual pay-off of the mortgage (the “forced savings” effect), inflation, and long-term demographic and appreciation trends.

The best way to overcome cycles is to buy a home for the longer term, one whose monthly cost is readily affordable for you now, ideally using a long-term, fixed-rate loan, while keeping an adequate financial reserve for emergencies – and then resisting the urge to use your home as an ATM during times of significant appreciation. If one keeps to those rules, then it usually true, quoting a NYT editorial, “Renting can make sense as a lifestyle choice… As a means to building wealth, however, there is no practical substitute for homeownership.”

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

Mixed Signals in San Francisco Real Estate Market

Autumn markets in counties around the Bay Area have seen significant shifts, with wide variance in the magnitude of these changes between counties. So far, San Francisco itself has seen less dramatic changes than other local markets such as Santa Clara and Sonoma Counties.

Homes that sell have generally continued to sell quickly, at prices often well over asking. Median sales prices are considerably higher on a year-over-year basis. However, listing inventory has climbed, sales volume has dropped, and the numbers of price reductions and expired listings have increased. Luxury house sales hit a new all-time high in San Francisco. Luxury condos hit a new sales peak for the month of October, but the number of listings hit a new all-time high.

Market statistics are generating contradictory readings amid a background of financial market and political volatility, and rising interest rates. Some standard statistics take time to reflect changes on the ground, and will bear watching in coming months.

Median Sales Price Appreciation
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Long-Term Annual Trends since 1993
(2018 figure reflects YTD sales)

In recent years, house price appreciation has far outpaced that of condos.

3-Month Rolling Median Price Trends since 2005

Year-over-Year Comparisons, 2016-2018: S
an Francisco, San Mateo, Santa Clara Counties

Appreciation percentages can change rapidly in these year-over-year comparisons.

Monthly Median Price Changes since 2012
COMBINED House and Condo Median Sales Prices

Monthly and seasonal fluctuations are very common.

Supply & Demand Statistics

More new listings came on market in autumn 2018, providing buyers with more choices and lessening the sense of urgency and competitive bidding.

The number of active listings on the market is significantly higher than in October 2017, 2015 or 2014, but comparable to October 2016 and 2013. Further increases might considerably alter the supply and demand dynamic.

Looking at the past 3 months, sales volume has dropped about 2% year over year. September 2018 saw the lowest volume of any September in 10 years, but then September is not typically a high volume month: It mostly reflects accepted-offer activity in August when the market slows way down.

October 2018 saw the highest number of price reductions in 6 years. Some other counties saw much more dramatic increases. This is an important indicator of changing market conditions.

The number of expired and withdrawn listings – no sale – started to climb in October 2018 above previous years. December is the big month for listings being pulled off the market for the mid-winter holiday slowdown. This statistic will bear watching to see if there is a big jump in homes that sellers have not been able to sell at prices they consider acceptable.

Average percentage of sales price to original list price (overbidding) declined from the heat of the spring selling season, as is typical, was lower than in October 2017, 2015 or 2014, but higher than in October 2016.

Looking at the past 3 months of median sales price to final list price percentages, overbidding varied greatly by property type and by price segment, and some rates remain staggeringly high. But the increased number of listings undergoing price reductions this autumn has generally not yet had time to sell and thus be reflected in these statistics – when they do, if they do, they may well lower the rates seen in the charts above and below.

So far, those listings selling this autumn have generally sold relatively quickly. But this statistic won’t reflect properties that have not yet sold, perhaps after necessary price reductions. If the market is in the midst of a sustained transition, future months may see significant adjustments in this metric

Luxury Home Sales Hit New Highs

Houses selling for $3 million and above hit an all-time high – by a tad at 38 sales – in October 2018, as reported to MLS. The great majority of these sales occurred in 2 districts, the Noe, Eureka and Cole Valley district, and the Pacific & Presidio Heights-Marina district – though smaller numbers of sales took place in a wide variety of other neighborhoods. The highest-price sales were for $32 million in Pacific Heights and $16 million in Nob Hill. There were 4.5 months of inventory at the end of October, not a particularly high level of inventory for this market segment, and down 15% from October 2017.

Luxury condos, co-ops and TICs selling for $2 million+ hit their highest point ever for the month of October – 32 sales – but were well below highs hit in previous spring selling seasons. The highest sale in October, as reported to MLS, was for $10.9 million – a 3200 sq.ft. unit in the St. Regis in Yerba Buena. However, the number of active listings also hit an all-time high in September (144) and October (141) – 11% higher than October 2017, the previous peak (not illustrated on the sales chart below). The months supply of inventory stood at 6.5 months, which would be considered high as compared to the last 5 years – and does not include many new-project luxury condos not listed in MLS.

SF District Median Sales Price Appreciation
since 2005

San Francisco Houses

Short-term fluctuations are not particularly meaningful as pertaining to changes in fair market values – and big fluctuations are more common in more expensive areas. What are important are the longer term trends

San Francisco 2-Bedroom Condos & Co-ops

New condo construction can muddy the water of apples-to-apples comparisons of median condo sales prices over time, but the the general trends are still relatively clear.

In Pacific Heights, a neighborhood of big, very expensive houses, both median sales prices and average dollar per square foot values (illustrated below) have dropped from peaks hit in 2015- 2016.

It is impossible to know how median and average value statistics apply to any particular home without a specific, tailored, comparative market analysis.

These analyses were made in good faith with data from sources deemed reliable, but may contain errors and are subject to revision. It is not our intent to convince you of a particular position, but to attempt to provide straightforward data and analysis, so you can make your own informed decisions. Median and average statistics are enormous generalities: There are hundreds of different markets in San Francisco and the Bay Area, each with its own unique dynamics. Median prices and average dollar per square foot values can be and often are affected by other factors besides changes in fair market value. Longer term trends are much more meaningful than short-term.

Compass is a real estate broker licensed by the State of California, DRE 01527235. Equal Housing Opportunity. This report has been prepared solely for information purposes. The information herein is based on or derived from information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy or completeness of the information. Compass disclaims any and all liability relating to this report, including without limitation any express or implied representations or warranties for statements contained in, and omissions from, the report. Nothing contained herein is intended to be or should be read as any regulatory, legal, tax, accounting or other advice and Compass does not provide such advice. All opinions are subject to change without notice. Compass makes no representation regarding the accuracy of any statements regarding any references to the laws, statutes or regulations of any state are those of the author(s). Past performance is no guarantee of future results.

© 2018 Compass

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